Expanding a franchise in Italy: what options?
When considering franchising as an option for business expansion in Italy, a carefully planned approach is required, since the choice of the structure used for the expansion in Italy is likely to have a dramatic impact on the success of the whole project. Franchisors have a variety of legal solutions to enter the Italian market; each of them contains advantages and disadvantages, that should be carefully considered, with the support of a local law firm. The main alternative to investigate is whether to franchise directly (through a subsidiary, a joint venture or an Area representative) or indirectly (by an area Developer or a Master Franchisee). Master franchising is by far the favorite solution adopted by foreign franchisors in Italy, since it allows to reach significant expansion without significant expenses and risks. However, an accurate due diligence investigation of the Italian possible business partner, as well as careful and qualified local legal consultancy, are highly recommended.
1.Choosing the right franchise expansion structure in Italy
Many franchise systems that are successful abroad can be successful in Italy as well. But when considering franchising as an option for business expansion in Italy, a carefully planned approach is required. In fact, it is of paramount importance for foreign brands to avoid future legal risks and to ensure the solidity of the Italian franchise network.
In fact, the choice of the structure used for the expansion in Italy is a critical issue, since this decision is likely to have a dramatic impact on the success of the whole project.
Franchisors have a variety of legal solutions to enter the Italian market. Each of them contains its own set of issues, challenges, and advantages, that should be carefully considered, with the support of a local law firm, having real experience in franchise law.
When choosing the Italian expansion structure, there are a number of key considerations that must be addressed, such as:
- control on franchise network;
- characteristics of the Italian market;
- available human and capital resources;
- tax implications;
- distribution issues,
The main alternative to investigate is whether to franchise directly or indirectly.
In direct franchising, the franchisor sells franchises and attempts to directly support those franchises in Italy, having a direct legal relationship with franchisees.
Direct franchise in Italy can be made by using:
- a subsidiary, based in Italy, or
- a joint venture with an Italian company, or
- Area rapresentatives.
Finally, it is also possible to appoint franchisees in Italy directly by the franchisor’s head office abroad.
Direct franchising has some benefits; the main one is that it allows the foreign franchisor to keep high control on Italian franchisees, since it has a direct contractual relationship with them.
However, direct franchising has also some relevant disadvantages. In fact, training, supporting, supplying and monitoring franchisees in Italy from abroad can be difficult and expensive. Usually foreign franchisors do not deeply know the characteristics of the Italian market. And, from a legal point of view, it keeps all direct liabilities vis a vis the franchisees.
For this reason, this form of entering the Italian market is probably the most difficult for foreign franchisors, unless their country of origin is in close physical proximity and is relatively similar to Italy, from an economic and social perspective. While some European franchisors favor this method of expansion in Italy, it’s cumbersome when it comes to more distant foreign markets, such as U.S., Australia or China.
3. Indirect franchising
Therefore, in the majority of cases, franchisors will need to have recourse to third parties to manage their franchise in Italy. The two main options are:
- appoint an Area developer;
- appoint a Master Franchisee,.
- The Area Developer,; is charged with establishing an agreed number of units of its own in the area granted to it. Such an agreement provides the advantages of Multi-Unit franchising, such as accelerated growth with less investment on the franchisor and direct control over the franchisee. However, it can create difficulties in terms of achieving the schedules by franchisees, given the scope of their territory, and managing Multi-Unit franchisees by the franchisor.
The Master Franchisee is granted the right to use the mark and the franchise system in a given territory for a certain period of time. The Master Franchisee is typically responsible for entering into a number of sub-franchising agreements, for training the sub-franchisees, for supplying them and collecting from them fees and for monitoring compliance with system standards. Master Franchisee may be also required to open company-owned units and/or to develop a certain number of franchised units according to an agreed-upon development schedule.
Master franchising is by far the favorite solution adopted by foreign franchisors in Italy, since it has many advantages. In fact, a Master Franchisee can provide not only local market and culture knowledge, but also capital, management and support to sub-franchisees in the Italian territory. Therefore, the master franchise relationship allows foreign franchisors to reach significant expansion without significant expenses and risks.
However, Master franchising may also have some problems. In fact, since the franchisor loses a substantial part of control over the network, selection of the Master Franchisee is a crucial endeavor critical to the success of the relationship. Indeed, the Italian Master Franchisee should have solid business experience, financial reliability and high commercial standing.
Typically, the decision to expand in Italy comes as the result of a qualified third party expressing genuine interest in taking the foreign concept into our country. Successful international franchising often depends on having good local business partners. Therefore, an accurate due diligence investigation of the Italian possible business partner is highly recommended.
Additionally, careful and qualified local legal consultancy, is needed in structuring a Master franchising transaction in Italy.
Avv. Valerio Pandolfini
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The information contained in this article is of a general nature and is not to be considered an exhaustive examination of the various issues, nor is it intended to express an opinion or provide legal advice. Specific legal advice must be provided with regard to individual cases.