What Foreign Franchises Coming to the U.S. Should Know

By: Joyce Mazero & Michael Seid
Published: April 26th, 2019

Although many Americans may not realize it, the U.S. isn't the only mother of invention. Companies worldwide are giving birth to their own franchised concepts and, with increasing frequency, are crossing borders and offering franchises all over the world.

Because of its size, the U.S. market is extremely attractive to many foreign franchisors. Americans also have a deep-rooted fascination with franchising, relatively high disposable income, and enthusiastically embrace new products and services. We are also the consummate consumers -- just check out our credit card debt!

The biggest problem for foreign franchisors is fear. They fear being sued because of the U.S.'s reputation for litigation. Furthermore, foreign franchisors know that playing the game in the U.S. requires investing a lot of money because of the regulatory environment, and are often daunted by the size and diversity of the market.

Foreign franchisors often offer master franchises or set up joint ventures when entering the U.S. That's not surprising because they have seen U.S. franchisors using master franchising in their home countries. But this likely is not the most productive way to expand in the U.S. because master franchising is rarely used by U.S. franchisors at home.

Foreign companies entering the U.S. need to understand the U.S. market and answer the same key questions we posed for U.S. franchisors going overseas. Even if foreign franchisors are convinced that their concept will work in the U.S., they could drain their financial resources if they miss the mark.

Working far from home presents challenges that foreign franchisors must be ready for in the U.S. These include the following:

• Will you adapt the concept to the local market? Who will control the adaptations? Who is your local consumer and competition? Remember: Unlike many foreign countries, the U.S. is not a homogeneous market. It also is a very sophisticated market and readily adopts foreign concepts. Care should be taken, therefore, in changing a brand offering based on some perception that Americans shop in any unified way.
• Are inventory and equipment available locally? If you must import them, what are the duties, shipping costs, and time constraints?
• Will you store inventory locally to make up for potentially longer delivery times to your franchisees of the products and supplies they will need?
• Does your brand have enough name recognition to demand a higher price -- especially compared with local competition -- to cover any increased costs?
• What happens if things don't work out?
• What are your termination provisions and dispute resolution procedures?
• What is your corporate culture like? Do you have open communication? How will you communicate with franchisees who speak a different language from that spoken by everyone else in the system?
• How will you get paid? Are you required to pay taxes and, if so, to whom?
• Can you enforce your core rights related to payments, termination, and intellectual property?

In conclusion

1. Just because a franchisor is from overseas doesn't mean it won't have to meet all the requirements of a domestic U.S. franchisor. If a franchisor is offering franchises in the U.S., it must provide an FDD and may be required to satisfy state franchise laws as well. Just as U.S. franchisors going overseas should work with local experts, franchisors entering the U.S. should work with U.S. consultants and an experienced franchise attorney.
2. The U.S. can be a tough and unforgiving market. Historically, few foreign franchisors, including those from nearby Canada, have prospered in the U.S. The size, costs, market diversity, and the different cultures of U.S. franchisees and consumers often overwhelm foreign franchisors. Plan on testing your concept first in a local market with a company-owned location. When you begin to expand, broadly test a market like Dallas or Chicago, which could provide you with a good opportunity to check your ability to support multi-unit development before expanding further in the U.S.

This is an excerpt from the book Franchise Management for Dummies by Michael Seid and Joyce Mazero.

 Joyce Mazero, a shareholder with Polsinelli PC, a law firm with more than 850 attorneys in 22 offices, is co-chair of its Global Franchise and Supply Network practice. Contact her at 214-661-5521 or jmazero@polsinelli.com. Michael Seid is managing director at MSA Worldwide. Contact him at 860-523-4257 or mseid@msaworldwide.com.

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