Those who think they can expand their business into the Middle East singlehandedly may need to rethink their plans. Many Middle Eastern countries have prescriptive business ownership rules which mean that businesses have to be owned partly or wholly by local nationals.
The upshot is that working with the right partner can reduce some of the risks associated with overseas expansion. It's possible to choose a partner with a proven track record of operating in the local market; tried and tested supply networks and distribution channels; a first-hand understanding of the culture, language and local laws; and access to key real estate.
Increasingly the first port of call for businesses looking to grow internationally, the Middle East is home to a number of huge multi-brand franchisees that have access to key real estate, capital, experience and infrastructure for establishing and growing new businesses. Examples include Victoria's Secret, H&M, Starbucks, F&F, Mothercare, Carluccio's, Hamleys, ELC, Debenhams, Costa and New Look.
However, there are a number of obstacles that can trip up those inexperienced with the region. Here's our checklist of the top three questions businesses looking to expand into the Middle East should be asking:
1.Where would disputes be heard?
Middle Eastern courts will not usually enforce an English court's judgment as there is no agreement between the UK and most Middle Eastern countries for reciprocal enforcement of court judgments. It can be a painful lesson to find out that, when needed most, that carefully negotiated contract cannot be enforced easily against the franchisee in the country where it is trading/has assets.
It is surprising how often businesses fail to effectively nail down the contractual documents for franchise arrangements, with disastrous effects. Without proper targets and a variety of enforceable commercial levers for dealing with below-par performance - not just a blunt right to terminate - franchisors can find themselves with under-developed territories from which they are locked out. They can end up spending significant sums of money to reverse their position, or face having to sit out the remainder of a lengthy term with a failing partner.
Overseas countries usually have laws that will apply to the arrangement regardless of what the contract says. These could be franchise laws requiring local registration and/or specific advance disclosures to the franchisee; rules about how an agreement is executed; terms that are implied into a contract; and terms that would not be enforced by local courts. Failure to get this right can give the franchisee a right to rescind the contract.
2.Will the franchisee register as a commercial agent?
In a number of Middle Eastern countries, including the UAE, Bahrain, Lebanon, Oman and Kuwait, local commercial laws will treat franchisees, as well as distributors, as commercial agents and afford those franchisees that become registered agents with protections, including:
- The ability to block the franchisor's attempts to terminate or refuse to renew unless it can prove there is a material reason justifying termination/non-renewal;
- A right to claim compensation/damages on termination;
- Being able to block anyone else importing products so long as it is still registered.
Careful structuring of these arrangements is crucial to avoid unwanted repercussions.
3.Is the business's IP protected?
Any business expanding into a new territory should ensure that it has protected its intellectual property rights in that territory, ideally years before entry, so that nobody else can block the expansion when the time is right.
At the least, before launching or supplying any products/services into a new territory, businesses should check that nobody else owns any IP rights in that territory that could be used to stop the import, marketing or sale of those products or services.