Global Franchise Issue 10.1

RICHARD L. ROSEN Founding member of Rosen Karol Salis, PLLC When a franchisor embarks on the complex journey of international expansion, it is surprisingly easy to make missteps or overlook critical details. One of the most common and costly omissions is the franchisor’s failure to protect its trademark on a global scale. This can be accomplished by seeking to register any existing trademark(s) utilizing the Madrid Protocol, which provides a single application to file and manage trademarks in more than 120 member countries and regional trademark offices that the franchisor designates in its application with theWorld Intellectual Property Organization (WIPO). If a franchisor is looking to expand its brand internationally, whether entering the U.S. market or expanding from the U.S. (or any other country) into foreign markets, the process is complex, and the guidance of legal counsel is essential.We typically start by providing our clients with a detailed questionnaire, designed to focus their attention on key considerations they must address as part of the expansion. The goal is for our client to set forth its views and preferences regarding these issues, which will include: the term of the franchise and/ or development agreement; renewal terms; how many renewal terms; might they be perpetual; what is the initial franchise fee; will it increase; what is the formula; what is the ongoing royalty; how is it structured; can it change over time; how; what other fees and costs are there; can they change over time; what is the range of costs and expenses for a new master franchisee; what about for a sub-franchise; what are the various development schedules; for master franchisees; for multi-unit sub-franchisees. With the answers to these, and various other questions as a guide, we set up the program with our client. Full disclosure The next phase is putting the documents into place.We need to draft the Franchise Disclosure Document (FDD), which, in the U.S., includes 23 ‘disclosure’ items, designed to inform the reader as to certain information relating to the franchisor, including, without limitation, the range of costs that the franchisee (or, potentially, a master franchisee) should incur, and the basic terms of the documents (all of which are included as exhibits, so we must prepare them as well) and financial disclosures, which are also included as exhibits. This, of course, requires the engagement of accountants who are familiar with franchise financial disclosure requirements. A corporate structure will have been proposed, analyzed, and agreed upon, and entities will have been formed. Banking arrangements must be in place. The international franchisor, while all of this is going on, must be actively putting its team in place so that they will be ready to start marketing and selling franchises when they are permitted to do so, and then to be able to operate the franchised business in the U.S. When the FDD, with all the agreements and financial disclosures is completed and ready, it must be registered with the attorney general’s office (or the applicable authority) in any of the 14 Registration States from which, or into which, the franchisor will be offering franchises. If the franchisor is selling a master franchise (or direct franchises) in an international jurisdiction, its local law must be complied with, local counsel will, typically, be retained, and most typically, an experienced master franchisee must be identified and negotiated with. This will frequently (but not always) entail negotiation over the manner in which all of the various fees will be split between the master franchisor and the master franchisee. All the above is a simplified analysis of the many steps that need to be undertaken, all either by or with the guidance of counsel, in order for a franchisor to sell franchises from outside the U.S. to within the U.S., or from the U.S. to jurisdictions outside of the U.S. And be aware, frequently, the franchisor may need time to put its plan in place, whether inside the U.S. or outside, and we, as legal counsel, must be prepared to wait until our client is ready to move forward. Remember, patience is a virtue. Working together In working with our franchise clients, we have always sought to provide strategies and business planning as part of our role, along with helping see that the franchisor complies with the law.We believe that “The business plan itself must work for both parties, and we counsel our franchisor clients to follow that path” 40 GLOBAL FRANCHISE Issue 10.1