International businesses see the U.S. as fertile ground to broaden their reach. If their business model and value proposition is one that appeals to the masses, it can be a wise move to make. There are, however, a number of things to consider before bringing a franchise concept to America.
“What many companies don’t realize is how franchising operates in the U.S. and how that differs from how it operates overseas,” says Larry Schwartz, Director and Senior Consultant with the Franchise Services Group at RBZ.
“There is crossover, but there are many unique aspects to franchising here versus most other countries. A lot of companies are simply unaware of the many regulatory issues and industry standards unique to the U.S. franchise industry.”
Smart Business spoke with Schwartz about the steps inbound franchisors need to take before opening their doors in the U.S.
What is the first step when bringing a franchise business to the U.S.?
The first and most important thing to be done is to assemble a team of franchise experts to start and complete the entire process. One of those professionals should be a franchise attorney who will prepare your Franchise Disclosure Document (FDD).
The FDD is required by the Federal Trade Commission, as well as state regulatory agencies. It provides a prospective franchisee with detailed information about the franchise and its entity, the history of the company, the business model, the principals and executive team and their backgrounds.
It also contains information about how your business operates, who your competitors are, the obligations and expectations of parties to one another, risk factors, financial information, etc.
It’s meant to protect the prospective franchisee and help them understand where they’re investing their money.
Who is the best person to draft the FDD?
A U.S. transactional franchise attorney should always draft the document.
In addition, as the international franchisor, you must decide which states you want to expand into. There are additional requirements in 14 states, including California, which requires the FDD be provided to the Department of Business Oversight.
This group looks for certain criteria to be met in order to approve the franchisor to sell and operate franchises in the state.
You need to know which states you want to be in so you can file the necessary paperwork. You’ll also need to set up a U.S. bank account. An audited financial statement of the new U.S. entity must also accompany the FDD.
Can overseas vendors and suppliers support U.S. franchisees?
They may be able to do a great job providing products and services where the franchisor is based, but it’s highly unlikely they are going to be able to provide those same products and services in the U.S.
So you’ll need to seek the advice of a professional consulting firm to assist you in establishing a vendor/supplier network on behalf of your new franchisees.
It’s also prudent to establish a U.S. based training program and determine what that program looks like, who is going to conduct it and where it’s going to be held.
How can master franchise licensees help your efforts?
You need to think about how you’re going to market your franchise opportunity in the U.S. as well as support franchisees. Most often, a master licensee pays a fee to the franchise entity for the exclusive right to develop and support the franchise within a specified market or markets.
Master Licensees act as your agent in the U.S. The Master benefits by being compensated a portion of the franchise and royalty fees paid to the franchisor and is highly incentivized to develop his/her market.
What are the keys to success for inbound franchisors?
Is there a market for your product or service that is in the U.S.? Will the brand and business model resonate well with consumers? Are you evaluating the competitive landscape the right way to make sure you are not entering a market that is oversaturated?
Are you selecting the right market and building the right infrastructure? If you have all those components, you are likely to be successful. ●
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