Guide to International Franchising in the United States
How to Bring Your Brand from Overseas and Franchise in the US
Are you an overseas brand and you have interested franchisees and licensees here in the United States? Do you have interest from master franchisees who want to start selling franchises in the US? Do you have questions about registering an FDD, the difference between licenses and franchises, or how to franchise in the US?
If these are questions that you have, then this guide will help.
For many international brands, franchising in the United States makes sense and is an achievable goal. Overall, whether you are a domestic US based brand or an international brand entering the US market, the process of franchising is largely the same and within this guide we’ll discuss some of the unique factors that you need to be aware of as you enter the United States market. Generally, for an in depth understanding of franchising and how to franchising works in the US, read the Ultimate Guide to Franchising Your Business.
The Basics About United States Franchise Law?
United States Franchise Laws and Franchise Disclosure Document (FDD)
In the United States before you can legally offer or sell a franchise you must first comply with federal and state specific franchise laws that require the pre-sale disclosure of a legal prospectus to your prospective franchise buyers. This pre-sale disclosure is known as a Franchise Disclosure Document or FDD and it must be developed, prepared, and issued in accordance with the Federal Franchise Rule and state specific laws where you will be offering and selling franchises. In certain states known as the “Franchise Registration States“, your FDD must also be submitted, reviewed, and registered with a state administrator. Once issued and, as applicable, registered with the franchise registration states, the your FDD must be properly disclosed to a prospective franchise buyer 14 days before they sign a franchise agreement or the payment of any fees. To learn more about the federal and state franchise laws and what states require FDD registrations and filings, visit our interactive franchise registration map.
If you are interested in franchising in the United States, contact us at (800) 976-4904 or use our contact form and find out how we could get you up and running and selling franchises in the United States.
Licensing is Not an Alternative to United States Franchise Expansion
Many times international brands enter the United States market by initially structuring license agreement, e.g., where they authorize a US partner to establish a branded location, outlet, or service territory through a license agreement. In the United States license agreements are not an alternative to franchising and if the goal is unit level brand expansion, most license agreements end up being an illegal franchise. If you have already sold licenses in the United States, a plan should be put in place to convert you licenses to franchises and cure any prior franchise violations. To learn more about this topic you review our licensing vs franchising guide.
Individual Unit Franchises verses Master Franchises
When you enter the United States market it is important to determine your franchise sales strategy and whether you will be directly selling individual unit franchises, master franchises or, a combination of both. We discuss the differences below.
Individual Unit Franchise Sales – If you are selling individual unit franchises in the United States (i.e., where each franchisee will open their own franchised location) this means that you will be directly selling franchises to individual unit franchisees throughout the United States. Most likely you will be establishing a United States based affiliate entity and this affiliate will become the franchisor in the United States. The franchisor / franchisee relationship will be directly between your United States based affiliate and the individual unit franchisees located in the United States. Your United States Based affiliate will be required to issue its own FDD and will be required to register and file its FDD in the appropriate states. Next we’ll discuss master franchise sales which is a more common sales strategy for overseas brands entering the United States market.
Master Franchise Sales – If you are selling master franchise rights in the United States, unlike individual unit franchise sales, you will be selling large territories – such as a portion of a state, an entire state, and, sometimes, the entire United States – to one or a few franchisees that will become your master franchisees. In this case, you will be selling your master franchisees the right for them to develop and sell franchises within the United States. After you sell these master franchise rights, as to the future individual unit franchise sales, the franchisor / franchisee relationship will not involve you or your United States based affiliate but, rather, will involve a direct relationship between your master franchisee and the individual unit franchisees who they sell franchises to. Your master franchisees will then pay you royalties and fees based on a percentage of the royalties and fees that they collect from their individual unit franchisees.Before you sell master franchise rights in the United States, you must issue a United States based master franchise FDD outlining the disclosures and legal obligations between you and your US based master franchisees. Once you sell your master franchise rights, your master franchisees will then be required to issue their own FDD as they proceed with individual unit franchise sales. It’s important to remember that both you and your master franchisees will both be required to issue FDDs.
Establishing Your United States Legal Infrastructure
Establishing Your United States Franchising Corporate Structure
For legal protection purposes, generally, you should consider establishing a United States based franchising subsidiary company, e.g. XYZ USA Franchising, LLC. Your US franchise subsidiary company will be owned and controlled by you, will be incorporated within the United States, and will be the legal entity that will be granting franchises. Reasons why a US franchising subsidiary is recommended include limiting the liability of your parent company, limiting your legal exposure within the United States and, procedurally, because your US based FDD will either initially or, over time, require the inclusion of audited financial statements prepared in accordance with US based GAAP. Your US based subsidiary would be granted the license and right to use your trademarks and sell franchises in the United States.
During the franchise development process, your franchise lawyers should be coordinating the formation of your US based franchising entity with your internal corporate legal team, accountants, and tax advisors. Some corporate formation issued that should be discussed and considered, include:
- State of Formation – The state where the franchising entity will be formed.
- Type of Entity – Whether or not the franchising entity will be established as a limited liability company or corporation;
- Ownership – Who will be the shareholders / owners of the franchising entity. Consideration should be given to international tax treaties and methods for distributing income from the US franchising entity to international shareholders and owners.
- Tax Identification Number and Bank Account – Obtaining a tax identification number for the new franchising entity, opening a bank account, and depositing funds for capitalization.
From a capitalization standpoint, there is no technical requirement as to the amount of funds that need to be deposited into the bank account for your new franchise entity. However, in certain registration states, if a franchisor maintains a low level of capital relative to the investment that a franchisee will be required to make and the level of pre-opening training and support that the franchisor must provide, state specific franchise registration may be conditioned on the imposition of a financial assurance requirement that, most commonly, will require your franchising entity to defer receipt of a franchisee’s initial franchise fee until you have completed all of your pre-opening training obligations, and the franchised business is opened.
A primary component of the franchise rights that you will be granting in the United States includes your trademarks. To protect your trademarks in the United States and, to ensure that you have protected the interests of your future franchisees, your trademarks must be registered with the United States Patent and Trademark Office. Once your trademarks are registered, depending on who owns the registrations, i.e. your overseas company or your new US based subsidiary, a license agreement may need to be structured to ensure that your US based franchising subsidiary possesses the necessary trademark rights to sell franchises. To learn more about protecting your trademarks in the US, read our Guide to Registering Your Trademarks and Protecting Your Brand.
Operations Manual Development
The operations manual is a critical element to integrating the legal and operational obligations that your individual unit franchisees and, if applicable, your master franchisees will be expected to follow. As you enter the United States market you must develop an operations manual.
If you are ready to get started and sell franchises in the United States, we’re here to help. We’ve helped brands across the world enter the United States market. Through our fixed fee Franchise Launch Program, you’ll have a US based team to help you franchise in the United States the right way.