Many franchise system that are successful in the U.S. can be successful in other countries. But, there are special legal, business and cultural issues involved in international franchising. Vinson Franchise Law Firm prepares the types of agreements needed for international franchising, and we work with local franchise counsel in the relevant country to help make the franchise agreement valid and enforceable there.
The U.S. represents a huge market, with more than 300 million people, most of whom have a very high standard of living compared to many countries. A franchise system that is not doing business in the U.S. is missing out on this important market. But, there are special legal and business issues involved in franchising in the United States. Vinson Franchise Law Firm works with foreign franchisors and/or their existing legal counsel in their country to help make their U.S. expansion go as smoothly as possible.
Services for U.S. Franchisors Expanding Internationally
1. Overview of Sevices for Outbound Franchise Systems
We assist U.S. franchisors with:
Modifying standard U.S. agreements for use in foreign countries
Preparing international master franchise agreements (or other types of international franchise agreements)
Hiring and dealing with local legal counsel in the relevant country
Interpreting and implementing comments and changes in the documents suggested by local counsel
Understanding the different legal and business environments involved in international franchising
Merging with or buying foreign franchise systems
2. Preliminary Steps for Franchising Outside U.S.
Typically, the initial decision to expand internationally comes as the result of a qualified prospect 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.
a. Protection of 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.
b. Due Diligence Investigation. You must conduct a due diligence investigation of the proposed international business partner -- for your own protection, and to ensure compliance with the U.S. Patriot Act and the U.S. Treasury Department’s Office of Foreign Assets Control's regulations.
c. Select Business Model. The most common relationship in international franchising by far is the international master franchise business model, 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 may have an significant impact on selection of the business model.
d. Preparation of Standard Forms for International Franchising. After the business model has been selected, the relevant legal documents will need to be prepared. For a U.S.-based franchisor, this typically invloves the use of an international master franchise agreement (in English and governed by U.S. law) and modified version of the unit franchise agreement for use in the foreign country.
e. Selecting and Hiring Competent Local Legal Counsel in the Relevant Country. The U.S franchisor will need to have the international master franchise agreement and the modified unit franchise agreement reviewed by a local franchise lawyer. This lawyer will point out any problem areas under the documents and local laws, and will help guide you through the process of complying with all of the applicable legal requirements for doing business in the relevant country.
f. Compliance with Local Laws. Because the International master franchise agreement usually specifies that it is governed by U.S. law, the impacts of foreign laws on that agreement are usually minor. However, it is crucial for the franchisor to make sure that the choice of law provision and the dispute resolution provisions in the international master franchise agreement will be recognized and enforced by the courts in the foreign country. Additionally, there could be peculiar legal requirements under the particular laws of the foreign country to maximize the likelihood of enforcement, possibly including translation of the agreement into local language, registering the international master franchise agreement with a governmental agency, and/or obtaining governmental approval of the agreement.
Under the international master franchise business model, the local master franchisee bears most of the burden of ensuring compliance with local laws in connection with the offer and sale of unit franchises and in connection with relationships with unit franchisees. However, it is in the franchisor's best interest to make sure that the master franchisee has fulfilled its obligations in this area.
g. Supporting Foreign Franchisees. Typically, under the master franchise business model, the local master franchisee will bear all of the responsibility for training and supporting the local unit franchisees. This might require translation of the franchise operations manual into the local language, implementing an ancillary web site (and/or intranet site) in the local language, and translating marketing materials and training materials into the local language. The franchisor will need to consider how it will monitor and enforce the master franchisee's compliance with system standards.
h. Adapting to Foreign Customs and Cultures. Most U.S.-based franchise systems will need some adaptation to local customs and cultures. Many successful businesses in the U.S. have stumbled badly when expanding internationally by failing to adapt the business for the local customs and cultures.
We can help you with all of these steps.
3. Basics of the Master Franchise Relationship
In an international master franchise arrangement, the U.S. franchisor gives the foreign master franchisee 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 franchisee will act as the franchisor. The master franchisee will typically be responsible for developing leads for qualified unit franchisee prospects, for signing the unit franchise agreements, for training new franchisees, for collecting fees from unit franchisees in the territory, and for monitoring franchisee compliance with system standards.
The master franchise usually pays a portion of its revenues to the U.S. franchisor as royalties.
The master franchisee 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.
4. Primary Benefits of the International Master Franchise Relationship
Like franchising in general, the international master franchise relationship allows for significant expansion without significant expenses and without significant risks for the U.S.-based franchisor. Additional advantages of the master franchise arrangement include:
The master franchisee (or its owners) are typically natives of the foreign country, and are expected to be very familiar with the language, customs and culture of that country.
The master franchisee may also have helpful business experience, business contacts, and government contacts in the relevant country.
The master franchisee in the country can provide training and support to franchisees easier than the U.S. franchisor.
The burden of translating all franchise materials is normally shifted to the master franchisee.
The burden of complying with the applicable foreign laws is normally shifted to the master franchisee.
5. Typical Risks of International Franchising
The franchised concept may not "translate" well in another country.
The reputation and 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.
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 franchisee.
Revenues from international franchising will be affected by international tax treaties.
Revenues will also be affected by fluctuations in currency exchange rates.
International franchising may require more management resources than the franchisor can spare.
Supporting and supplying foreign franchisees may be more difficult and more expensive.
In master franchising, the franchisor has even less control over operations by unit franchisees than under domestic franchising.
Successful international franchising often depends on having good local business partners. Bad master franchisees can be disastrous.
Capitalism is a new concept in some countries.
Local competition may be well established.
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.
Political instability is a serious risk in some countries.
Governmental corruption is prevalent in some countries.
6. Finding Prospective Foreign Franchisees or Master Franchisees
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.
Services for Foreign Franchisors Expanding Into U.S.
Many of the services we perform for foreign franchisor are similar to the services we perform for start-up franchisors. Please see the web page for Start-Up Franchisors which describes the basic requirements for franchising in the United States.
We assist foreign franchisors with:
adapting foreign franchise systems to the U.S. market
preparing international master franchise agreements
adapting form franchise agreements (and other agreements) to be used with U.S. franchisees to comply with U.S laws and business customs
drafting franchise disclosure documents (FDDs) and exhibits
preparing and filing the registration forms required by various state agencies
complying with other U.S federal and state laws and regulations affecting franchise sales or franchise relationships
For U.S. franchisors expanding internationally, we offer a fixed-fee package that includes the preparation of an international master franchise agreement and appropriate modification of the franchisor's existing unit franchise agreement. The fixed-fee price for this package is US$10,000.
For foreign franchisors expanding into the U.S., we offer the same fixed-fee packages as for start-up franchisors, and at the same prices. See Start-Up Franchisors.
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