International Franchising: Getting the Information You Need – and Why

Editor's note: The author will be part of a panel on this topic at the upcoming IFA Annual Convention in Las Vegas. The session, "The Help You Need and Where to Find It," is part of Track One of the International Summit on Monday morning, February 25 from 8:30-10:30 a.m.

Below are key areas of inquiry any franchisor desiring to lay a firm foundation for an international franchise sales program should examine. Knowing where to find information to assist the emerging international franchisor - and why this information is essential for getting deals done properly and efficiently - is critical to a successful launch of any international franchise sales program.

1) Market and Business Environment

The first of the necessary inquiries to make is understanding the advantages and disadvantages of your target market, as well as assessing the degree to which your business model will need to be adapted to that market. Markets will vary depending on how material operating issues such as sourcing of product, menu selections and ingredients, hours of operation, and the like are to your franchise system. To assess the degree to which a market is initially friendly or not to your franchise system, consider the following resources:

• International Franchise Association
• The World Bank
• Development Economics Group (The World Bank)
• Doing Business (The World Bank)
• International Finance Corporation
• Office of Foreign Assets (U.S. Dept. of the Treasury)
• The World Factbook (CIA)
• The Economist Intelligence Unit
• U.S. Commercial Service Reports
• Transparency International
• MAPIC
• International Distribution Institute
• International advisors and trade experts

2) Budgeting for Business

No one likes to be surprised by the investment necessary to launch an international franchise program, so consider the following initial infrastructure costs:

• Recruiting candidates
• Legal and regulatory
• Use of a franchise broker
• Training and support
• Translations
• Sourcing and procurement

Consider the following resources for establishing a budget for infrastructure and deal-specific costs you will invest, and how you will recoup that investment:

• International Trade Administration (U.S. Dept. of Commerce)
• Brokers
• Translations
• Worldwide tax
• Customs and tariffs

An important part of structuring a budget is calling on the right experts for brokering deals, sourcing, and manufacturing and distributing your product or service. In addition, counseling on legal, tax, and related matters is critical when building your international franchise infrastructure. Consider the following resources for finding the advisors and providers who will fit your culture and help you meet your goals:

• Wholesale Suppliers
• Wholesale Central
• The Reseller Network
• Industry Trade Publications
• Supply Chain Quarterly
• Supply Chain Digital
• Supply Chain Management Review
• Forbes
• NRA Supply Chain Management Executive Study Group
• TCU Center for Supply Chain Innovation
• Council of Supply Chain Management Professionals
• IFA Supplier Forum
• ABA Forum on Franchising
• Referrals from manufacturers

3) Due Diligence

Nothing is more important than finding the candidate that fits your culture and business model. In an international context, the same due diligence you would use for domestic franchise sales and more is needed. As part of the pre-sale vetting process, conducting online searches and using an "on the ground" investigative resource are key tools for gaining insight into relevant professional and personal data about the prospect. It will be necessary to use an application or qualifying reservation agreement to obtain the prospect's consent for release of information that is not available online and would require third-party sources to reveal. Suffice it to say that unless you do so, you will not be able to realistically assess the candidate's fit for your business. If you craft this properly, you can recoup costs associated with the background investigation of the prospect through an application or reservation agreement fee. Resources for you to consider for due diligence activities are:

• U.S. Dept. of the Treasury sanctions programs
• USDA Foreign Agricultural Service Attaché Reports
• U.S. International Trade Administration
• Export.gov
• Trace International
• "On the ground" local investigators such as Kreller Companies
• Trade associations such as the International Organization for Standardization
• World Organisation for Animal Health
• Private databases such as the Decernis Library

4) Pre-Sale Negotiated Terms

In any franchise agreement there are provisions that will draw comments from any prospect and its counsel. Being prepared for how to respond in advance of a negotiating session is important. Typical provisions that come under fire are: imposing a letter of credit, bank guaranty, or credit risk insurance condition to better ensure royalties are paid; territorial rights in the applicable market and the ability to operate other businesses including competing businesses; transfer restrictions; liquidated damages; and payment for translation costs and the like. It is useful to know your business case for each of these provisions and establish your position up front. To do so, you will need competent and experienced international franchise counsel. Consider the resources below for locating an advisor that fits your needs:

• IFA Supplier Forum
• ABA Forum on Franchising
• International Bar Association
• Who's Who Legal
• International Comparative Legal Guides

Building a plan for the kickoff of any international franchise sales effort is challenging because you will not cover everything. However, a franchisor's ability to build a strong foundation for an international franchise sales program will not be successful without attention to the foregoing areas.

 Joyce Mazero, a shareholder with Polsinelli PC, a law firm with more than 825 attorneys in 21 offices, is co-chair of its Global Franchise and Supply Network Practice. Contact her at 214-661-5521 or jmazero@polsinelli.com.