Selling Franchises to E-2 and EB-5 Visa Applicants
As you grow your franchise system one way to expand your base of potentially well-funded, good-fit franchisee candidates is selling franchises to foreign nationals entering the United States using E-2 Visas and EB-5 visa investment programs. Questions like can I sell a franchise to an E2 Visa or EB5 Visa franchisee come up often. An even more important question is should you sell a franchise to an E2 or EB5 visa franchisee?
- An E-2 Visa is a non-immigrant visa that, from a franchise sales perspective, allows foreign nationals to enter the United States for the purpose of developing and operating a business. To qualify a franchisee candidate must be a citizen of a country that maintains an E-2 Visa treaty with the United States and must invest his or her capital in the United States for the purpose of developing and operating a business. The investment capital requirement for an E-2 visa is not specified but, generally should not be less than $120,000 and must be invested in a business that designed to generate significant returns.
- An EB-5 Visa is an immigration type visa used by foreign nationals that wish to become permanent residents of the United States. To qualify and obtain an EB-5 visa the franchisee applicant must invest capital in a business that creates at least 10 full-time jobs. EB-5 visa capital requirements are designed to created jobs in the United States and require substantial capital investments.
Below we discuss what's involved in obtaining an E2 and EB5 visa, the qualification requirements, and characteristics of these visa programs that will help you determine if these franchisees are a good fit for your franchise system.
E-2 Visas and Franchising
An E-2 Visa is a non-immigrant visa available to qualifying lawful nonimmigrant foreign nationals of treaty countries physically located in the U.S., as well as to foreign nationals abroad through a separate process, E-2 treaty investor visas allow investors to enter the U.S. to develop and operate a commercial enterprise in which they have invested. In addition to treaty investors, E-2 visas are also available to treaty investors’ employees and family members if they meet specific criteria. For entrepreneurs that are citizens of one of the treaty countries (nations with which the U.S. maintains a treaty of commerce and navigation) or a nation that has been classified as a qualifying country under U.S. law, E-2 nonimmigrant treaty investor visas can be a great option when it comes to buying a franchise – but there are still important considerations to take into account.
“We run into the situation where there’s a connection, and it's going to be an E-2 visa franchisee candidate. The next conversation is, they will sign the franchise agreement, they need to make the investment. But once we do that, then we have to apply for the visa and it’s going to take about five to six months for this process,” Internicola says.
Because of the lengthy – and often complicated – process of obtaining an investor visa, it’s critical for franchisors and foreign investors to understand the requirements for an E-2 visa as soon as possible. By gaining familiarity with visa criteria early on, franchisors can better predict whether a candidate will be eligible for approval down the road.
E-2 Visa Capital Investment Requirements
As a visa geared toward foreign investors, the requirements treaty investors must meet to obtain an E-2 visa are guided primarily by Title 8 of the Code of Federal Regulations, in addition to other titles under the Code. Per that guidance, E-2 applicants are required to be nationals of treaty countries (but not U.S. immigrants), to invest a “substantial” amount of capital in a bona fide U.S. enterprise that is not marginal, and to seek to enter the U.S. solely for the purpose of developing and directing the investment enterprise.
Because there is no legally established minimum investment amount required to obtain an E-2 visa, consulting firms working with treaty investors during the application process will sometimes advise minimums for clients based on typical approval outcomes.
“The government doesn't have a set number [for E-2 visa capital investment]. But, for example, in our firm, we recommend candidates who have over $120,000 to $150,000 for the business – and we make that very clear, because that does not cover personal expenses. We want them to be safe in their investment, so that's kind of like our floor where we can work with people and actually be able to help position them into a good business,” says Jaime Sánchez, founder of Interlink Franchise and Business Consultants, a firm that promotes and facilitates entrepreneurship opportunities for foreign investors.
When it comes to investing in businesses that meet the requirements for “substantial” capital investments under the E-2 visa program’s criteria, Sánchez says franchises can be an excellent option for treaty investors due to their well-documented capital requirements.
“Franchising fits really well because it proves that it's a real and operating business, and usually franchises require a substantial investment,” Sánchez says.
E-2 Visa Business Requirements
According to the U.S Citizenship and Immigration Services E-2 Treaty Investors webpage, a bona fide enterprise is defined as “a real, active, and operating commercial or entrepreneurial undertaking which produces services or goods for profit. It must meet applicable legal requirements for doing business within its jurisdiction.”
E-2 requirements exclude marginal enterprises that “do not have the present or future capacity to generate more than enough income to provide a minimal living for the treaty investor and his or her family.”
“In the guidelines for the E-2 visa, it says that the business needs to be operating or about to be operating – so, very close to being operating. The business doesn't necessarily have to be operational to apply for the visa,” Sánchez says.
Per the requirements for E-2 visas, new enterprises are required to demonstrate “the capacity to generate such [non-marginal] income within five years from the date that the treaty investor’s E-2 classification begins.”
“In these cases, we use a business plan to create those numbers or those projections. For a lot of these visas, we use projections – by the time you apply, it's a new business or operation. You use a business plan, and that business plan contains what is the projected P&L? How many people are you going to employ? What's your cash flow going to look like? How much is the investment going to look like? So, the business plan is key to these processes as well,” Sánchez says.
E-2 Visa Operations Requirements
According to the USCIS E-2 Treaty Investors webpage, criteria for E-2 visas require that treaty investors “only work in the activity for which he or she was approved at the time the classification was granted” and demonstrate “50% ownership of the enterprise or possession of operational control through a managerial position or other corporate device.”
Because of the guidance surrounding E-2 visas, franchisors planning to work with treaty investors should make sure the candidate intends to have regular direct involvement with the business before offering an opportunity to them.
“Our third criteria that is really important – and it should be really important for franchisors as well – is that someone is going to be involved in the business, one of the owners. And that's key because, a lot of times, a lot of foreign candidates think that franchising is fully passive, so they have that misunderstanding. In order to qualify for the visa, you need to work in the business,” Sánchez says.
Although some treaty investors may view those requirements as cumbersome, being active in the daily operations of a franchise can have advantages that extend beyond obtaining a visa – including contributing to the overall success of the franchise system itself.
“Franchise success always requires franchise owner engagement and participation in the development and operations of the franchised business. Without active franchisee owner engagement, franchised businesses underperform. There are always variations, depending on the franchise business model, but franchisors should not sell franchises to visa applications that are just using the franchise purchase as a vehicle of immigration or visa access,” Internicola says.
EB-5 Visas and Franchising
An EB-5 Visa is an immigration type visa used by immigrant entrepreneurs seeking ways to become permanent residents of the U.S. while owning a business and creating jobs, the EB-5 immigrant investor visa can be a great option – including when it comes to franchising in certain industries. Established by Congress in 1990, the EB-5 Immigrant Investor Program was designed to stimulate the economy by creating jobs and increasing capital investments in U.S.-based businesses. The eligibility criteria for EB-5 visas is guided by Volume 6, Part G, Chapter 2 of the USCIS Policy Manual. According to those guidelines, EB-5 investors are required to contribute capital to a new commercial enterprise that will create jobs.
EB-5 Visa Capital Requirements
Per the USCIS guidance, capital is defined as “cash, equipment, inventory, other tangible property, cash equivalents, and indebtedness secured by assets owned by the immigrant investor, provided the immigrant investor is personally and primarily liable and that the assets of the new commercial enterprise upon which the petition is based are not used to secure any of the indebtedness.” All invested capital should be valued at fair market value in U.S. dollars.
Unlike the E-2 visa, the EB-5 visa requires specific capital investment amounts from immigrant investors – although the guidance surrounding those amounts has sometimes been a source of confusion due to changes over time.
“Recently, there's been a lot of changes continuously by the Senate. It has been back and forth. It started with a $500,000 investment, and then it went up about $900,000, and then it's gone down again,” Sánchez says.
Per USCIS Policy Manual guidance available online as of Apr. 26, 2022, “The present fair market value, in U.S. dollars, of the immigrant investor’s lawfully-derived capital must be at least $1,000,000, or $500,000 if investing in a targeted employment area for petitions filed before November 21, 2019. For petitions filed on or after November 21, 2019, those amounts are $1,800,000 or $900,000 respectively, and automatically increase October 1, 2024, and every 5 years thereafter.”
“[Immigrant investors] have to prove that they invested that amount of money, and they have to also prove the trace of the funds – how the funds got to where they are. So basically, how did you make those $800,000? You have to even show a history of all the movements of the money in your country, so that sometimes creates obstacles because, imagine finding documents for like 10 to 15 years. Depending on how you came about that money, it can be complex or easy,” Sánchez says.
In addition to meeting the required amount of investment and specific redemption provisions, immigrant investors must also prove that their capital has been obtained lawfully, among other requirements.
EB-5 Visa Job Creation Requirements
Under current USCIS guidance, EB-5 immigrant investors are required to create at least 10 full-time jobs through their investment enterprise – criteria Sánchez advises franchisors and visa applicants to pay close attention to before offering a franchise or starting the application process.
“You have to create 10 employments, full-time, over a five-year period. So not all franchises are going to apply, and not all franchises will create 10 jobs full-time continuously. They can't be just temporary jobs – they have to be full-time jobs. So some of the risks of that is that you need to employ that amount of people from the beginning, and you have to prove that you're creating those jobs for that period of time,” Sánchez says.
Due to the widely varying needs of franchised businesses operating in different industries, Internicola advises franchisors to be wary of this requirement. Depending on the nature of the business, some franchises might not have the need – or even the capacity – for 10 employees.
“If your franchise is an owner-operated business, like a man in a van or a woman in a van, it's not a good candidate for you to attract these visa applicants, because one of the prerequisites is the creation of jobs,” Internicola points out.
In those situations, Sánchez says EB-5 applicants might want to consider alternative investment options outside of franchising.
“Usually most EB-5 candidates will apply to the EB-5 regional centers, which are other kinds of investments not relevant to franchising that generate those 10 jobs and that give those criteria,” Sánchez says.
Additional Benefits of EB-5 Visas
As a visa program intended for immigrants, the EB-5 visa program carries additional advantages for applicants that extend beyond business. Once approved, EB-5 visa holders are eligible for a U.S. Green Card, as are their spouses and unmarried children aged under 21.
“[Immigrant investors applying for EB-5 visas] will get a conditional Green Card – and then, once that conditional Green Card is approved, they’ll be Green Card holders,” Sánchez says.
Also known as a Permanent Resident Card, a Green Card allows immigrants to permanently live and work in the U.S. while enjoying the full protection of U.S. laws without risk of deportation to their home country, among other benefits.
Practices to Consider When Selling Franchises to E-2 and EB-5 Franchisee Candidates
Common Challenges
Although the process of selling a franchise, including FDD disclosure requirements, remains the same whether a franchisee candidate is a U.S. citizen or a foreign national considering applying for a visa, franchisors should be aware that visa applications can add complexity to the process due to the lengthy duration and other unique challenges.
“Franchisors should plan and have a clear understanding as to whether or not visa applicants can be a good fit and, if so, the type of visa and the skill sets that they are looking for in their visa applicants. Once a franchisor understands the process and the types of franchisees they will consider, then the next step is to work with outside professionals that can assist in streamlining the franchisor's processes in working with visa applicants and qualifying them,” Internicola says.
Effective communication
When it comes to running a business, good communication is critical for ensuring smooth operations and satisfied customers. Because of that, franchisors need to make sure they can communicate effectively with treaty and immigrant investor franchisee candidates before offering opportunities to them.
“Consider that, for many visa applicants, English may be a second language, and consider whether or not that may impact sales processes and tasks that you will be expecting your franchisees to complete,” Internicola cautions.
Because the ability to communicate and convey important information without obstacles is necessary for a business to function properly, Sánchez says Interlink only works with foreign entrepreneurs that are fluent in English.
“We don't work with anyone unless they speak English, or the person operating the business speaks English. Why? Because most franchisors don't have others speaking. In terms of support, all the training is done in English, all the documents are done in English,” Sánchez says.
Licensing and regulations
Although proper licensing is critical for anyone involved in a franchise in the U.S., obtaining licenses can sometimes be more complex for foreign nationals, especially in certain industries.
“Obstacles that franchisors may face with foreign franchisees are also the terms of licensing in the states for that specific business. For example, in Florida, there are some restrictions for contractors – so they need to have certain requirements by the state to have that license, and it's not that easy for foreigners to qualify for those licenses. So a lot of times, it's also a state-to-state thing, because of these licensing requirements,” Sánchez says.
Sánchez says some states, like Texas, are less restrictive than others in regards to licensing. In states with stricter laws, including California and Florida, Sánchez believes it can be a good idea for foreign franchisee candidates to consider investing in opportunities in less regulated industries.
“In terms of industry, I would say we do a lot of work with a lot of service industries – anything with remodeling, construction, cleaning, commercial cleaning, residential, food can also be good, beauty can also be good,” Sánchez says, adding that more regulated industries like medical spas and chiropractors can sometimes involve additional challenges for foreign nationals when it comes to obtaining special licenses.
Contingencies
To mitigate the potential business risks associated with selling franchises to treaty investor or immigrant investor franchisee candidates, it can be a good idea for franchisors to take into account the nuances of the visa application and approval process when drafting their legal documents.
“For many [franchisors], the process and the completion of the franchise sale will be dependent and conditioned on the franchisee candidate being awarded the visa. For franchisors, this means that franchise agreement addendums may include contingency provisions triggered by whether or not a visa is granted,” Internicola says.
Because the needs of franchisors can vary widely depending on their industry, location, and circumstances, it’s important to work with an experienced franchise attorney when drafting franchise agreements and other legal documents.
A lengthy process
Another common challenge for franchisors and franchisee visa applicants is the duration of the approval process – a detail that can sometimes leave candidates waiting to open their businesses, especially when it comes to obtaining an E-2 visa.
“One of the things that franchisors need to understand and know about the E-2 visa is that [candidates] need to make the investment in order to get the visa. So the investment comes first, and the visa comes later. A lot of times, there is a gap where [candidates] can't do anything, or they paid the franchise fee and now they're waiting for their visa,” Sánchez says, explaining that the process can take up to six months.
Those delays can create challenges for candidates and franchisors that often want to start generating income in a more timely manner once the franchise agreement has been signed,
“For the franchisor, sometimes it's like, ‘Well, I can't wait five or six months for you to operate if you already paid the franchise fee.’ So, that's one thing that tends to happen a lot,” Sánchez says.
Finding the Right Fit
Beyond understanding the requirements for each type of investor visa, it’s also important for franchisors to make sure foreign candidates are the right fit for their franchise before offering franchise opportunities or starting the application process.
“Franchisors need to evaluate and understand the skill sets of foreign franchisee candidates and how they translate into developing, marketing and operating the franchised business. The skill sets for services-based business that are usually heavily dependent on franchisee sales activity are very different from the skill sets needed for a restaurant or service-based business where sales are usually driven by location,” Internicola says.
Another important consideration for franchisors and foreign franchisees is the maintenance of the franchisee’s visa status following approval. Although circumstances get easier once a visa is approved, franchisees operating under E-2 and EB-5 visas need to make sure to renew their visas periodically based on the requirements of their visa.
“Usually, [visa holders] need to renew their visa every four to five years. Usually, that's the average – some countries will be less. It's anywhere between three months and five years, depending on the treaty country. But as long as the business is operational, they have a need to [renew] – and it's renewable unlimited times,” Sánchez says.
Avoid Mistakes
Because the processes for obtaining and maintaining E-2 and EB-5 investor visas can be lengthy and complicated, franchisors and foreign franchisee candidates need to have a complete understanding of the requirements for each program – something that can be achieved by working with experienced professionals.
Beyond ensuring that a foreign candidate’s visa application is prepared and filed correctly, working with qualified attorneys and business consultants that specialize in foreign investors can also help avoid wasting time and money – something every busy business owner can appreciate.
“There's a lot of misunderstandings about E-2 visas – not everyone can qualify. What I would recommend to any franchisor is to make sure that the candidate is working with an immigration attorney that's going to guide them the right way – because they might not even qualify for an investor visa, even if they have the money,” Sánchez says.
For more information about entrepreneurship for foreign investors, visit Interlink Franchise and Business Consulting or call Jaime Sánchez at (210) 463-5037.
