Things to consider when buying an American franchise

18/07/2018 17:00 | Start a business

Top american franchises

In the UK we’re surrounded by famous franchises that were founded in America. Dominating the fast food sector, in particular, global brands such as McDonald’s, Subway, Papa John’s, KFC and Starbucks, adorn high streets up and down the country. And it’s not just the famous franchises that are making their way across the Atlantic to build their brand over here. But why is the UK such a popular destination for franchisors from the USA?

There are many reasons, in fact, why Britain is an excellent location for franchisors to start their journey into global expansion. For a start, we speak the same language. This isn't attractive from just a practical perspective, but due to the similarities in culture, it's more likely that American brands will perform well here.

Secondly, franchising in the UK isn’t regulated so there are fewer barriers for franchisors to overcome when they’re establishing themselves. Lastly, and perhaps the most compelling reason, is that franchising is growing in the UK and shows no signs of slowing down.

According to the British Franchise Association / NatWest Franchise Survey 2015, found that franchising contributed £15.1bn to the economy and employs 621,000 people. Both of these figures are up more than 10% since 2013.

American franchises in the UK

But before you become a franchisee with an American franchise there are some things you should consider:

1. Be prepared to prove your worth

Unlike the UK, franchising in the US is heavily regulated. The popularity and growth of franchising mid-way through the last century led to the California Franchise Investment Law being passed. This law meant that before franchisors could grant franchises, they had to register their business within their state and produce a pre-sale disclosure document.

The aim of the law was to protect prospective franchisees from unethical franchisors using unreasonable practices. Many other states introduced similar laws following California’s lead. The Federal Trade Commission (FTC) also introduced the FTC Franchise Rule in 1979. The regulations that this applied to franchising in the US (which have now been updated) had a significant impact on the industry. Now, unfair practices carried out by franchisors can result in a damaged reputation, hefty fines, and civil proceedings.

For this reason, American franchisors view the adherence to franchise regulations as serious business. The UK may not have any regulations for you to follow but you can be sure that American franchisors will have a very robust due diligence process in place when it comes to finding suitable franchisees to join their network. Be prepared to earn your right to become a franchisee.

2. There’s more paperwork in the form of the Franchise Disclosure Document (FDD)

When you’re looking to invest in a franchise the number of documents to review and paperwork to complete may seem daunting but, on the whole, they’re there for your benefit. An example of one such document that provides you with more information about the opportunity before you sign the franchise agreement is the Franchise Disclosure Document.

This is a pre-sale document which tells you all you need to know about the franchise network and the franchisor. Although some UK franchisors have adopted this practice, they have no obligation to produce an FDD. This means that when UK franchisors recruit franchisees, they can share as much or as little information as they deem necessary to ‘sell’ the opportunity.

If you’re looking to become a franchisee with an American company, you can expect to receive an FDD. It's recommended that you review this alongside an experienced franchise solicitor before proceeding to the next stage of the recruitment process. It may seem like just another hurdle to jump over, but it's in your best interests to make an informed decision about the franchise you're investing in.

3. The franchise agreement is likely to be long and complex.

A franchise agreement can vary in length from one franchise to another, but when it comes to American contracts, you can expect them to be double the length. They’re usually stricter when it comes to franchisee obligations and more generous when it comes to franchisor rights.

Many famous franchises tend to demand that an American-style franchise agreement is used but if you’re looking to invest in a less established franchise from the US, then they may be willing to use an agreement more in keeping with the UK.

However long, or whatever style, your franchise agreement is, you should always have the contract reviewed by a UK based franchise solicitor. This is because there may be some clauses in the agreement that wouldn’t be able to be enforced in this country. Your solicitor will be best placed to advice you on which elements of the agreement should be amended from a legal and practical perspective.

4. You'll need to research whether the franchise culture is a good fit for the UK.

Although there are lots of similarities in the culture between the UK and the US, there are differences too. Before you invest in an American franchise, it would be wise to research whether the brand will resonate with a UK audience.

For example, in the fast food sector, the brand and service that you receive at a McDonald's restaurant will be the same whether you buy a Big Mac in Liverpool or Los Angeles. However, to appeal to the tastes and preferences of different countries, the menu is tweaked slightly depending on the restaurants’ location. So, customers can order a Filet-o-Shrimp burger in Japan or a McCurry Pan in India.

The same principle applies to any American franchise that you're looking to buy into. Make sure that you perform your due diligence to understand if the franchise culture and systems will be thriving in the UK. Providing you do your homework, you could be living the American dream.

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