For many non-U.S. franchise concepts, entering the U.S. market is the pinnacle of international expansion. The IFA’s Franchise Business Economic Outlook for 2017, estimates the economic output of franchise businesses in the U.S. at $711 billion with 745,000 franchise establishments. Simply stated, this massive American market cannot be ignored if you want to be a truly global franchisor.
Launching in the U.S. market may seem daunting to international franchisors. No doubt, it’s a major undertaking that should be carefully planned. However, the barriers to entry may not be as treacherous as some international franchisors imagine. Recent successful U.S. market launches by international franchisors shed light on the possibilities. International franchisors that are eyeing the U.S. market should consider the following best practices:
- Create a realistic financial plan for your U.S. franchise market entry.
Capital requirements to set up a U.S. franchising program will vary depending on the franchise. However, typical costs range from $150,000 to $500,000 or more before a franchisor can begin selling franchises, (not including startup costs for company-owned pilot locations.) Also, it’s not all legal fees. Recent international franchisor launch budgets indicate that legal fees only accounted for about 10% to 20% of total first year franchisor costs. Instead, personnel and marketing costs were the bulk of the expense budget.
Bear in mind that this capital commitment should result in a return-on-investment within a reasonable timeframe. A simple five- or ten-year financial projection will help a franchisor to clarify the risks and returns. How many franchises could you open in the U.S.? What would that represent in terms of new franchise fees and ongoing royalties? What will be the resulting valuation of your U.S. franchisor company in three, five or ten years? Some young, high-growth U.S. franchisors reached lucrative valuations of $10 million within five years.
- Proof-of-concept is a critical first step to validate your franchise in the U.S.
Without existing units in the U.S. market, it can be difficult for a foreign franchise to sell and support U.S. franchises in the early stages. Additionally, U.S. states requiring franchise registrations may reject a franchise without viable U.S. operations. Bottom line, an international franchisor that is serious about entering the U.S. should first set up a pilot unit to demonstrate proof-of-concept.
A recent example is the Germany-based fitness franchisor Bodystreet, who opened their first U.S. pilot unit in Phoenix, AZ at the end of 2017 and is currently gearing up its franchise sales program for 2018.
According to Bodystreet Founder and CEO Matthias Lehner, opening a pilot studio was an important first step in their U.S. franchise launch. “Although we have over 270 Bodystreet studios in Europe, we fully understood the importance of proving our franchise concept in the American market. Our investment in the U.S. Bodystreet pilot studio demonstrates our commitment to the success of our franchise concept for future American franchise owners. It was also invaluable to help us better understand particulars of the U.S. market and our target consumers.”
This perspective on proof-of-concept is shared by Australian-based Poolwerx, who entered the U.S. market in March 2015 and has grown its pool services franchise to 33 stores and 120 service vans across seven U.S. states.
Before selling franchises, the Poolwerx franchisor made a sizeable investment to open multiple pilot stores in Arizona, California and Florida, and spent two years to test and adjust their U.S. business model. “It was a significant capital investment for us,” states Poolwerx CEO John O’Brien, “but committing to the proof of concept helped us to grow quickly and confidently once we began selling franchises.”
- Ensure you have “boots on the ground” in the form of American partners and franchise experts.
For franchisors new to the U.S. market, it is critical to have a team of American subject-matter experts available during the early stages to guide the launch and ongoing expansion of their franchise concept. This team should include a top-rated franchise law firm, U.S. tax accountants and American franchise executives with experience developing and supporting franchisees. In early stages, this team can be available as contracted part-time consultants or on retainer. As the U.S. franchise grows, these positions may be filled by full-time management.
A joint venture is another approach to quickly get boots on the ground with American management, infrastructure, capital and other resources. Take the example of New Zealand-based kitchen remodeling franchise Dream Doors International Ltd., which signed a joint venture in October 2017 to enter the U.S. under the Amazing Kitchen Facelifts (AKF) brand.
The franchisor’s CEO Derek Lilly explains, “In addition to hiring contracted U.S. executives and attorneys, AKF decided to sign a joint venture with an established team of investors in California. These JV partners had U.S.-based infrastructure, management and resources, which enabled us to move quickly into franchise sales mode.” These partners are also investors in an AKF pilot franchise opening, led by a seasoned business owner familiar with the remodeling business.
- Seek U.S. legal guidance early, and know the dangers of earnings claims.
Consulting with legal experts is key. According to Carl Zwisler, franchise lawyer with the Gray Plant Mooty law firm, “Although foreign franchisors typically don’t want to incur the expense of preparing U.S. franchise documents until they are reasonably certain that they have a prospect, they must be careful to avoid making even oral earnings claims. Consultation with U.S. franchise counsel is essential before commencing discussions with U.S. franchise prospects.”
Understanding U.S. franchise regulations on financial performance representations (FPRs or “earnings claims”) is essential for international franchisors to avoid future lawsuits or enforcement actions by U.S. regulators. In brief, a franchisor may not discuss financial performance of their units — verbally or in writing — unless that information is already included in the franchisor’s Franchise Disclosure Document (FDD).
However, the question of disclosing non-U.S. unit financial performance in the FDD is a topic of legal debate, which is sure to evolve as new international franchisors enter the U.S. market. It’s critical that international franchisors get solid legal guidance to clarify their options in this regard.
For more information on trends and analysis on Item 19 disclosures by U. S. franchisors, read the April 2017 IFA report, Financial Performance Representation, prepared by FRANdata:
Bottom line: Even the most seasoned and successful international franchise concepts will need to overcome challenges to successfully enter the U.S. market. Entrusting your franchise brand to the right American partners and franchise experts will be the key to cracking the U.S. market, meeting your business goals, and becoming the next rising star in American franchising.