For many years, U.S.-based franchise companies have been
"exporting" their brands and franchise concepts to other
countries all over the world. The opposite trend began a number of
years ago and has been accelerating recently: foreign-based
franchise companies that are bringing their brand and operations to
our market.
This is an exciting business dynamic, as it gives franchisees a
fantastic way to take advantage of business concepts that may not
exist in the domestic market or that have a unique twist. That
said, this dynamic also raises a number of questions in the minds
of many prospective franchisees.
Some of the most common questions we hear in relation to
foreign-based franchises coming to the United States include:
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"How safe is investing with a foreign-based
franchise?" The same disclosure requirements that apply to
a domestic franchise also apply to any foreign company that comes
into the United States to offer franchise opportunities. The
franchise must provide you with a UFOC disclosure document
containing information on key mandated factors. They are also
subject to the same consumer protection rules in terms of their
behavior during the process of selling their franchise. Also, you
can use the internet to find out information about any company
anywhere in the world. Most prospective franchisees don't find
any significant difference in the research process of a
foreign-based franchise company compared to any other, so the fact
that they are foreign-based should not, in and of itself, affect
your risk in a negative way.
"What corporate structure do foreign-based franchises
typically use in the United States?" Most successful
international franchising, in either direction, uses a "master
licensing" arrangement. In this scenario, the franchisor finds
a domestic partner that they contractually agree will develop the
franchise in the selected country. In the case of foreign-based
franchises, this is the most typical structure we see. The
foreign-based company will research the franchise business in the
United States, then interview and select a master licensee that
will own and control the franchise rights in this market. The
foreign-based company may own some percentage of this entity or may
simply require the entity to pay it fixed or variable fees in
exchange for the development rights. The most common alternative to
this structure is for the foreign-based company to create a
wholly-owned subsidiary in the new country and then hire local
employees to run the operation.
"What extra research do I need to undertake?"
It's always a good idea to check out the track record of any
franchise company in relation to their past results. In the case of
foreign-based franchises, you effectively have two companies you
should research: the U.S. master licensee and the foreign-based
main franchise company. In relation to the U.S. master, you want to
make sure you have a track record of performance sufficient to
demonstrate that they know what they are doing and can help you be
successful. You also need to know that they are strong enough
financially to last and support your efforts long term. In relation
to the foreign-based franchise company, you may want to gather
additional information about the franchisor's operations in
other foreign countries to see how well they follow the standards
and values we're used to in the United States. Also check on
the financial strength of the parent company in case the master
licensee in the United States encounters difficulty and needs to be
supported in some manner by the parent company.
"What if I am the first U.S. franchisee?"
There's an old adage used in relation to smart money investing
in franchises: "When in doubt, send a scout." The simple
fact is that being the first franchisee, or even part of the first
group of franchisees, in any system under any circumstances always
involves far more risk than waiting until later. No matter how much
experience a franchisor has elsewhere, each country they go into is
different. Until they are tested in the real world, the company
simply doesn't know how well their operating systems,
marketing, training and brand are going to work. If you do decide
to be a test subject for them in their new U.S. operation, one
advantage you may have relates to bargaining power. The very least
you should do is negotiate for some form of an early bird discount
of costs, such as the initial franchise fee (or even better--a
large special marketing test allowance paid for by the franchisor).
This approach will help you, but it still doesn't change the
fact that you will be entering the business with a fair degree of
uncertainty.
"What are the red flags I should be on the lookout for
with a foreign-based franchise company?" There is really
just one, and that involves the transition of their opportunity
into a different culture. There are many examples of U.S.-based
franchises that have struggled when they brought their concepts
into a foreign country because of cultural or language barriers.
Make sure you have taken this into consideration prior to making
any investment. If the company has not been operating in the
domestic U.S. market long enough to prove the effectiveness of
their concept, you have exactly the same risk as with any other
startup franchise--you don't know for sure that it's going
to work well and should therefore be cautious.
Investing in a franchise concept that has been developed and
proven in another country before entering the U.S. market can be a
wonderful opportunity ... or a train wreck. The only way to know
for sure is to conduct a complete and thorough investigation of the
franchise. This includes researching the people operating the
franchise, the capital structure of the U.S. entity offering the
franchises and the track record of success they've achieved
with other U.S. franchisees.
One final piece of advice: When in doubt about anything, ask the
franchisor. Don't be bashful about this, since they have
probably been asked the same thing by many others before you and
should have the answers to your tough questions all ready to go.
Research thoroughly, take the time to do this right, and you should
be fine.
Jeff Elgin is the "Buying a Franchise" coach at
Entrepreneur.com and has almost 20 years of
experience in franchising, both as a franchisee and a senior
franchise company executive. He is currently the CEO of FranChoice Inc., a company that provides free
consulting to consumers looking for a franchise that best
matches their needs.