News Briefs

Franchises See Opportunities Internationally

U.S. franchisors have long understood that building an international franchise network can reduce their dependence on domestic sales. “That message really hits home now,” noted William Edwards, CFE, who is CEO of Edwards Global Services, Inc., which provides management and development services to franchisors worldwide.

Speaking on a panel at the IFA Legal Symposium in May, Edwards said that “some American franchisors ignored international markets in the past.” But no one is ignoring opportunities abroad today, when the United States is mired in a recession, and domestic capital for franchising is difficult to obtain.

However, Edwards and his colleagues on the panel, “Strategies for Growing Your System Internationally in Today's Economic Climate,” cautioned that poorly designed and executed international ventures will surely fail. “Is your domestic system strong enough? It's very hard to be successful internationally if your domestic operation is not in good shape,” said Lee Vala, senior vice president, global development, The Alternative Board, a consultancy firm for private businesses.

U.S. franchisors will find that critical systems will have to be reworked to succeed in other markets, Vala said. Beyond obvious issues such as building brand recognition and modifying product and service mix, franchisors will need to revise operations, such as franchisee training and recruiting.

Furthermore, franchisors must be prepared to spend a significant amount of money to protect their trademarks, said panelist Jane LaFranchi, vice president and senior counsel, Marriott International. “In addition to registering the trademark and logo in English-language versions, consider registering translations and transliterations of the marks and obtaining local domain name registrations,” she said.

In addition to trademarks, franchisors will have to meet franchise-related laws in each country in which they operate. “When Marriott considers expansion, we look at which laws are applicable,” said LaFranchi. “Over 20 countries now have franchise disclosure requirements, and over 30 countries have agency or relationship laws.”

A country's tax laws and exchange controls can have a considerable effect on the profitability of a franchise arrangement and the ability to expatriate those profits, Vala said. Franchisors operating in India, for example, usually need approval from the government for their initial franchise fees and ongoing royalty rates.

Since many U.S. franchisors sign master franchise agreements that give one operator the right to franchise in a particular nation (and the obligation to meet growth targets), selecting a master franchisee is a crucial matter. “I look for people who have a track record of building a company in their country,” said Vala.

Past performance of a prospective master franchisee is a much better indicator of future performance than is net wealth, even though a franchisor might be attracted to a wealthy prospect. Yet, having deep pockets also is an issue because the franchise will not likely generate much revenue for a while. “Tell your master franchisee to do a pro forma to make sure there's enough money for three hands to dip into the revenue stream ' the franchisee, the master franchisee, and you,” Vala said.

Money can become an issue for the franchisor, too, especially in the early years of the operation. “Your return on investment will probably not turn positive until the third year of a master franchise agreement,” said Edwards. “Remember that the master franchise will probably generate costs for you, not fees, in the first years.”

Vala counseled against quickly seeking default of a master franchise when things go wrong. “The arrogance of Americans about defaults has mostly gone away,” Vala said. “It's much wiser to keep a master franchise going, even if it cannot meet all of its development targets.”

LaFranchi said that Marriott “will accommodate” a master franchisee under some conditions, such as if it is not fully meeting operating standards or has fallen behind on its commitment to upgrades and renovations. However, if the franchisee has missed payments and hotel occupancy rates are well below the target, then Marriott will usually seek a termination agreement.

Edwards remarked that franchisors face a dilemma because “if you don't enforce your agreement, other franchisees will come to you for concessions. But yet, if the problem arises from an external problem, like a weak economy or a currency drop of 50%, you should be flexible.”

FTC Issues New FAQs for FDD

On May 18, the FTC issued five new FAQs for compliance with FDD requirements. The FAQs, now reaching a total of 33, can be found on the “Franchise and Business Opportunities” section of the FTC's Web site, at www.ftc.gov/bcp/franchise/amend ed-rule-faqs.shtml.

The three responses to new FAQs that are considered most significant state that:

• An FDD should be revised to reflect any new FAQs “before any new filing required by a registration state of an FDD” and before required quarterly revisions;
• A franchisor must disclose the financials of its parent if that parent “is the only supplier of a good or service that is so essential to the franchise that the franchised business cannot be conducted without it”; and
• If a franchisor decides to include a Financial Performance Representation in its FDD, it must be included in Item 19, rather than as an attachment.

NASAA Finalizes Commentary on FDD Regulations

The North American Securities Administrators of America (“NASAA”) finalized its Commentary on 2008 Franchise Registration and Disclosure Guidelines, designed to give guidance on how states are interpreting the federal FDD rules. The final Commentary is almost unchanged from the draft issued in the fall (see FBLA, November 2008, p. 6), and one attorney called the revisions to the draft Commentary “a non-event.” The document can be found online at www.nasaa.org/content/Files/FranchiseCommentary_final.pdf.

Franchises See Opportunities Internationally

U.S. franchisors have long understood that building an international franchise network can reduce their dependence on domestic sales. “That message really hits home now,” noted William Edwards, CFE, who is CEO of Edwards Global Services, Inc., which provides management and development services to franchisors worldwide.

Speaking on a panel at the IFA Legal Symposium in May, Edwards said that “some American franchisors ignored international markets in the past.” But no one is ignoring opportunities abroad today, when the United States is mired in a recession, and domestic capital for franchising is difficult to obtain.

However, Edwards and his colleagues on the panel, “Strategies for Growing Your System Internationally in Today's Economic Climate,” cautioned that poorly designed and executed international ventures will surely fail. “Is your domestic system strong enough? It's very hard to be successful internationally if your domestic operation is not in good shape,” said Lee Vala, senior vice president, global development, The Alternative Board, a consultancy firm for private businesses.

U.S. franchisors will find that critical systems will have to be reworked to succeed in other markets, Vala said. Beyond obvious issues such as building brand recognition and modifying product and service mix, franchisors will need to revise operations, such as franchisee training and recruiting.

Furthermore, franchisors must be prepared to spend a significant amount of money to protect their trademarks, said panelist Jane LaFranchi, vice president and senior counsel, Marriott International. “In addition to registering the trademark and logo in English-language versions, consider registering translations and transliterations of the marks and obtaining local domain name registrations,” she said.

In addition to trademarks, franchisors will have to meet franchise-related laws in each country in which they operate. “When Marriott considers expansion, we look at which laws are applicable,” said LaFranchi. “Over 20 countries now have franchise disclosure requirements, and over 30 countries have agency or relationship laws.”

A country's tax laws and exchange controls can have a considerable effect on the profitability of a franchise arrangement and the ability to expatriate those profits, Vala said. Franchisors operating in India, for example, usually need approval from the government for their initial franchise fees and ongoing royalty rates.

Since many U.S. franchisors sign master franchise agreements that give one operator the right to franchise in a particular nation (and the obligation to meet growth targets), selecting a master franchisee is a crucial matter. “I look for people who have a track record of building a company in their country,” said Vala.

Past performance of a prospective master franchisee is a much better indicator of future performance than is net wealth, even though a franchisor might be attracted to a wealthy prospect. Yet, having deep pockets also is an issue because the franchise will not likely generate much revenue for a while. “Tell your master franchisee to do a pro forma to make sure there's enough money for three hands to dip into the revenue stream ' the franchisee, the master franchisee, and you,” Vala said.

Money can become an issue for the franchisor, too, especially in the early years of the operation. “Your return on investment will probably not turn positive until the third year of a master franchise agreement,” said Edwards. “Remember that the master franchise will probably generate costs for you, not fees, in the first years.”

Vala counseled against quickly seeking default of a master franchise when things go wrong. “The arrogance of Americans about defaults has mostly gone away,” Vala said. “It's much wiser to keep a master franchise going, even if it cannot meet all of its development targets.”

LaFranchi said that Marriott “will accommodate” a master franchisee under some conditions, such as if it is not fully meeting operating standards or has fallen behind on its commitment to upgrades and renovations. However, if the franchisee has missed payments and hotel occupancy rates are well below the target, then Marriott will usually seek a termination agreement.

Edwards remarked that franchisors face a dilemma because “if you don't enforce your agreement, other franchisees will come to you for concessions. But yet, if the problem arises from an external problem, like a weak economy or a currency drop of 50%, you should be flexible.”

FTC Issues New FAQs for FDD

On May 18, the FTC issued five new FAQs for compliance with FDD requirements. The FAQs, now reaching a total of 33, can be found on the “Franchise and Business Opportunities” section of the FTC's Web site, at www.ftc.gov/bcp/franchise/amend ed-rule-faqs.shtml.

The three responses to new FAQs that are considered most significant state that:

• An FDD should be revised to reflect any new FAQs “before any new filing required by a registration state of an FDD” and before required quarterly revisions;
• A franchisor must disclose the financials of its parent if that parent “is the only supplier of a good or service that is so essential to the franchise that the franchised business cannot be conducted without it”; and
• If a franchisor decides to include a Financial Performance Representation in its FDD, it must be included in Item 19, rather than as an attachment.

NASAA Finalizes Commentary on FDD Regulations

The North American Securities Administrators of America (“NASAA”) finalized its Commentary on 2008 Franchise Registration and Disclosure Guidelines, designed to give guidance on how states are interpreting the federal FDD rules. The final Commentary is almost unchanged from the draft issued in the fall (see FBLA, November 2008, p. 6), and one attorney called the revisions to the draft Commentary “a non-event.” The document can be found online at www.nasaa.org/content/Files/FranchiseCommentary_final.pdf.