• International Franchising
  • June 5, 2003 | Author: James M. Wilson
  • Law Firm: <?notran?>DurretteBradshaw PLC - Richmond Office
  • Franchising, the source of the ever-present McDonalds, Pizza Huts, and Burger Kings in our lives, is viewed by many as a strictly American way of doing business. Nothing could be further from the truth, however. Many American franchise systems look to other countries to expand when their American markets are full. Increasingly, foreign concepts are using franchising to open outlets in the United States, as well.

    This article will offer some insights to franchising internationally from the perspective of one going outside the US for additional franchisees and from the perspective of one looking to become a franchisee of a foreign system.

    To start, let's visit a basic definition of franchising. According to the Federal Trade Commission, a franchise consists of a marketing program where one sells goods or services of another in association with the other's trademark and where the owner of the trademark exerts some level of control over aspects of the business. Additionally, the FTC requires a payment of at least $500 when the business is started or within the first six months of starting.

    In international franchising, one of the first areas that should be looked at is the trademark. A US company seeking to franchise into another country must be sure that their trademark registration is recognized in the host country or that the trademark is filed in the host country for protection. One problem that a franchisor can encounter in an international franchise situation is a trademark that is taken in the host country already. An international trademark search can be an expensive but necessary step before committing to going into another country.

    Another critical element of an international franchise is banking and monetary restrictions on payments being made outside of the host country. The new international franchisor should well investigate how banking laws in the host country will affect its abilities to receive monthly royalties from its foreign franchisees.

    Once the mundane aspects of getting started and getting paid have been attended to, the next step is to determine how the system will operate in the new cultural environment. Tastes and customs obviously vary around the world and the successful franchisors adapt their products and services to the local culture. Much has been made recently of the changes McDonalds has made to their cuisine in their French restaurants and of the French reaction to those changes.

    Recognizing the need to be flexible in how the franchise outlets are set-up and operated, many franchisors license a person to operate as a sub-franchisor in the host country. This sub-franchisor has the authority to modify the outlets, the services and products offered as well as register new trademarks, if necessary, in the host country. The sub-franchisor should have the authority to market franchise sales, pick new franchisees, establish local financing programs and do all things to make the franchise system successful in the new country.

    As a US franchisee of a foreign franchise system, one needs to be aware of many of the same issues that impact US franchisors going to new countries. Is the trademark registered or protected in the US? Does the concept translate well into American culture? Will the franchisor allow the US licensee to make modification to accommodate US tastes? The largest concern for a person accepting a license to franchise a foreign concept in the US is the US laws on franchising apply to the franchise system. A disclosure document, the UFOC, must be drawn up that legally covers the franchise system before sales can be made. In some states, including Virginia, that UFOC must be registered with the state before franchise sales can be solicited.

    Franchising can be a great way to expand a system to new markets, but careful preparation must be taken to meet the requirements of the host country. As Franchising has expanded, countries other than the US now have disclosure requirements and registration requirements that must be met before sales can be made.