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 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, and how to franchise in the US?
If these are questions that you have, then this guide will help.
For many international brands, franchised expansion 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 franchise your business read the Ultimate Guide to Franchising Your Business.
The Basics About United States Franchise Law?
Franchise Disclosure Document (FDD)
In the US before you can legally offer or sell individual unit or master franchises you must first issue and, in certain states, register or file a franchise disclosure document or FDD. The FDD must be properly disclosed to your US based prospective franchisees not less than 14 calendar days before signing any franchise agreement or accepting any fees. There are some variations on this rule but, generally, this is the baseline standard that will apply.
United States Federal and State Franchise Laws
In the US franchising is regulated at the federal level and at the state specific level. The FDD must be prepared and issued in compliance with the Federal Franchise Rule issued by the United States Federal Trade Commission. In addition to the Federal Franchise Rule, many states have also implemented supplemental franchise regulation and certain states (“Franchise Registration States”) require FDD registration or a filing (“Franchise Filing States”) of the FDD before a franchise may be offered or sold. To learn more about the federal and state franchise laws and what states require FDD registrations and filings, visit our interactive franchise registration map.
Due to the multiple levels of regulation it’s important that your US based FDD be prepared on a multi-state level where the FDD meets and satisfies the federal disclosure requirements and that it also includes state specific amendments and modifications to ensure compliance at the state level. This can all be done in one unified FDD.
If you are interested in franchising in the United States, contact us at (718) 979-8688 or use our contact form and find out how we could get you up and running and selling franchises in the United States.
Individual Unit Franchises verses Master Franchises
When you enter the United States market it is important to determine your franchise sales strategy and, in particular, whether you will be directly selling individual unit franchises, master franchises or, a combination of both. We’ll 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 the 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. Its important to remember that both you and your master franchisees will both be required to issue FDDs.
Establishing Your United States Legal Infrastructure
Your US Based Subsidiary
For a number of regulatory and legal protection reasons, serious consideration should be given toward establishing a United States based franchising subsidiary company. 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. You would then grant your US based subsidiary the license and right to use your trademarks and your US based subsidiary would directly sell individual unit franchises or master franchises within the United States.
A primary component of the franchise rights that you will be granting in the United States will include 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.