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Exporting Your Franchise to the United States

Exporting Your Franchise to the United States

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Published by carlkosnar
Franchise Development and Sales Consulting
Franchise Development and Sales Consulting

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Published by: carlkosnar on Apr 10, 2011
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07/23/2015

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EXPORTING YOUR FRANCHISE TO THE UNITED STATESBy Carl J. Kosnar
The greatest growth in franchising over the past decade has been outside the UnitedStates. After examining the 2010 Asia-Pacific Franchise Guide and reviewing nationalfranchise association Websites, it is obvious that franchising is increasing in popularitythroughout the world. Despite their ever-increasing number, it is surprising that very fewforeign franchise systems have extended their franchising programs to the United States.This article is intended to provide practical advice for non-United States companies thatare considering franchising in the United States. Although each company’s particular situation will be different, the following are some general considerations with regard toestablishing a franchise system in the United States.One of the major reasons foreign franchise companies have avoided the United Statesmarket has been the cost of conforming to old FTC Rule 436. The Amended Rule hasmade it substantially easier to do business in the United States.
Amended Franchise Rule Exemptions
Three new exemptions to the Rule enable many foreign-based franchise companies toavoid the franchise disclosure process altogether. The Amended Rule exempts franchiseoffers made to “sophisticated investors,” companies that have been in business for at leastfive years and have a net worth of at least $5 million. Only one member of an investor group needs to meet the requirement for the exemption to be applicable. Therefore,franchises may be granted to companies with established regional or national businesseswithout the need for a disclosure document, audited financial statements, or other documents usually required by the Amended Rule.Also exempt are franchises requiring investments exceeding $1 million, excluding thecost of investments in unimproved land and any financing provided by the franchiseorganization. In calculating the investment, franchise companies may include theexpenses and fees associated with establishing franchised outlets under multi-unitfranchise agreements, such as area development agreements and master franchiseagreements. Multi-unit franchising programs are the norm in international franchisingand are therefore likely to satisfy the $1 million investment threshold in many retail andhospitality franchise offerings. Prospective franchisees who agree to convert existingbusiness operations to a franchise also may include the value of their business assets inthe calculation of the amount they are investing in a franchise.Finally, franchises sold to officers, owners or managers of a franchise system which havebeen employed by the franchise company for at least two years before purchasing thefranchise will be exempt. This will allow a joint venture formed to enter the United
 
States market to be sold as a franchise if one of the franchise company’s managementstaff owns a 50 percent interest in the venture without the need for FTC disclosures. Anentity “which is at least 50 percent owned by a person who, within 60 days of thepurchase of the franchise, has been, for at least two years, an officer, director, generalpartner, individual with management responsibility for the offer and sale of the franchisesystem’s franchises or the administrator of the franchised network” qualifies for thedisclosure exemption. The same exemption applies to a person who has owned at least a25 percent interest in the franchise system for a two-year period, ending no later than 60days before the franchise sale. Thus, if a member of a franchise firm’s management or ownership team could acquire a 50 percent “ownership interest” in a United Statesfranchisee, and operate it as a prototype unit in the United States, the exemption would beavailable. The Amended Rule does not prohibit the other owners from having votingcontrol over the franchisee entity, nor from investing a majority of the capital needed toacquire the franchise and launch the franchised business.
Financial Audit Requirement Changes
The Amended Rule relaxes the audit requirement somewhat, and allows foreigncompanies to use statements prepared under their country’s Generally AcceptedAccounting Principles, so long as the statements also satisfy criteria published by theUnited States Securities and Exchange Commission for the use of foreign financialstatements in United States securities offerings. Foreign franchise companies can usuallyfind accounting firms willing and able to modify existing statements to meet the SECcriteria in a cost-effective way.
State Regulations Remain in Place
The Amended Rule applies to all franchises offered for locations in the United States andits territories. However, franchise sales laws in 15 states also regulate offers and sales of franchises by their residents to their residents, and sometimes to non-residents if franchised locations will be established in those states.
Market Research
Before entering the United States market, the first step is to determine the United Statesconsumer market for the products or services. Is there demand for the products or services? What is the competition? What is the pricing? What are the costs of production and distribution considerations?In addition, a company should conduct research on the market for franchises to sell thesame products or services. Are there already systems which offer similar franchises?What are the initial fees and royalties? What type of training or support do theyprovide?
 
How to Get Started
A non-United States company should open at least one “company-owned” location(owned by the franchising entity) in the United States, before it begins to franchise in theUnited States. It needs to have this experience, so that it will know what is involved inopening a store in the United States, in terms of start-up costs, fees, build-out,government permits, supplies, and other aspects of the operations. This will also give itexperience in determining the demand for the products and services in the United States,as well as the right form of marketing and pricing.The experience of opening and operating a store in the United States will also give theforeign company the opportunity to “Americanize” the services and products, tryingdifferent business methods, branding, and pricing for the United States market. Onlyafter it has this first-hand experience in the United States, will the company be ready tostart offering franchises in the United States.
Corporate Structure
Normally, we advise foreign companies to form a United States affiliate company, whichwill issue the franchises in the United States.This accomplishes a number of things: 1) limits potential liability of the “Mother”company if franchising in the United States does not go well; 2) avoids the possibilitythat a United States taxing authority may declare the”Mother” company must report all of its income to the United States taxing authority; and, 3) makes it less expensive toprepare audited financial statements for the franchising entity.
Trademark Registration
Trademark rights are generally determined in the United States by priority of use, and notpriority of registration. Nevertheless, a company that is considering franchising in theUnited States should register its trademark as soon as possible. Registration serves anumber of useful purposes, including putting the world on notice that the owner considersit a protected trademark, and also providing additional remedies if someone uses thetrademark.United States trademark law allows an applicant to file an application for trademark registration even before the applicant has started using the trademark in the United States(an “intent-to-use” application), provided that the applicant files a certification withinthree years after the application is approved confirming that it has in fact started using thetrademark in the United States.
Training, Communication and Support
To succeed in any country, a franchisor must provide good training, support andcommunication.

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