Monday August 10, 2020

updated - August 10, 2020 Monday EDT


Mar 06, 2012 11:59 AM EST | By Staff Reporter

International franchising has grown significantly in recent years. Franchising now exists in more than 160 countries and is used in more than 70 different business sectors. U.S. franchisors are expanding internationally, and in doing so, will need strong master licensees in the host countries. Master franchisees must have the capital, business acumen and knowledge of local markets to make the franchises there successful. While Canada is still the most popular country for U.S. franchise expansion, Asia, Europe, South America, Central America, and Mexico are also experiencing great international franchising growth.

With the ever-increasing growth of international franchising, potential franchisees in these markets will need information covering a wide range of subjects - from general data concerning the culture, political climate and economic trends of a target country, to specific product or market surveys. Also, a country's treatment of certain legal issues is critical. There is absolutely no substitute for a thorough analysis of all of these areas before a transaction is consummated. Being aware of the issues likely to arise in any international franchise arrangement, and how such issues will likely affect the franchisee during the term or after expiration/termination of the relationship, can save a prospective franchisee from committing to terms he/she cannot live with in the future.

Franchise Regulation

While no country imposes as many presale restrictions on franchisors as the United States, many countries do have pre-sale regulations. Currently, there are at least twenty-four countries which specifically regulate franchising. Australia, Brazil, Canada (Alberta only), China, France, Indonesia, Japan, Malaysia, Mexico, Romania, South Korea, and Spain, have laws regarding pre-sale disclosure, requiring franchisors to provide to a prospective franchisees, prior to sale, a disclosure document setting forth required information. Some countries also require that the disclosure document be filed with a specific government agency. In addition to pre-sale disclosure regulation, international franchising is affected by a wide range of laws, including those which relate to trademark, antitrust, contract, tax, and technology transfer issues, currency control, foreign investment, import and export restrictions, and dispute resolution. A prospective franchisee should seek assistance in such laws which include U.S. federal and state statutes and regulations, laws of the foreign nations where the franchise will be located, and even any bilateral or multilateral treaties which may apply.

The U.S. Federal Trade Commission's Trade Regulation Rule on Franchising (FTC Rule 436), may be applicable in an international franchise relationship, and covers all "continuing commercial relationships" that are either "package and product franchises" or "business opportunity ventures." Under Rule 436 a prospective franchisee must be provided with a disclosure document containing information in twenty categories, financial statements, and a copy of the franchise agreement. Section 5 of the Federal Trade Commission Act (FTC Act) states that "unfair or deceptive acts or practices in or affecting commerce, are declared unlawful." Although it has been held in at least one U.S. federal court that the FTC Rule does not apply to a transaction between a U.S. franchisor and a foreign citizen, the FTC Act defines "commerce" very broadly. As a result, the FTC Rule may still be useful in assisting courts in determining disputes between international franchisors and franchisees.

In addition, fifteen states in the United States have franchise sales laws that also require a franchisor to provide certain disclosures to a prospective franchisee at the time a franchise is offered or sold. These state franchise laws may also apply to an international franchise transaction, where the offer originates in the subject state, is accepted in the subject state, or is made to a subject domiciliary of the state, in that these laws, generally, apply in the event of an "offer" or "sale" of franchise rights in the subject state.

Other considerations should also be made prior to entering into an international franchise relationship. As in any franchise relationship, after an international franchise relationship is entered into, unanticipated events can lead to disputes. However, unlike disputes which arise when franchisor and franchisee are in the same country, a dispute involving two different legal systems can become a difficult and costly problem for all concerned. Issues such as which country's law governs the franchisor-master franchisee agreement, and where a dispute is to be resolved, are important factors to be considered by a prospective international franchisee. A prospective international franchisee should consider whether the laws which govern include any specific franchise regulation at all. For instance, are there any requirements for a comprehensive disclosure document, a cooling off period, or mandatory dispute resolution procedures? As such, while significant and exciting potential exists for franchisees in international franchising, it is important for a potential franchisee to seek U.S. and foreign legal assistance in evaluating these issues before entering into an international franchise relationship.

Types of International Franchising

The most common form of franchisor-franchisee international franchise relationship is the master franchise, also known as sub-franchisor. In such a relationship, the master franchisee is granted a franchise for all or part of a particular country. The master franchisee is granted the right to develop the entire territory or sub-franchise the units to third parties (sub-franchisees). The master franchisee is trained by the franchisor. Thereafter, in consideration for a portion of the royalties, the master franchisee recruits, trains, and supports sub-franchisees to operate individual units of the franchise in the territory. In effect, the master franchisee is now the franchisor for that particular country, and normally there is no privity of contract between the sub-franchisee and the international franchisor located in the United States, or other countries.

Another form of international franchisor-franchisee relationships is the Area Development Franchise. Like the master franchise discussed above, the franchisor grants the Area Developer the right to develop an entire country or part of it. Unlike the master franchise, the Area Developer focuses on running the business, rather than selling franchises.

Although less common, some international franchise relationships take the form of single-unit franchises. A single-unit franchisee is granted the right to open one franchise. Franchisors steer away from this type of arrangement due to the great costs sustained in servicing one unit outside the country.

Checking out the Franchisor

Any prospective franchisee should check out the past results of the international franchise company and its franchisees. In the case of a foreign-based international franchise, a prospective franchisee should research both the U.S. master licensee and the foreign-based main franchise company.

The track record of the master franchisee is important in that you will want to make sure that the master franchisee is competent in its endeavors and assists its unit franchisees in being successful. Checking the financial records of the U.S.-based international franchisor is also important. Is it financially sound enough to continue in operation and support the efforts of the master franchisee directly, as well as your efforts indirectly long term?

The track record and financial strength of the foreign-based franchise company is also important. How well does the company follow the standards and values we are used to in the United States? Does this parent company have the financial resources to support the master licensee, should the master licensee encounters difficulty and need support from the international franchisor?

Investing in a franchise concept that has been developed and proven in another country can be a wonderful business opportunity ... or a financial disaster. A prospective franchisee of an international franchise opportunity should take care to make a complete and thorough investigation of the international franchise opportunity, including the principals of the company, the track record and financial strength of the U.S. master and foreign-based franchise company, the litigation/arbitrations that the companies have been involved in, and the track record of success in its existing franchises.


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