Expanding your SME to the U.S. by Franchising your brand to the U.S. Market

What is Franchising in the U.S. Context?

To franchise your brand to the U.S. is to create a contractual relationship between the franchisor (your SME) and the franchisee who will have the right to market the product or service in the U.S. using your SMEs trademark or trade name.

General Benefits of Franchising your Brand to Fulfill your Business Expansion Goals to the U.S. Market

Franchising your SME to the U.S. creates public awareness for your brand in the U.S. and service royalty fees based on the revenue or sales of the product/service while overcoming the following barriers to U.S. market expansion:

  • Capital because the franchisee invests their own money to run the business using your SMEs trademark or trade name.
  • Labor because franchisee hires and supervisors its own employees to run the business while developing your brand.
  • Rapid growth and brand awareness.
  • Strict oversight because franchisee is responsible for supervision of business operations.

General Aspects of Franchising your SME in the U.S. to Keep in Mind

  • Franchise are creatures of statute – meaning that it is the law that dictates whether the contractual relationship of your trademark/name license is actually a franchise.
  • Franchises are regulated by federal law (specifically “FTC Rule” 16 CFR Part 436.1) and state laws, where multiple state laws can apply to one franchise relationship.
  • The expression “if it walks like a duck and quacks like a duck, it’s a duck” very much describe franchise agreements. That is to say, no matter what the parties call the relationship (Joint Venture, Licensing Agreement, Distributorship, Sales Agent, etc) if the factors that constitute a franchise are found in the contractual relationship between two entities, it is a franchise and that is that. Failure to know this, no matter how unintentional, will not free parties from liabilities if federal and applicable state franchise statute are violated.
  • Franchise agreements are difficult to terminate.
  • Relationships between franchisor and franchisee are long.
  • There are significant legal consequences to violations of either federal or state(s) laws.

Legal Considerations for your Legal Strategy to Execute your SME Expansion Strategy to the U.S.

  • Type of Franchise Agreement to enter into that is aligned with your U.S. business expansion strategy;
  • Deciding what state to register your franchise:
    • How various state franchise laws interact with your business strategy 
    • What state(s) or regions would support profitable business expansion objectives
  • How much control do you want over your U.S. franchisees and what does that mean under federal & state laws
  • What type of relationship do you want to have with your franchisee’s and what state laws support the relationship.
  • Fee, revenue and royalties will you require your U.S. franchisee pay as per federal & state laws
  • Preparing your Financial Disclosure Document for your U.S. franchisee’s
    • how long it will take to prepare the mandated documents that adhere to federal & state regulations; and
    • how the delivery rule aligns with your timeline to have operations started
  • Preparing your Financial Performance Representation that is aligned with business projections in the targeted segment of the U.S. market
  • Deciding if it is in your strategic interest to provide a Financial Performance Representation to provide it to prospective franchisees and if not, what other way you will provide such information
  • Knowing which state requires you to register your franchise before you can offer or sell your franchise.
  • What is your overall timeline to sell trademark/name license and when do you want franchisor’s to begin operations.

Note that this list is not exhaustive as there are other legal considerations that are specific to your strategic  business objectives.

As you develop your legal strategy, the answer to the most important question should be answered as you consider expanding your SME to the U.S.market:

  • Is becoming a franchisor the best option for expanding  business to the U.S. market?

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The views expressed in this article do not constitute legal advice and legal information provided in this post should not be relied upon as legal advice. Please contact an Attorney for advice on your specific matter.

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