Franchise 2018: Trends & Conclusions

With the increasing presence of private equity interest in the franchise market as well as the continued appeal of untapped markets in Asia, franchise practitioners we spoke to are seeing healthy growth and healthy returns in the sector. The nature of the franchising business model lends itself to expansion and development, prompting lawyers in the field to see a steady flow of work. However, sources did note concerns centring around upheaval caused by new technologies as well as secondary issues relating to data use and privacy. As a result, the market is an attractive one, but practitioners preach caution in the face of change.

Private equity potential

With several large franchise transactions in recent years, including the acquisitions of Buffalo Wild Wings and Ruby Tuesdays by private equity firms in high-value deals, it is clear that franchises remain a key area of interest for investment.

Franchise systems have significant appeal due to their stability, as well as their relatively predictable profitability. In North America, one source also highlighted the increasing accessibility to capital as an incentive to franchisors to expand their brands. Sources noted that in the wake of the recession, interest by private equity in franchises lessened, but now it is “definitely coming back, in a more diversified way”, as one practitioner put it, referencing a shift away from interest solely in the big-ticket transactions and a greater focus on franchising medium-size brands.

The potential negatives of private equity interest in the market are linked to the pressure to modernise and develop that is often required for the company to grow at the desired rate. The friction between one group’s vision of the business and another’s can lead to disputes between the parties.

Technological disruptions

One common feature of such disputes is the development and application of technology. Sophisticated technology is increasingly key to the growth of any business in a world where customer needs and businesses’ capabilities are ever-changing. However, several practitioners described to WWL the potential negative effects of the push to modernise franchises, particularly in light of the specific relationship between franchisors and franchisees.

As one lawyer remarked, “The consumer’s expectation to be at the cutting edge requires system change,” but sometimes franchisees can’t or won’t implement those changes, leading to disputes. This is prevalent in the cases of private equity firms who acquire franchises and look to modernise the business through technological development.

Another significant facet of technology’s changing impact on the franchise market is the issue of data. One lawyer stressed to us the importance of technology, while at the same time pointing out its potential issues and vulnerabilities, stating that technology is “absolutely pervasive in all forms of franchise” with “data and its use and misuse becoming the most substantial concern for virtually all businesses”. An important aspect of this is the customer’s conflation of the brand and the franchise. If a data breach affects a brand, it will have an effect on the franchisee.

Data privacy and protection is a hot-button issue in the franchise world, particularly in the wake of the GDPR’s implementation in the EU. The global reach and continuing internationalisation of many franchises mean that they are not immune to region-specific regulations such as the GDPR. Sources note this development, stating that “compliance checks will be big” with another highlighting the importance of data compliance specifically with regard to disclosure documents. They asserted that “as a franchise practitioner, compliance is key”, while noting that currently, with regard to disclosure documents in North America, only “about 60 per cent [of companies] are compliant”.  

The increasing importance of data protection, combined with the often-breakneck speed of technological development, creates more grounds for potential disputes, particularly as the implementation of updates are not necessarily harmonised across franchises. 

Appealing markets

While the development of the franchise market in regions such as North America and Europe tends to be focused on mergers and acquisitions, developing markets in, for example, Asia pose ripe opportunities through the expansion of franchises.

The lack of standalone franchise legislation in countries such as Thailand and Cambodia makes Asia an attractive region for franchisors, as the regulatory regimes are relatively permissive, lending themselves to growth. Practitioners noted that this growth is not limited to Western franchises, as domestic franchises are increasing their presence and market share.

Competition

The competition between firms varies greatly between jurisdictions; it remains fierce in North America, though many sources distinguished between firms with dedicated franchise practices and those with less specialised practitioners. As one practitioner pointed out, “The game-changer is how fully you embrace franchising as well as how you understand franchising.”

In other jurisdictions such as Ukraine, political developments have undermined the franchise market, causing some planned expansions by international groups to falter, affecting competition within the market. In general, franchise teams outside of North America tend to be smaller and less specialised. One source, commenting on the European market, stated: “Franchise law is still a small part of the legal market; I don’t see too many legal experts simply because the market is not big enough.”

However, practitioners in traditionally smaller markets are noticing the rise of franchising as an increasingly important part of their corporate offering. One noted that “unusual businesses are starting to get involved in franchising” and that “a lot of foreign franchisors are expanding”.

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The franchise market is faced with numerous challenges, ranging from the sensitivity of data protection to the increasing influence of private equity firms and political uncertainties. One bright spot for franchisors in the North American market is that the issue of joint employer liability has currently been set aside due to the Trump administration’s business-friendly and regulatory-opposed approach. However, one interviewee described a potentially worrying trend in a lopsided market where franchisors outnumber franchisees. This results in “more franchisors competing for fewer qualified franchisees”, and more franchisors settling for less-qualified franchisees who may not be able to develop the brands so effectively.

Despite concerns, the franchise market on the whole appears robust, with significant activity present in many jurisdictions in the form of M&A deals and expansions. The increasing attraction of markets that previously posed little interest to franchisors could lead to an international franchising boom. Furthermore, while technology poses some concerns among practitioners wary of the difficulty of implementing widespread system changes, the long-term benefits of making franchise systems as sophisticated as possible are undeniable.

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