Franchising Insight Why U.S. Franchises Face Problems Abroad

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Although the demand for American products and services is rising overseas, selling franchises abroad is becoming more of a challenge.

The Internet and satellite television have increased the desire for American products and services around the world. But instead of getting easier, selling franchises overseas is getting more challenging.

One reason, says Russell Smith, vice president of franchising for Regus Business Centers Inc., of Kennesaw, Ga., is that U.S. franchise companies have already picked the low-hanging fruit, and ventured into markets that are easy to enter. "To further expand globally, we must face more challenging markets, where economies are not as fully developed," he says.

The economic infrastructure that has evolved in emerging-market countries can be very confusing, even to long-time franchise attorneys like Joyce Mazero, head of franchise development for Jenkens & Gilchrist P.C., in Dallas. "The hardest bit of information to track down today is who you're actually doing business with," she says. "Is the person you're negotiating with the one who's making financial guarantees, or will someone else be standing behind your contract?"

Mark Forseth, senior counsel for Marriott International in Washington, D.C., says his company recently ended negotiations on a hotel deal in an unnamed city when it discovered that the investors planned to sell interests in the property, just like a condo. "Would we then have been doing business with 350 individuals?" he asks.

To prevent such confusion, Ms. Mazero advises her franchise clients to begin each negotiation with an organizational checklist, detailing who owns the company and the other businesses they're affiliated with. In the native language, of course.

The Language Barrier

When international franchising was easier, a franchisor could expect someone on his international partner's staff to speak English. That's no longer true. "In 22 years of negotiating internationally, I never had a real problem with language, until last year, when one client expanded into the People's Republic of China," says Ms. Mazero. Translating disclosure documents and 85-page franchise contracts into less-common languages adds weeks and thousands of dollars to each deal, she says.

Those documents are further complicated by a spate of new laws. Today, other jurisdictions -- including Albania, Australia, Brazil, some Canadian provinces, China, France, Indonesia, Italy, Japan, Malaysia, Mexico, Romania, Russia, South Africa, South Korea and Spain -- have passed their own franchising laws, and rules are pending in Venezuela and Sweden. While some of these laws simply regulate what information a franchisor must disclose to a prospective franchisee, others attempt to regulate the franchising relationship, says Kay Marie Ainsley, managing director of Michael Seid & Associates, a franchise consultancy in Troy, Mich.

The Internet's Influence

On the plus side, the global environment has helped spawn 52 world-wide franchise associations, from Argentina to Zimbabwe, that franchisors can contact for expansion assistance.

Perhaps no force has influenced international franchising more than the Internet. Franchise companies' Web sites are available world-wide, and franchisors who once promoted international opportunities at a couple of trade shows each year now receive e-mailed requests for information on a 24/7 basis.

But, launching franchise names and trademarks into cyberspace also puts them in danger. "You must protect your intellectual property rights from trademark pirates," warns Erik Wulff, a partner in the franchise group at Hogan & Hartson LLP, in Washington, D.C. "If you go into Sydney Airport, you'll pass hamburger stands called Burger King and Hungry Jacks. In Australia, another restaurant group registered the Burger King name first, so all real BK burgers there are sold at Hungry Jacks."

Mr. Wulff advises franchisors to register their primary trademarks in "every significant country," before someone else takes them. Domain names are also in jeopardy. It's less expensive to register every permutation of your franchise company's name, even the pejorative ones, than it is to litigate a single dispute, Mr. Wulff says.

A Case for Caution

In the new global environment, you can also damage your name on your own. Just a few years ago, international franchising was a hit-or-miss affair. A franchisor sold a license to someone he met at a trade show or who sent him a fax. If the franchise succeeded, great. If it failed, no one knew about it anyway. Today, a problem with an international franchisee can ruin your brand in that country, says Ms. Ainsley of Michael Seid & Associates. "If something goes wrong, there's a stigma of failure that makes it more difficult to reintroduce your brand."

"International franchising can be a great opportunity," says Ms. Ainsley. "But it's easy to underestimate the amount of time and money it costs. You can get a store open in 120 days in the U.S.; in some of the emerging markets it can take years."

"With the demand for franchising so high today, it's tempting to sign an overseas contract and consider the $500,000 license fee as profit to your company. But with attorney's fees, translations, travel, trademark registrations and other expenses, you can run through that money very quickly," she says. "If you want to franchise internationally, do it because you believe your products or services will make a difference there. Don't do it to fix your problems at home."

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