International Franchising

Many franchisors believe that the international expansion of their franchise concept is a great way to generate cash on a short term basis especially in the context of a not-so-rosy domestic economy.  What they may not fully appreciate is the long term commitment that successful international franchising requires.

Whether to Go International. 

When making the decision to go international, you must consider the additional resources that you will need to successfully expand and support your new international franchisees. Areas that must be evaluated include supply chain issues, quality assurance support, travel, marketing, foreign legal expense involved in trademark registration and preparing international franchise agreements (and potentially disclosures and document registration), costs of goods due to export/import controls, foreign taxes and translations, to name a few.  A franchisor that wishes to expand internationally must have a plan in place to tackle these issues, and also have thought through the economics to ensure that internationally franchising will provide a sufficient margin to cover these increased costs, while still yielding an acceptable profit.

A franchisor should also consider whether the prospective franchisee is the right one to take its brand to a given territory.   Because a franchisor will have less ability to safeguard its system and marks in an international territory, a franchisor needs to be comfortable that its prospective international franchisee has the skills and resources to manage its franchises without a great deal of direct supervision.

Determine What You Will Offer.

There are numerous ways to structure the international franchise relationship.  Below is an explanation of the three most common structures:

Master Franchising, or Sub-Franchising.  International deals are usually structured very differently from domestic franchising in large part because of the franchisor’s limited resources internationally.  Many are structured to allow a single developer (or master) to develop a given territory, whether through establishing its own units, or granting “sublicenses” to single unit franchisees.  Under this structure, the “master” enters into franchise agreements directly with franchisees and has a contractual obligation under its franchise agreements to train and support its franchisees, with the franchisor only stepping-in if the master does not do its job.  In this situation, it is all the more important to evaluate whether the master has the ability to be a good brand steward.

Direct Franchising.  Or, a franchisor could offer single unit franchises (sometimes called direct franchising) in a given territory – much like how many systems sell franchises in the United States.

Area Development.  Another method commonly used in the United States, but less common in international franchising is “area development”.  Under this structure, a developer is given the right to develop multiple units in a given area according to a schedule.  Typically, the developer must fulfill the obligation to develop with either affiliate-owned units or units that it owns itself, but sometimes a developer may fulfill a certain portion of its obligation by referring other franchisees that enter into franchise agreements with the franchisor.

Timing.

Franchisors should be aware that international franchising doesn’t happen overnight.   Your United States counsel will need to identify and work with international counsel to make sure that the international franchise documents conform with the requirements of local law.  Foreign counsel may also need to prepare a disclosure document similar to the U.S. Franchise Disclosure Document.   Many countries also impose additional barriers to the payment of funds outside of the United States and require that the franchise documents be “registered” after signing – a process that can take months in certain countries.

Researching the Opportunity

The internet provides a wealth of information on the economy and demographics of various countries. The United States Department of Commerce website is a good starting point (www.commerce.gov) as is its included agency, the International Trade Administration (www.trade.gov). The trade promotion unit of the International Trade Association, the United States Commercial Service (www.trade.gov/cs), may also be helpful by  providing market research and worldwide trade events for promoting your offering.

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