SERVICES FOR U.S. FRANCHISORS EXPANDING INTERNATIONALLY Many franchise system that are successful in the U.S. can be successful in other countries. But, there are special legal issues involved in international franchising. I can prepare the types of agreements you will need for international franchising, and work with local franchise counsel in the relevant country to help make your franchise agreement valid and enforceable there.
I assist U.S. franchisors with:
- Hiring and dealing with local legal counsel in the relevant country
- Modifying standard U.S. agreements for use in foreign countries
- Understanding the different legal and business environments involved in international franchising
- Conducting due diligence investigations of potential foreign business partners
- Merging with or buying foreign franchise systems
FAQS FOR U.S. FRANCHISORS
What do we need to do to get started in international franchising?
Typically, the initial decision to expand internationally comes as the result of a qualified third party expressing genuine interest in taking your concept into a foreign country. Before entering into an agreement with this third party, there are many issues to be considered and tasks to be performed.
1. You need to protect your intellectual property in the foreign country. U.S. trademark registration is not much help beyond U.S. borders. A franchisor should explore international trademark registration as soon as possible in the process.
2. You need to conduct a due diligence investigation of the international business partner to comply with the U.S. Patriot Act.
3. You need to select the structure of the business relationship with third party. The most common relationship in international franchising is the master franchise arrangement, where the third party acts as a sub-franchisor in the country. But, there are other types of possible arrangements, such as direct franchising, international subsidiaries and international joint ventures – each of which has its own advantages and disadvantages. Local law in the relevant country and the applicable international tax treaties should be considered.
4. You need to select and hire competent local legal counsel in the relevant country. This lawyer will help guide you through the process of complying with all of the applicable legal requirements for doing business in the relevant country.
5. You need to modify your existing U.S franchise documents for use in the foreign country. This may include translating your documents into a foreign language, and preparing a franchise offering circular in a different format than the UFOC format. You may also need to register your franchise with certain foreign governmental offices (and some countries require governmental approval of each franchise agreement).
6. You need to consider how you will train, monitor and support franchised locations in other countries. I can help you with all of these steps.
What is a master franchise relationship?
In a master franchise arrangement, the U.S. franchisor gives the foreign master franchisor the right to use the marks and the system in connection with franchising in a particular territory for a certain period of time. In that territory, the master franchisor will act as the franchisor. It will typically be responsible for developing leads for qualified franchisee prospects, for signing the franchise agreements, for training new franchisees, for collecting fees from franchisees in the territory, and for monitoring franchisee compliance with system standards. The master franchisor usually pays a portion of its revenues to the franchisor as royalties. The may be required to open company-owned units and/or to develop a certain number of franchised units according to an agreed-upon development schedule.
Why is the master franchise relationship so popular for international franchising?
Like franchising in general, the master franchise relationship allows for significant expansion without significant expenses and without significant risks. Additional advantages of the master franchise arrangement include:
- The master franchisor (or its owners) are typically natives of the foreign country, and are very familiar with the language and culture of that country.
- The master franchisor may also have helpful business experience, business contacts, and government contacts in the relevant country.
- The master franchisor in the country can provide training and support to franchisees easier than the U.S. franchisor.
- The burden of translating all franchise materials can be shifted to the master franchisor.
- The burden of complying with the applicable foreign laws can be shifted to the master franchisor.
What are some of the risks of international franchising?
1. Cultural:
- The franchised concept may not "translate" well in another country.
- The goodwill associated with the franchise in the U.S. may be non-existent in another country.
- Consumers may be biased against foreign brands for certain products and services.
2. Financial:
- The franchisor’s net revenues from international franchising are often less than domestic net revenues due to increased expenses and sharing of revenues with the master franchisor.
- Revenues from international franchising will be affected by international tax treaties.
- Revenues will also be affected by fluctuations in currency exchange rates.
3. Business:
- International franchising may require more management resources than the franchisor can spare.
- Supporting and supplying franchisees is more difficult and more expensive.
- In master franchising, the franchisor has even less control over operations by franchisees than under domestic franchising.
- Successful international franchising often depends on having good local business partners. Bad master franchisors can be disastrous.
- Capitalism is a new concept in some countries.
- Local competition may be well established.
4. Legal:
- It will probably be more difficult to enforce a franchise agreement against a franchisee in a foreign country.
- Some countries have laws that are very protective of franchisees.
- The laws governing business relationships may be undeveloped in some countries.
5. Political:
- Political instability is a serious risk in some countries.
- Governmental corruption is prevalent in some countries.
How can we find foreign franchisees or master franchisees?
International Franchising Trade Shows. The International Franchise Association’s web site includes a listing of upcoming events by date and by country.
Franchise Associations. Many countries around the world have franchise associations. These local organizations often have matchmaking programs to help franchisors with international expansion. The International Franchise Association’s web site includes a listing of these organizations with contact information.
American Chambers of Commerce. The International Franchise Association’s web site includes a comprehensive listing of these organizations.
Where can we get additional help with international franchising?
International Franchise Association
1350 New York Avenue, NW Suite 900
Washington, D.C. 20005-4709 USA
phone 202-628-8000
www.franchise.org
U.S. Chamber of Commerce
1615 H Street, NW
Washington, DC 20062-2000 USA
phone 202-659-6000
www.uschamber.com
Global Trade & Technology Network
1301 Pennsylvania Avenue, NW, Suite 925
Washington, D.C. 20004 USA
phone 202-628-9750
www.usgtn.net
Overseas Private Investment Corporation
1100 New York Avenue NW
Washington, DC 20527 USA
phone 202-336-8400
www.opic.gov
Where can we get more information online about international franchising?
See the sites listed in the previous 2 FAQs.
Franchise Update magazine’s web site has some information about international franchising.
Also see Franchise International magazine’s web site.
