Franchising in the U.S. is a dream for many prospective investors. However, the U.S franchise laws are arguably the most developed globally, meaning you must be compliant with franchising laws before selling franchises in America. Total compliance involves adhering to federal and state franchising statutes, besides the laws where the parent company will be based.
If you’re considering growing a local brand to an international brand in the U.S, you must have a comprehensive plan to be competitive on the global front. Franchise law attorneys provide compliance services if a business is not structured on domestic or international franchise laws. The best approach to expanding internationally is by implementing a franchising strategy for international business.
What’s International Franchising?
An international franchise can be called a Master Franchising or Master Licensing, and it’s with brands that are keen on expanding globally. International franchising doesn’t differ much from domestic franchising because in both cases, prospective franchisees acquire exclusive rights to market, brand, and operate a new business using the trading name of a parent company–franchisor.
Additionally, both international and domestic franchising involves selling franchises to third parties who become master franchisees in their jurisdictions. However, you must consider certain issues if you’re considering international franchising, including:
- Feasibility of the business.
- Market competition.
- The advantages and disadvantages of international franchising.
- Resources to be invested.
- Adaptation challenges.
- Operational challenges in the new market.
- Return on investment.
- Federal and state statutes–U.S;
- Franchise laws of the parent company;
- Applicable bilateral and multilateral treaties.
International Franchise Regulations
Franchising is governed by franchising laws in all countries, but no country can be compared to the U.S when it comes to imposing many pre-sale disclosures. Many countries have thriving franchising statutes, which require franchisors to issue federal and/or state-level pre-sale disclosures to prospective franchisees.
According to franchising rules, pre-sale disclosures must be contained in federal disclosure documents and should be issued 14 days before signatures are appended. Some jurisdictions require franchisors to issues FDDs to be filed with specific government agencies.
International franchising is particularly impact by laws of:
- Contract breach;
- Technology transfer;
- Currency control;
- Property ownership & foreign investment;
- Imports and exports
- Dispute resolution.
Types of International Franchises
There are different types of international franchising business models, including:
This is the easiest and most popular form of franchising and is commonly use by the majority of investors when going international. Franchisors make critical decisions regarding the target market and the type of person to work with (master franchisee). The qualifying franchisee becomes a franchisor in the new jurisdiction after paying a franchise fee.
Master franchisees promote the products of the mother company and open franchise units in their jurisdictions. A franchise agreement specifies the maximum number of units that can be opene in a new market. Most franchisees are natives of target countries which is a plus because they understand the business laws, politics, trading habits, and the local culture of the target country. Also, their business connections and networks could benefit your brand.
Regional franchises are ideal for big markets due to the complexities of managing a franchise. Management is simplified by dividing a region into smaller units, which operate like your standard master franchise. Regional franchises have a regional master franchisee and sub-franchisees below them.
The franchisee acquires the rights of a franchisor in direct franchising. In other words, they’re franchisors in their designated jurisdictions. The features of direct franchises are similar to those of domestic franchises. These franchises require substantial capital, and the franchisee is expect to train, recruit, and provide ongoing support to sub-franchisees–just like in ordinary domestic franchising. Domestic franchises usually have centralized administrations thus, ideal for markets sharing similar features, such as:
- Culture and languages;
- Legal statutes, systems, and regulations.
- Climate and weather conditions.
Area development is ideal for jurisdictions where sub-franchising is illegal. A franchisor can consult an international franchise lawyer to recruit a suitable prospective franchisee in area development. The market can be divide into smaller units like in regional franchising, although such divisions are only necessary for advance franchise agreements.
Advantages and Disadvantages of International Franchising
- Prior experience isn’t a must.
- The rate of success for international franchising is usually higher than domestic franchising.
- Promotes business outlook.
- On-going support simplifies business processes.
- Franchisees are the boss in their designated territories.
- Going international promotes business reputation.
- Significant capital is required.
- Franchise agreements can be unfavorable to franchisees.
- The legal structure of an international franchise complex.
- The franchisors can lose control in master franchising.
- Supervision can feel intrusive.
- Terminating a franchise isn’t straightforward.
- Profits or royalties reduce franchisors’ income.
- Franchising disputes can stall a business.
International franchises must adopt and implement franchising strategies for international businesses to succeed–that’s why they should consult franchising attorneys for legal advice.