As franchising continues to grow in popularity around the world, foreign brands are increasingly seeking to franchise in the United States. If you are thinking about investing in a foreign franchise brand, there is a lot you need to know. Along with all of the considerations involved with buying a franchise generally, there are some unique considerations involved as well. International franchise attorney Jeffrey M. Goldstein explains.
7 Important Considerations for Buying a Foreign Franchise in the United States
Any time you are thinking about buying a franchise, you have a lot to consider. But, when buying an international franchise with its headquarters abroad, you must be especially careful to ensure that you are prepared to deal with everything that comes with franchise ownership. This means that you must carefully consider factors such as:
1. Compliance with the FTC Franchise Rule and State Franchise Laws
Franchisors selling franchises in the U.S. must comply with the Federal Trade Commission (FTC) Franchise Rule. They must also comply with the franchise registration and disclosure laws in all states in which they intend to offer franchises to prospective buyers. If a franchisor fails to comply with the law, it can face enforcement action—which can not only lead to significant financial liability but potentially force the franchisor to stop selling franchises in the United States as well.
While compliance is a concern with any franchisor, it can be of particular concern with foreign franchisors who aren’t familiar with the federal and state requirements in the United States. Since non-compliance could potentially lead to a departure from the U.S. market, this is an important factor to consider when evaluating international franchise opportunities.
2. Brand Recognition and Viability of the Franchise Concept in the U.S. Market
One of the main reasons to consider buying a franchise is to benefit from the franchisor’s brand recognition. So, if a foreign franchisor doesn’t yet have an established presence in the U.S., what are you paying for? The answer might be that you are paying for the ability to offer the overall franchise concept to a new market—but this raises a key question as well.
Is the concept viable in the United States? Tastes, trends and consumer preferences often vary widely between the United States and other countries. As a result, even if a concept is extremely successful abroad, this won’t necessarily translate to success at home.
3. The Franchisor’s Commitment to Expanding in the United States
Regardless of why you choose to buy a franchise, you will necessarily be reliant on the franchisor’s commitment to expanding in the United States. If your franchise is a test case, you might find that the franchisor is devoting the substantial majority of its time and resources (including your Advertising Fund contributions) elsewhere. Eventually, you may find that you are essentially operating an independent business—though you will still need to comply with your franchise agreement in order to avoid termination and potential post-termination liability.
4. The Franchisee Network in the United States (if Any)
As a franchisee, the ability to communicate with other franchisees in the franchisor’s network is extremely valuable. It allows you to share ideas, get answers to questions that you don’t want to ask the franchisor and leverage your collective bargaining power when changes need to be made. If the franchisee network in the United States is small (or non-existent), you will lose out on this important benefit of franchise ownership. Of course, a robust network of franchisees may develop over time, but the likelihood of this happening is a factor that you will need to evaluate thoroughly as you go through the due diligence process.
5. Costs of Ownership in the U.S. vs. Costs of Ownership Abroad
Franchisors are required to disclose the costs of opening a franchised outlet in Item 7 of the FDD. While franchisors can provide estimates, these estimates must be based on reliable real-world information. However, if a franchisor is inexperienced in the U.S., its cost estimates in Item 7 could substantially understate how much you will need to invest in order to open for business.
The franchisor might also have group purchasing arrangements, volume discounts, and other financial incentives abroad that it has yet to cultivate in the United States. If you will be paying more for your inventory and supplies, this is a factor that you will need to carefully consider when preparing your pro forma.
6. Costs (and Limitations) of Conducting Your Due Diligence
When buying a franchise, a key step in the due diligence process is “discovery day.” This is when you visit the franchisor’s headquarters, meet with its key personnel and get a hands-on look at how the franchise system operates. If the franchisor’s headquarters are located abroad, attending a discovery day could be significantly more expensive than attending one in the United States. If the franchisor’s personnel don’t speak English (and you don’t speak their language), this could limit the value of your discovery day as well.
The same considerations apply when it comes to visiting franchised outlets and speaking with current and former franchisees. If you will be traveling abroad, the franchisor may suggest that you visit a highly successful outlet near its headquarters—which may or may not be representative of the system as a whole. If you cannot communicate effectively with current and former franchisees, then you won’t be able to get all of your questions answered.
7. The Franchise Agreement’s Dispute Resolution Provisions
Finally, it is important to consider what will happen if things go wrong. If you end up in a dispute with the franchisor, you will most likely need to travel to the city where the franchisor’s headquarters are located to pursue mediation, arbitration or litigation. This is a standard requirement in most franchise agreements. Given the costs involved, it may or may not be worth it to assert your legal rights—and the franchisor will take this into consideration when deciding how to approach the dispute.
Schedule an Appointment with International Franchise Attorney Jeffrey M. Goldstein
Are you thinking about investing in a foreign franchise brand in the U.S.? If so, we strongly encourage you to contact us for more information. To schedule an appointment with international franchise attorney Jeffrey M. Goldstein, call 202-293-3947 or request a free consultation online today.
