International expansion comes with its own set of challenges that may be more extreme than what you have faced setting up for franchising in the U.S. We tell clients, “do not do it just because you want to brag to your buddies at the country club.” If that’s your motivating factor, it’s not a good reason.

You have to be over royalty break-even, and you have to view international franchising the same way you are considering domestic franchising. It is a long-term play. Although you will get a pile of money upfront, it’s potentially not going to be profitable. In the first couple of steps, you’re going to be learning everything and it’s going to take a massive chunk of your brain and time as the founder. You should be sure that your domestic franchise system is really humming before we would recommend that you consider expanding into international markets.

As a franchisor, you are always going to have people who want to take you internationally. It is a massive distraction, and until you own the US market, you should not even touch it because it is so different. You must be confident in what you are doing domestically because you are multiplying your risk. Our advice is to always get a big enough check upfront, because if you never get another check, it was still worthwhile. As a general rule, we do not encourage our clients to consider international expansion unless you put your toe in Canada. But even there, it’s difficult, and there are a whole host of issues.

Finally, consider leaving money on the table for the next person. Part of the valuation proposition for franchisors is scalability, which implies there are more places to bring the concept. So, leave some money on the board for the next person to branch out.

There are generally three options for setting up for international expansion.

• Master: Master Franchising is the most common option for your international expansion. In this model, a franchisor sells a territory to a Master franchisee who is granted the right to offer and sell franchises within the defined territory. The Master essentially steps into the shoes of the franchisor and performs all of the services that a franchisor would and signs each sub-franchise agreement with the sub-franchisee. The franchisor is not a signatory to each of these agreements. They franchisor and master franchisee will share in the fees that are paid by each sub-franchisee. This is frequently a 50-50 split, but it can be as much as 60-40 with the master receiving the 60. The franchisor will almost always require the master to open its own unit before it begins marketing the franchise within the territory. This will establish a footprint for each sub-franchisee to follow. The arrangement will allow the master to expand the brand in the territory without any interference from the franchisor, except for the customary monthly or quarterly visits. The negative for the franchisor is that they will lose control over the territory and will rely exclusively on the master to meet their development schedule and work with the sub-franchisees.
• Area Representative: Area Representative model is a hybrid of the Master model. In this model, the franchisor grants the same rights to the Area Rep but maintains control because the franchisor will sign each franchise agreement, so that there is a direct relationship with each franchisee. In this model, the split of fees is almost always 50-50. This model does provide the franchisor with the ability to terminate each franchisee as opposed to relying on the Master to that.
• Multi-Unit: Multi-Unit model is not any different than it is in the US. The franchisor targets a local operator who is granted the right to develop its own units in the territory. This model does not give the developer the right to offer or sell franchises in the territory. The operator must own each unit.

We rarely see single units in the international arena, and our recommendation is to go with the master setup, provided you do not give away too big a territory. The size of the territory and the selection of the right master is the key to having international success.

International intellectual proprietary is very hard to enforce. Even if there are laws on the books and it is expensive to register and enforce. Once you file your trademark, you will get letters in the mail advising you that you’re not protected internationally. This is a trademark scam, and if it doesn’t come from us and it looks like an invoice, do not pay it.

Our recommendation is that if you do not have an intention to expand internationally, do not secure and maintain all those trademarks as it can be expensive and daunting. If you are expanding, identify your target countries and spend the money to get it registered. Be aware that in some countries, it can be as much as five thousand dollars just for the application.

The Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks – the Madrid Protocol – is one of two treaties comprising the Madrid System for international registration of trademarks. The protocol is a filing treaty and not a substantive harmonization treaty. It provides a cost-effective and efficient way for trademark holders – individuals and businesses – to ensure protection for their marks in multiple countries through the filing of one application with a single office, in one language, with one set of fees, in one currency. Moreover, no local agent is needed to file the initial application.

While an International Registration may be issued, it remains the right of each country or contracting party designated for protection to determine whether or not protection for a mark may be granted. Once the trademark office in a designated country grants protection, the mark is protected in that country just as if that office had registered it.

The Madrid Protocol also simplifies the subsequent management of the mark, since a simple, single procedural step serves to record subsequent changes in ownership or in the name or address of the holder with World Intellectual Property Organization’s International Bureau. The International Bureau administers the Madrid System and coordinates the transmittal of requests for protection, renewals, and other relevant documentation to all members.

The United States is a member of the Madrid Protocol.

International franchising can help build your franchise system, but there are many countries that have franchise laws with which you will need to comply with.  The following countries have franchise disclosure or relationship laws:

Not all disclosure laws are registration laws. In fact, in most of those countries that have disclosure laws, do not require a registration prior to making a sale, as do the US registration states. However, those countries with disclosure laws will not permit any payments to be made to the US franchisor without having a disclosure document in place that complies with the law of that country. If you are expanding into countries without any franchise laws, such as the UK or Germany, you can accept a non-refundable deposit that will cover your legal fees for local counsel to review your US documents.

If you expand internationally, you are going to need local counsel. We will assist you in identifying local franchise counsel who will be able to adjust your franchise documents to comply with local franchise law. We recommend this because we are only licensed to practice law in the US. We have an extensive list and can recommend a franchise attorney who can handle your legal matters in each specific country.

There is no arguing with the idea that franchising is an alternative method of financing the growth of a business, as the franchisee’s capital is employed in the expansion rather the franchisor having to tap its own financial resources. However, that truth is moderated by the fact that the “pump has to be primed”. As is the case in an early-stage domestic franchise program, you must invest capital before a return is realized. International expansions are no exception, even if the categories of investment are different.

Internationally, you have to be prepared to encounter greater travel costs, costs in establishing solid supply chains locally or across borders, greater franchise marketing costs, costs for foreign market research for adaptation issues, translation costs for agreements and manuals, legal costs to protect trademarks and comply with local laws, etc. Another factor affecting your capital requirements will be the international expansion vehicle you choose. Master franchising typically allows you to download a significant portion of the foreign development costs onto the shoulders of the master franchisee. By comparison, unit franchising directly into the foreign market requires you to finance all of the costs.

The bottom line is that an international franchise expansion will not succeed if you do not have sufficient capital to cover the necessary costs.

People run businesses, not machines. Having the right people to do the required jobs is critical in any business and in any type of franchise activity, whether domestic or foreign. However, the skill sets for international franchising, in many ways, are different than the skill sets for purely domestic franchising. One reason for this is that the international franchisor is dealing with cultural and possibly linguistic differences that are sometimes deep and complex. If your people do not understand the nuances of the foreign market, the chances for disappointment are that much greater.

Strong senior management buy-in to expanding internationally has never been more important. The commitment to the strategy must be at the CEO, ‘C’ level, and ownership level. International expansion is both a financial and a people commitment.

Another danger exists in underestimating the amount of time that is required to sell and service foreign franchises. Usually, the cost of franchise sales and the time it takes to complete them is two to four times greater than similar domestic sales. Franchise support and service can similarly cost much more in foreign markets initially, until the system matures in that market.

Typically, the international licensee of US brands is a well-established and successful local company seeking new brands to fill a niche in their countries. They are real businesses, not entrepreneurs with money and no management experience. They are going to dissect the concept to ensure to them that it works, makes money, and can fit their local culture. They will start with the US FDD and then want the equivalent of a very detailed Item 19 to build their local financial and operating models. The system had better be successful in the United States.

Fully documented training, support and marketing programs that are defined in detail in manuals and online are what you are selling as a business system. The more documentation there is, the more programs there are, and the more manuals are online, the better are the chances of finding real, qualified licensees in other countries.

All too often, a franchisor begins an international franchise expansion or jumps into another foreign jurisdiction because some eager prospect approaches them with a financial enticement.

Sometimes, such a move by a too early stage franchisor is justified by arguments like “well if it fails over there it won’t affect the system in the US”, “it is easy money that is much needed at home and we are not investing in this, there will be no cost”, “our competition is over there already” or “it will enhance our image and make domestic sales easier when everyone sees we have ‘gone global’”. In reality, an international expansion must be “pushed” by solid planning and the establishment of a sound foundation, not “pulled” by a chance encounter with an eager prospect. The drain on resources, the loss of future possibilities and the potential for bad publicity, in this electronic and ‘global’ age, of a failed international expansion may out way any perceived advantage.

The choice of which foreign markets and in what order is critical in succeeding in an international franchise expansion. Some obvious factors are closeness geographically to the home market and linguistic and cultural similarities. Although, Mexico, for example, meets one criteria, but not the other. Grouping countries in natural blocks, i.e., the Middle East, Eastern Europe, South America, may also prove to be more efficient than to direct limited resources to more wide-ranging markets.

You must be aware of the worldwide proliferation of franchise specific legislation or legislation that affects franchising. We provide that list above.

Not all of these countries require a registration like the US registration states, but many have disclosure requirements (which requires to dissemination of the local disclosure document before any funds can be taken), and some require the filing of the executed franchise agreements. Some of these are merely franchise relationship laws, like in Kazakhstan, others are only disclosure laws, like in Ontario, China, or Taiwan. Others, however, require a filing/registration prior to being able to sell franchises in those countries, these include Brazil, Indonesia, Malaysia, South Korea, Mexico, Australia, Saudi Arabia, Vietnam, and Japan. Penalties in some of these countries can be significant, while others may not be, but could prevent or delay the relationship. The existence or not of such laws is a factor to consider when deciding upon an expansion strategy.

Acceptance/demand for the products and services of the franchise system should also be an important factor. This is a point not lost on the Wal-Mart company, when it closed its operations in Germany. Also, these days there are many more competing franchises available around the world that are local or from countries other than the US. There can be strong local brands that will be fierce competition to the system’s franchisees.

There are dramatic differences, one country to the next, as to the number of businesspeople who will be accepting of the franchisor’s terms and financial proposition. To put it more directly, on average, prospects in countries like Canada and England, for example, are more likely to negotiate strenuously and over longer periods of time, than would typically be the case in say Mexico or Bahrain.