Buying a Foreign-Based Franchise

What to know when researching a franchise based outside of the United States.

learn more about Jeff Elgin

By Jeff Elgin • Jul 7, 2014 Originally published May 5, 2005

Opinions expressed by Entrepreneur contributors are their own.

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:

"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

Jeff Elgin has almost 20 years of experience franchising, both as a franchisee and a senior franchise company executive. He's currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best meets their needs.

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