Foreign franchise businesses in Thailand
Franchise businesses in Thailand – how to survive the pandemic
The Covid-19 outbreak has brought the value of Thai franchise businesses worth THB 300 billion down by THB 90 billion or 30 percent, the Department of Business Development (DBD) said in July 2020. “Over the past four months, the outbreak has had a 100-per-cent impact on hotel, spa and education franchises, 70 to 80 percent on food and beverage franchises and 30 to 50 percent on retail, convenience store and pharmacy franchises.”
CoronaAlliance: The Coronavirus outbreak is a challenge for the franchise industry. Thai businesses, as well as franchise owners, that were thriving and planning for expansion only weeks ago, may now be threatened with closure due to government direction or collapsing revenues. The effects depend considerably on the respective business segment. This concerns the rights and obligations of franchisees and franchisors.
- When does the franchise contract constitute a breach of contract, force majeure or a right of termination?
- What are the franchisor’s rights of instruction regarding opening hours, hygiene, and special measures under the contractual documents, and what additional rights result from applicable laws?
- Who bears the financial burden and operational interruptions?
- How are the insurance burdens distributed? Is there a comprehensive business interruption insurance?
- Under which conditions can the franchisor be held liable if the franchise owner jeopardizes the health and well-being of customers? #CoronaAlliance
PUGNATORIUS Ltd. supports franchise owners during this unique time. It represents franchisees in the joint negotiation of contract adjustments with the franchisor. It represents franchisors in understanding contractual obligations under the franchise and, if necessary, the rapid enforcement of measures to protect the trademark and reputation. The law firm assists in the drafting and negotiation of contractual arrangements to drop or reduce the royalty and franchise fee, execution of an emergency plan within a franchise system, and agreements with potentially diagnosed employees. Also, it helps in the negotiation of franchisees’ finances and similar tasks.
Thailand’s franchise markets: Thailand has over 500 franchises and more than 12,000 domestic franchisees, mainly in the food and restaurant sector, but also regarding services, education, fitness, lifestyle, and retailing. Thailand’s franchise business is estimated to be worth THB 250-300 billion per year, while its retail market is estimated at THB 3.6 trillion. The USA is the leader among international franchises and controls 65% of the international market. Pioneers of U.S. franchise brands include KFC, McDonalds, Burger King, Carl’s Junior, Starbucks, Swensen’s, Au Bon Pain, Pizza Hut, Krispy Kreme, IHOP, Cinnabon, Baskin Robbins, A&W, Subway, Coffee Beans and Tea Leaf, 7-Eleven, Outback Steak House, Sizzler, Domino’s Pizza, Dunkin Donuts, Anytime Fitness, and Taco Bell to name a few.
The general concept: The general idea is to start a business of choice at a selected location with a well-recognized brand. It bases on proven systems and processes that can be successfully replicated. While getting continuous coaching and support from experienced partners, the investor remains an independent entrepreneur.
Success factors: From a legal and tax perspective, the long-term success of the tried-and-true, time-tested business model depends on a solid corporate and investment structure, especially with respect to Thailand’s foreigner legislation,a beneficial franchise agreement which properly takes into consideration future developments on the business, regulatory, and on the taxation level a tax-efficient structuring of the cross-border business, especially with respect to withholding tax minimization, and legal advice and support starting from visa, work permit issues to leasing and employment agreements.
The franchisee’s negotiating power: The franchise system, the contractual framework of different agreements and the quality and standards set by the franchisor are essential to protect the brand and the franchise system’s image. Therefore, these elements are not negotiable. Other legal and business essentials as territory, a right of first refusal, contractual cure periods, and other tasks can be negotiated.
Franchised location, protected territory, intellectual property rights
Trademarks and more: The franchisor (sub-)licenses its trademark rights in the brand as well as additional or substitute trademarks, service marks, logos and commercial symbols in connection with the operation of the business. Also, the use of specified methods, procedures, standards, and specifications is educated to the franchisee, which qualifies as a trade secret under the Thailand Trade Secrets Act of 2002. All IP might be improved, further developed or otherwise modified from time to time.
The protected territory: Typically, the franchise is personal in nature and may not be used at any location other than the franchised location, and can’t be delegated, subfranchised, or sublicensed. An area surrounding the franchised location is defined as protected territory and the franchisor covenants not to operate or to license to anyone else the right to operate any business from any other location in the protected territory.
Thailand’s regulatory framework on franchises
Positive stance: Thailand’s Ministry of Commerce (Department of Business Development) actively promotes franchising as a “business strategy which could help franchisor and franchisee to grow their business and many of Thai franchise brands are now running stores abroad.”
Unregulated business: Franchise business is currently unregulated and needs no license. The Trademark Act, the Trade Competition Act, Patent Act, Copyright Act, Trade Secret Act, and Trade Competition Act, Foreign Business Act, etc. apply and have a significant impact on the franchise businesses.
No franchise whitepaper: Under current legislation, there is no need to prepare a franchise disclosure document (FDD, UFOC) with 23 specified areas of disclosure to provide franchise buyers with vetted and validated information that can be used to make an educated decision. This typically includes information about compensation and business expenses, franchise business plan, trademark rights, their amendments if any, as well as the termination of the contract.
Draft legislation: Franchise is defined under a pending draft of Thailand’s Franchise Business Act as „the operation of a business in which one party, called a ‘franchisor’, agrees to let the other party, the ‘franchisee,’ operate the business using the forms, systems, procedures and intellectual property rights of the franchisor, or to use its rights to operate a business during a specified time or in a specified area, such operation being under the direction of the franchisor’s business plan, and the franchisee having a duty to reimburse the franchisor.“ Under the draft version, the franchisee will require a franchise license and the franchise agreement has to be in written form and registered with the Ministry of Commerce. The Franchise Commission Agency will be created as a regulatory body.
OTCC guidelines: Effective on February 4, 2020, the Office of Trade Competition Commission guidelines on franchise business have been published under Section 57 of the Unfair Competition Act of Thailand. Under the new enactment, in particular, these seven requirements must be met:
#1. Restrictions of franchisee’s rights need a business reason.
#2. Limitations of subsequent contract adjustment rights by the franchisor.
#3. The prohibition to purchase products or services from manufacturers or other service providers need a valid reason.
#4. Selling discounted perishable goods can’t be prohibited without a valid reason.
#5. Equal conditions have to be offered to the franchisees (anti-discrimination rule).
#6. Contractual conditions have to pass quality and standard tests.
#7. Several disclosure requirements as a precondition for entering into a franchise contract by a franchise disclosure document.
Violations are subject to an administrative fine of up to 10% of annual revenue in the year of violation.
Professional services in Thailand’s franchise sector
PUGNATORIUS Ltd. is the Bangkok-based specialist provider of transactional legal and tax advice on foreign investments in Thailand’s manufacturing and service industries as well as property developments and acquisitions. In the franchise industry, the law firm provides, in particular, these seven professional services:
#1. Adoption to Thai laws and compliance: Support and assistance in the adjustment of U.S./international franchise systems to Thailand’s civil law system, regulatory framework, and taxation rules. Review of current franchise projects regarding compliance under Thai laws and regulations, as well as tax reduction opportunities.
Effective February 2020, a new regulatory framework for Thailand’s franchise contracts requires an adjustment of existing agreements. Ask the law firm for a comprehensive consultancy and support offer.
#2. Corporate structure: Designing and implementing a protected Thai corporate structure as a legal vehicle for the international franchisor in Thailand. Also, setting up a Thai Co. Ltd. for the franchisee in accordance with requirements set by the franchisor.
#3. Acquisition: Legal support and assistance of investors in the acquisition of franchises in Thailand. Negotiation of protected territory, renewal rights, Transaction support services in the evaluation of commercial conditions, franchise fees, advertising and promotion support, and other business aspects, based on deep market knowledge.
#4. Development of new Thai franchise projects including licensing and tax structuring. Preparation for internationalization of local franchises.
#5. Intellectual property management: Drafting and structuring of trademark agreements and other IP rights to protect the franchise brand. Registration of trademark licensing with the Thai authorities. Prevention, investigation, detection, and prosecution of IP right infringements. Confidentiality agreement with a franchisee.
#6. Ongoing assistance: Continuous support and assistance as a franchise lawyer as well as general legal counsel on the ongoing business.
#7. Franchise litigation advice, support, and representation on the franchisor or the franchisee side.
PUGNATORIUS Ltd. has a unique hands-on franchise industry experience and knows the typical tasks and steps to enter the Thai market by an international franchise brand.