Going International? Taking Your U.S. FDD Abroad
Today’s international franchisees are often successful companies seeking a new brand to develop a business segment in their country where they see a niche to fill. Or they may be a “MUMBO” (a multi-unit, multi-brand operator) of more than one brand in their country already. In both cases, the franchisee candidate will be sophisticated and will want to know the details of the franchise on offer. Often this means they want to analyze and understand your business using your published U.S. Franchise Disclosure Document (FDD). They likely will already know what an FDD is.
Based on my experience as a master franchisee in five countries, a franchisor executive leading an international operations and development department, and working with more than 40 franchises over the past 20 years in more than 35 countries and cultures, here are the FDD sections I have found international candidates are most interested in, the ones that will most affect their investment decision.
- The franchisor and any parents, predecessors, and affiliates. The corporate background is important for the candidate to understand the legal entity’s history they will be making an agreement with.
- Business Experience. The franchisee candidate wants to know that the owners and senior executives have the background to operate and grow the business. This is important because they want to see you have more knowledge of the sector than they do of the business. If the franchise has recently had an ownership change, the franchisee candidate wants to know that the core knowledge of the brand is still in place.
- Litigation. Companies from other countries are often worried about the litigious nature of the U.S. legal system and business environment. If they see more than a few litigation cases, they may worry the franchise has problems with its franchisees that could carry over to international franchisees.
- Initial and Other Fees. Of course, a major reason for wanting to review the U.S. FDD is to find out what all the initial fees, royalties, technology fees, marketing fees, etc., are. Although the initial franchisee fees can be different than the U.S. unit franchise fees, the franchisee candidate wants to see if what you charge is in the normal range, and what they might be able to charge in their countries should they be allowed to sub-franchise your brand.
- Estimated Initial Unit Investment. This section of the U.S. FDD gives the international franchisee candidate a range of unit start-up costs in relation to the U.S. market. Construction costs, utilities, permits, and insurance vary widely across the globe. But the U.S. FDD gives the international franchisee candidate company a guide to help build their own estimated unit start-up cost. “Additional Funds” or “Working Capital” in a U.S. FDD most always refers to a single unit and usually does not directly correlate to starting up a new country license. Their costs for construction, furnishings, equipment, insurance, and similar investments will differ, but the U.S. costs help them plan for their country units.
- Training. The training that the international franchisee’s management and operations team will receive, both in the U.S. before opening in their country and ongoing training is key to their seeing value in acquiring your brand. Both classroom and on-the-job training are key. They will also want to see your operations manual. We have found it is helpful to put a detailed table of contents of this manual in your FDD.
- Marks. Although you will need to register your marks and URLs in each country where you do business, it is important to international franchisee candidates to see that your marks are fully registered in your home country. Please do not start marketing for a franchisee in a country until you have filed for registration of your marks and URLs in that country. Otherwise, you may find someone has filed “for you,” and it can be expensive getting them back.
- Item 19. This is a very important section of your U.S. FDD for international franchisee candidates. Of course, they want to see all the details of your units’ P&Ls. Eventually you will have to share basic information on the range of top-line unit revenues, the associated expense categories, and expense percentages for them to build a viable financial model for their country and understand the overall investment they need to succeed with your brand in their country. Your U.S. FDD Item 19 is just a start.
- Units open and closed. An international franchisee candidate would like to see the growth pattern of your franchise over time. A track record of growth with few closures is best, of course. In any case, be prepared to explain the growth trajectory of your brand.
- Franchise audited financials. A potential franchisee wants to see that the franchise is viable financially. They will look at your revenues from franchise sales, royalties, product sales (if any), and other revenue sources. They will also look at your cost of sales.
Do you need to share your U.S. FDD?
If the international franchisee candidate asks for your U.S. FDD, do you need to share it? Some U.S. states make franchisor FDDs available online. So if you refuse to share your FDD it will not be seen as positive by the candidate as they can probably get it from a U.S. state. A sophisticated candidate will understand some of the information in the U.S. FDD is not germane to international business.
One solution I have seen is to use your U.S. FDD to create a general international FDD with the sections that are most useful for an international franchisee. They would receive such a document once they sign an NDA. It is worth the time and investment to create such a document that can be used in multiple countries.
What other countries require FDDs?
FDDs are becoming common in many franchise countries. The U.S. has exported the need for an FDD! In most cases, the local country FDD will be a subset of the franchisor’s U.S. FDD. Here are the countries that required a franchise disclosure document in 2021, compliments of DLA Piper: Albania, Argentina, Australia, Azerbaijan, Belgium, Brazil, Canada, China, France, Georgia, Indonesia, Italy, Japan, Latvia, Malaysia, Mexico, Moldova, Mongolia, Romania, Saudi Arabia, South Africa, South Korea, Spain, Sweden, Taiwan, Tunisia, Turkmenistan, and Vietnam.
Your U.S. FDD can be an excellent international license marketing tool. Go over your U.S. FDD with an international license candidate in detail so they understand what will be similar and what will be different in their country.
William Edwards is CEO of Edwards Global Services (EGS) and a global advisor to CEOs. From initial global market research and country prioritization to developing new international markets and providing operational support around the world, EGS offers a complete international operations and development solution for franchisors based on experience, knowledge, a team on the ground in more than 40 countries, and trademarked processes based on decades of problem-solving. Contact him at firstname.lastname@example.org or +1-949-224-3896. Read his latest biweekly global business newsletter at www.geowizard.biz.
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Franchise Update Magazine: Issue 1, 2022