Perhaps not so surprisingly, many U.S. companies are going overseas to license or franchise their brands. Franchisors have prospered in the United States during the pandemic if they could exploit omni-channel distribution. Pick-up, curbside delivery, third-party delivery and drive through works for many restaurants. Education companies can deliver through distance learning. But some companies simply cannot perform through these mechanisms. Moreover, even the restaurant companies are challenged by brick-and-mortar development. Supply chains for both food and construction are strained or delayed. Franchise employees and contractor employees are in short supply. It is just more difficult to grow in a United States that is constrained by COVID right now.

The Benefit of Going International

Historically many brands have prospered through international operation. Many travelers want to experience U.S. concepts. Many foreign mall owners, hotels and casino operators want U.S. concept to draw business, United States and foreign as well. Unlike the United States, the foreign landlords will pay a premium for U.S. brands. It not only provides a U.S. draw but also enhances the reputation of the overseas host or landlord. Many countries make it easy to want to do business with their citizens.

With respect to COVID risk, compare the strict entry requirements to the United States, Europe, Australia and New Zealand with the more relaxed entry requirements for countries like Turkey, some Middle Eastern countries and some Asian countries. Relaxed entry requirements are good for licensing or franchising U.S. concepts.

How To Go International

Ideally, the U.S. concept wants to dip its toe in the water when considering a new country. When planning to export your concept to a foreign country, you must ask yourself the same types of questions you would ask as if you were traveling overseas on an extended trip. Like any extended trip, you will need a guide or two to explain and limit risk in the country.

The types of questions before considering a foreign excursion should address these issues. Can the U.S. company supply and support the international developer? Can the U.S. company trust the U.S. developer? How can the U.S. company protect itself from financial and collection issues? How can the U.S. company protect itself from headline risk? What about foreign corruption, or just simply risks involved in cultural differences? Tried and true methods exist to minimize all of these risks. For many, the risks are acceptable given the opportunities abroad.

Minimizing Legal Risk

The first step in minimizing legal risk overseas is building the right legal foundation. If the concept works well in the United States, then one question might be whether the concept should be licensed or franchised for the first entry into the country. The United States has the FTC rule on the Offering and Sale of Business Opportunities and Franchises, and many foreign countries have similar regulation. But just like the United States, it is possible to navigate around the rules in the beginning while complying with the letter and the spirit of the law. In some countries, the U.S. company can own a part of the joint venture operators and license the joint venture operator under it business system without being required to comply with the franchise law in that country. Sometimes the law itself does not provide for this exception, but the regime does and its is a poorly known secret that there is a work around franchising compliance in that country. Other countries have strict rules that require franchise compliance, but are rarely enforce.

To License or To Franchise

For the first test location, licensing the first unit seems the logical solution. If a franchise law work around can be accomplished, then the legal compliance costs of franchising can be eliminated or deferred until the brand is proven overseas. But there is another consideration. Some countries will not allow the brand to franchise until there are proven locations with sufficient momentum that will be the franchisor for that country. This means that licensing may not be the way to open more than one unit in country unless it is structured properly. Sometimes the licensed unit can be the later franchisor in the country, which the regulators will consider as part of the unit count. Familiarity with the country’s franchise regime, and what is not written in the statute is essential.

Intellectual Property Issues

Some countries have strong interest in protecting intellectual property, such as the brand name and trade secrets. Some do not. Protecting the name sometimes will require trademark filings similar to the U.S. Patent and Trademark Office in the United States. Other countries require a filing of the license agreement at a government office as well. In an interest of economic development, even registered marks may revert to the licensee after a number of years regardless of protection. For these reasons, the intellectual property regime must be known before seriously considering licensing or franchising in foreign country.

Negotiating the Deal

I suggest protecting or securing the intellectual property rights in the foreign country before negotiating a deal. Consider using the Madrid Protocol for trademark protection to include as many countries as you can when filing your marks. The reason for securing the marks in advance of the negotiation is because unscrupulous parties may attempt to gain leverage in the negotiation by seeking to obtain trademark protection first and negotiating later. This is particularly true if the negotiations break down and the counterparty is vindictive. Always include a prohibition in any nondisclosure agreement which prohibits filing a trademark during and after negotiations. This prohibition is not foolproof, of course, as the negotiating party could obtain a proxy to seek to local registration of the brand, causing more confusion, time and money. Spend the money to register the brand first and avoid the risks.

Getting the Money Out

Make sure you are going to a country where you can get the money out. Your profitable overseas operation may have currency risks or limitations that you can limit through preparation. You might not have considered taxes or transfer pricing in the financials, so you need to structure the deal to consider these variables country by country.

To Go Overseas or Not To Go

Many brands have successfully expanded overseas, and many find their overseas operations more profitable than their U.S. operations. It takes more planning. It takes finding an overseas operator you can trust. It takes more patience. But there may be less competition and more rewards, especially if you enjoy overseas travel.

Reprinted with permission from the January 21, 2021 issue of The Legal Intelligencer© 2022 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.