Scaling internationally is equal parts exciting and daunting for businesses, and franchise companies are no exception. Indeed, the who, what, when, where, and even the why of international scaling can take years to refine. This article will distill some of the key considerations that arise when expanding into the United States via franchising and help U.S.-bound franchisors avoid a few common missteps on the way.


The Planning Stage

The importance of planning for an international expansion program cannot be understated, and a wealth of resources are available to prospective inbound U.S. franchisors. For example, the International Franchise Association (“IFA”) hosts a variety of conferences and educational opportunities throughout the year. The franchise bar has produced prolific scholarship that is readily available online, and magazines like Franchising Magazine USA also provide a terrific jumping off point. My firm, Arnall Golden Gregory, also recently released a podcast episode reviewing common issues facing franchisors expanding to the U.S. market. 

An economic analysis of the financial ramifications of U.S. expansion is another “must” early in the process.  The costs associated with international expansion can include trademark protection, corporate formation, tax analysis, legal compliance with U.S. franchise laws (including an annual U.S. GAAP audit), brand localization, and cross-border training and support—and the investment can be significant.

Identifying a franchisee and a market that are a good fit are also key. Some franchisors connect with an ideal partner and then expand to the market where that partner is located. Others prefer to target a particular market before seeking a franchise partner. There is no single right way to expand internationally, but choosing a market and an international partner are critical threshold decisions before scaling can gain momentum.


Legal Considerations 

Next, the legal considerations.  The core of any franchise relationship is a trademark license. Although not all trademark licenses are franchises, many of them are. The nuance of this issue has been explored extensively in articles on “accidental franchises,” but for franchisors seeking to license their trademarks—and typically their business system—to a U.S. licensee, one key takeaway should be this: U.S. franchise laws are relevant to all cross-border trademark licensing arrangements. Compliance strategies can vary widely depending on which U.S. states are targeted, the anticipated size of the franchise system, the availability of state and federal exemptions, and other considerations. However, a close look at U.S. franchise laws is always recommended.

Franchise laws exist at both the state and federal level in the United States, and the cornerstone of U.S. franchise regulation is the pre-sale disclosure requirement. Under U.S. federal law, franchisors must provide a prospective franchisee with a “Franchise Disclosure Document” or “FDD” at least 14 full days before accepting payment or entering into a franchise agreement, though a few states vary this disclosure period slightly. The FDD is a massive tome that provides a series of formulaic but required disclosures regarding the history of the brand, fees, litigation and bankruptcy history, an estimated initial investment, information about vendors and operational history, a summary of the agreement, a U.S. GAAP audit and other disclosures.

Other types of franchise laws dot the legal landscape, including state-level franchise relationship laws, franchise discrimination laws, and business opportunity laws. The extent to which these laws may apply to a given franchisor and its franchisees varies, however, based partly on the U.S. states in which the franchisor chooses to operate and offer franchises.  


Types of Franchise Relationships

The format of the proposed franchise relationship also varies widely. The most well-known franchise model is single unit franchising, which involves a linear licensing arrangement between a franchisor and a franchisee.  Another common type of international franchising is area development franchising, which provides an area developer the right to open and operate a designated number of franchised businesses within a geographic area according to a schedule. The parties then enter into separate franchise agreements for each franchised business that will be developed.

With master franchising, the franchisor licenses the right to offer franchises to a third party. In this format, the master franchisee (sometimes also called a master franchisor) essentially becomes the franchisor, and offers franchises to third-party subfranchisees in accordance with a set schedule and development quotas.  The master also typically develops its own franchised locations, while providing training and support and otherwise overseeing the franchise system in the territory.  The master franchise approach is most common in international franchising because it provides a convenient vehicle for a franchisor who seeks to expand into a territory but may not be equipped to have a significant presence on the ground.


Corporate Structuring and Trademarks

Another key threshold consideration is corporate structuring, which is typically a byproduct of tax planning and risk mitigation. In the United States, corporate entities are a creature of state statute and are formed through filing articles of incorporation with a state’s Secretary of State and paying a fee. Delaware is a common default state of formation, both because it is a business-friendly state and because it has a significant body of established corporate case law.

In addition, while obtaining a federal trademark registration in the United States is not a prerequisite to begin franchising, savvy franchisors should have at least explored whether the to-be-licensed trademark is viable. Ideally, a trademark registration should be pending before the U.S. Patent and Trademark Office. It’s not uncommon to see situations where franchisors have made significant headway on a U.S. franchise program, only to have momentum stalled when they discover a need to rebrand due to potential intellectual property infringement or related concerns. Identifying any issues early in the process mitigates the time and expense of finding a solution. 


Final Considerations

Without sufficient planning, inbound U.S. franchisors can be in for a few surprises. Common eye-openers include the fact that U.S. franchise laws prevent franchisors from saying much at all about the potential profitability of the prospective franchisee’s business. All “representations” by a franchisor to a franchisee that communicate a range or level of sales or profitability must be disclosed in the franchisor’s FDD, and those disclosures must comply with an increasingly stringent list of requirements under state and federal law. For a franchise system with no track record in the United States, deciding what “financial performance representations” to disclose in the FDD—if any—requires thoughtful consideration. And, if a franchisor does not disclose a financial performance representation in the FDD, it is restricted from saying much of anything to franchisees on the topic. 

This leads to a final point: Neither a Google search nor a consult with ChatGPT will be of any value to a franchisor looking to scale to the United States, because neither accurately or completely explains the nuances of U.S. franchise regulation or market capacity. Stick with the resources recommended above, and involve legal counsel in the process early. With prior proper planning and a bit of luck, you may find yourself cutting the ribbon on new U.S. franchise locations before you know it.


Erica Lynn Tokar is of counsel in the Corporate & Finance practice at Arnall Golden Gregory LLP. She is experienced in guiding franchisors through a variety of transactional franchise matters and advising clients regarding compliance with the Federal Trade Commission’s “Franchise Rule,” North American Securities Administrators Association guidelines, and state laws impacting franchisors and other businesses. She can be reached at