Expanding a franchise system into other countries is often a great opportunity for franchisors to reach untapped markets and grow their brands. Before such expansion can take place, however, franchisors must diligently assess country-specific franchise laws to ensure they are addressing all legal issues. Franchisors should pay particular attention to any unique disclosure regulations and commercial laws in the desired country or locality.
The United States’ disclosure regulations are governed by the Federal Trade Commission’s (“FTC”) franchise rule which requires franchisors to provide a Franchise Disclosure Document (“FDD”) to all potential franchisees. This document must disclose information in 23 items organized in a specific manner to give a complete overview of the franchise system. The FDD must include information concerning, but not limited to, the background of the franchisor, the expenses associated with opening the business (including any initial fee payment to the franchisor) and the franchisees’ obligations, including continuing royalties and marketing fee payments. The FDD also states the litigation and bankruptcy history of the franchisor. Franchisors expanding in the United States must also comply with individual state disclosure regulations. California, New York, Illinois, and ten other so-called registration states require franchisors to submit their FDDs for approval.
Other countries have similar regulations. For example, in China, the Franchise Regulation requires franchisors to disclose information listed in Article 5 of the Information Disclosure Measures to potential franchisees at least 30 days before signing the franchise agreement. Required disclosures include, among other things, the franchisor’s business experience and registration status, basic information about affiliate companies, and bankruptcy history. The Franchise Regulation prohibits franchisors from concealing any relevant information, regardless of whether disclosure is required. Unlike in the United States, there is no prescribed format for these disclosures.
Brazil’s New Brazilian Franchise Law (“NBFL”) requires franchisors to provide a Franchise Offering Circular to franchisees. Pursuant to Article 2 of the NBFL, the franchisor must disclose information concerning, but not limited to, periodic compensation for the use of the system, a list of all franchisees, sub-franchisees, and sub-franchisors, the franchisor’s support obligations, and the circumstances warranting fines or penalties. The Franchise Offering Circular must additionally state the contractual terms.
Because navigating international franchise regulations can be difficult, many franchisors enter into master franchise agreements. In fact, we often recommend this course of action to international franchisors. These agreements can be extremely beneficial, as master franchisees take on the responsibility of establishing and operating the franchise in an unfamiliar country. Franchisors grant the master franchisee the exclusive right to own and operate franchise units and sub-franchise to others in a specific state, region, or country. As the franchisor gives up the ability to regulate the franchise’s growth in a geographic area, it is extremely important to carefully choose the master franchisee.
Whether a franchisor is looking to expand into international markets or open new franchises locally, they should keep theses five strategic tips in mind:
- Branding Is Everything – A strong protected brand should be at the core of every decision the franchisor makes.
- Pick The Right Franchisees – Franchisees should have characteristics aligned with the brand to help foster growth.
- Balance Flexibility And Uniformity – Enforce the franchise system, accept relevant feedback from franchisees, and make responsive improvements.
- Grow – The corporate structure should be set up to maximize growth potential. When entering a new market, franchisors must perform due diligence.
- Improve The Bottom Line – Support franchisees to ensure success.
