Expanding Beyond U.S. Borders

International franchising can be an exciting and lucrative opportunity for a restaurant. Over the past few years, markets such as Asia, South America, Central America, and the Middle East have seen significant growth in this area. While there are similarities between U.S. and international franchising, the failure to understand and react to the differences can cause substantial financial losses and damage to brand reputation.

A restaurant that wants to establish an international franchise faces many of the same challenges that it would in the U.S. – however, choosing the right franchising partner and protecting intellectual property are often the most critical issues.

Although a master franchise agreement is generally used in international franchises, the typical model usually requires “tweaking” to recognize differences in culture and law. Considerations unique to international franchising include:
  • The currency of payment of franchise fees and currency exchange rates
  • Local government involvement
  • Local laws and regulations Local economic trends
  • Withholding tax on franchise fees
  • Language differences
Further, the product or business model may need to be modified because of cultural differences. This could include changes to the menu, to the ingredients of a product, to the packaging, or to the facilities. Maintaining the integrity of the brand throughout these changes is important.

It is critical for a restaurant that is contemplating expanding internationally to conduct its due diligence on the target market’s culture, political climate, and economic development. This process can delay the opening of an international franchise by months or even years. Additionally, legal fees, travel costs, and registration fees can add significant costs to the process. These costs, however, are sometimes offset by a lower tax rates and the opportunities to invest earnings in further overseas expansion.

It is also important to start off with the best structure. A poor decision can cost significant tax dollars as well as issues with the repatriation of earnings. Further, the dissolution of unsuccessful ventures can be tedious and timely in some countries.

With careful planning, your restaurant may benefit from global expansion. Risks may be alleviated by consulting with legal, financial, and tax experts before embarking on an international franchise opportunity.

Please contact BDO with any questions or inquiries regarding international franchising.

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