A Franchisor's Due Diligence for International Franchising
When a U.S. franchise system wants to expand internationally, the franchisor must perform the appropriate due diligence before selling units to franchisees in another country. Franchisors must assess and consider, among other things, foreign franchise rules, local law, cultural barriers and differences, and language barriers. Many franchisors will enter into a master franchise agreement with a master franchisee. Pursuant to a master franchise agreement, master franchisees will have the right to own and operate their own franchise units, and sub-franchise the right to sub-franchisees to open their own units. The master franchise agreement takes a significant amount of the typical operational responsibilities off of a franchisor’s hands. However, before getting to this step, the aforementioned due diligence must be completed properly.
Foreign countries may have their own franchise statutes, rules and/or regulations that will control if, how and when franchisors must file their franchise disclosure document (“FDD”), along with when and how they can begin selling their units. Many franchisors will engage the help and advice of local counsel to assess how to properly draft, register, if necessary, and issue their FDDs to potential franchisees. With regard to the drafting process, franchisors should be aware that cultural or even religious aspects of a certain country could affect the language contained in the FDD and franchise agreement. For example, many FDDs and franchise agreements include a provision that dictates how the ownership of the franchise would be transferred in the event of a franchisee’s death or disability, often providing for inheritance rights for the franchisee’s spouse/family. If such a provision is contained in a franchise agreement signed, for instance, in the United Arab Emirates with a Muslim franchisee, then Shariah law would override this transfer language because that estate would be controlled by Shariah inheritance law.
Similarly, franchisors may run into cultural barriers, or opportunities, depending on your point of view, when expanding to foreign countries. For an example of one industry, restaurant franchisors may have to alter their menu depending on where the franchise expands. Restaurant franchisors strive for menu uniformity to assure customers that they will be presented with the same menu and same tasting food, no matter which restaurant location they choose to dine. While uniformity remains a standard goal of restaurant franchisors who expand internationally, the franchisor must consider other countries’ cultural customs and preferences. This will likely mean that a foreign FDD and franchise agreement will have a different or modified version of “uniformity” with their menu in comparison to the franchise system’s U.S. counterparts. Often times, a restaurant franchisor will alter its menu by either eliminating certain menu ingredients, such as bacon, or creating a new menu option entirely, to meet a certain country’s demands. For example, if you eat at a McDonald’s in India, you will find that the menu options include a “McCurry Pan,” which is a bread bowl filled with chicken curry. This menu item is not available in the U.S., but was created and added to the Indian menu to attract the local customers.
Language barriers may also be an obstacle for franchisors depending upon which countries they choose to expand in. Assuming that English is the U.S. based franchisor’s language of choice, it is common that the franchisor will provide a provision in its franchise agreement acknowledging that any training, advice, written materials, and assistance provided by the franchisor to the franchisee will be provided in English. This provision will likely include a clause that requires the franchisee to pay for any cost or expense associated with translating any materials or having an in-person translator assist the franchisee. While these provisions handle the technicalities of the franchise agreement, a franchisor should still expect that a language barrier may delay the initial negotiation process or even day-to-day communications with the franchisee.
Expanding a franchise system into other countries could prove to be a great opportunity for a franchisor to grow its brand. However, a franchisor should be prudent in performing its due diligence to assure that the process of expansion goes as smoothly as possible. Assessing potential issues such as relevant foreign franchise rules and laws, cultural barriers and differences, and language barriers, as discussed above, will give a franchisor a leg up in the race to grow its system.