Going Global: Strategic Considerations for International Expansion
by Ann Hurwitz
Even before the Great Recession, many U.S. companies facing a saturated domestic market sought to sustain their growth by expanding internationally. That trend has increased during the last two years with the decrease in U.S. consumer spending and limited access to capital for domestic expansion resulting from the Great Recession.
Growing markets in China, India, the Middle East and Southeast Asia, among others, have enticed U.S. companies—and particularly U.S. franchise companies—to “go global. “When undertaking international expansion, franchise companies may be tempted to focus primarily on the franchise-specific regulation that has been enacted in numerous jurisdictions outside the U.S. in the last several years.
Roughly 18 countries outside the U.S. now have some form of franchise-specific regulation. Where they exist, these laws may require franchisors to register the franchise, conduct market studies, prepare country-specific disclosure documents that differ from the U.S. form of disclosure, wait for significant “cooling off” periods before signing the franchise agreement or taking a fee, and/or include certain mandatory provisions in, or omit certain prohibited provisions from, the franchise agreement.
Compliance with these laws is an extremely important consideration, but not the only consideration, when expanding internationally. In addition to the franchise-specific laws, a number of other key issues must be addressed for a successful international launch.
A critical first step is ensuring that the company’s principal trademarks are available for use in the countries targeted for expansion. Trademark regimes differ. A country may be a “first to use” jurisdiction (like the U.S.), where trademark rights are established through use of a mark, or a “first to file” jurisdiction (like China), where use is not required in order to file for registration. Trademark “piracy” in first to file countries, where others may register a company’s mark and hold it hostage in exchange for payment, is not uncommon. To preserve expansion opportunities an international trademark strategy should be developed early, using available international protocols to reduce costs and administrative burdens.
Understanding how the company’s brand “translates” locally is also critically important. In order to succeed outside the U.S., it may be necessary to adapt the company’s trademark and other characteristics of its brand to the local language and local tastes. A company’s initial due diligence is an important step in that process, but a full understanding of how best to adapt the brand to local tastes may come only after identifying the right local partner to act as the in-country master franchisee or developer.
The ideal master franchisee/developer will have an in-depth understanding of the local market, as well as the capital, infrastructure and expertise to develop the U.S. company’s brand in the target country. Each side should carefully conduct all appropriate business and legal due diligence to ensure the maximum opportunity for success.
Once a local partner has been selected, the parties’ negotiations must cover a variety of issues. On the business side, the parties must consider, among other things, the level of support to be provided by the U.S. franchisor, the development schedule to be undertaken by the master franchisee/developer, the establishment and operation of the supply chain, and of course, what fees are appropriate given the parties’ respective contributions. Among the most difficult issues are those relating to the unwinding of the relationship following expiration of the agreements or an event of default resulting in termination.
Critical legal points to be addressed include currency exchange issues, possible governmental restrictions on payments, and applicable withholding taxes (including possible structures to reduce the level of withholding). Dispute resolution mechanisms may need to be modified; often, companies that rely on the U.S. courts to resolve domestic disputes look to recognized arbitral procedures for international disputes. Applicable competition laws may require reassessment and modification of territorial provisions.
Knowledgeable local counsel can provide invaluable assistance on these and other country-specific issues, including whether local agency laws will require compensation to a terminated franchisee, the enforceability of post-term covenants, industry-specific regulations and, of course, compliance with franchise-specific laws.
International expansion of a U.S. franchisor’s brand can contribute significantly to the brand’s growth. But that contribution does not come without careful initial planning.
Ann Hurwitz is Chair of the Franchise & Distribution section at Baker Botts, LLP. She can be reached at email@example.com.