If you are here it is because you are probably looking to acquire a franchise in the USA. In this blog we share an introduction to the world of franchising in the USA and everything you need to know if you want to acquire a franchise in the United States.
The purpose we have dedicated so much time to this writing is because we know the importance of education when acquiring a franchise. If this is your first time here, my name is Jaime Sanchez, I am the founder of Interlink FBC, a franchise and business consultancy in the United States, I am also a franchisee in the United States (owner of a franchise).
It doesn’t matter if you are a foreigner wanting to immigrate through a franchise, or if you are already living in the United States and are researching which franchise to buy, this guide is made for anyone who wants to acquire a franchise in the USA.
How do franchises work in the USA?
A “franchise” is a business relationship in which a franchisor grants the use of its brand in exchange for a franchise fee to a franchisee.
The relationship between franchisee and franchisor in the USA has apre-established “franchise agreement” that usually lasts between 5 – 15 years and is renewable if both agree to continue their business relationship.
The franchise agreement establishes in great detail how the relationship of the two is. Who has what responsibility and what participation each one is going to have in the business. This agreement can sometimes be very complex to understand. Part of what we do at Interlink FBC is to help you understand these agreements and how to properly analyze them.
I know that many of you have an idea of how a franchise works in the USA, but it is essential to understand that in the United States being called a franchise has certain legal implications that you have to know as a consumer, since the industry is regulated by the FEDERAL TRADE COMMISSION (commonly known as FTC). This government entity protects the investor from fraud and bad business practices, therefore, it provides greater security when choosing which franchise to invest in in the USA.
What is the “FTC” (Federal Trade Commission) and what relevance does it have if I want to acquire a US franchise?
The FTC is a government entity in the USA that regulates the franchise industry nationwide. This is good for any investor, as there are laws that protect you. The bad thing is that many times you don’t know that these entities exist and, much less, what these laws are that protect you from fraudulent practices when acquiring a franchise in the USA.
Here are 2 very important tips that can save you thousands of dollars (in some cases millions of dollars) when acquiring a franchise in the USA:
1. In order for any franchise in the USA to offer you to be part of their franchise, the franchise has to give you a document called FDD (Franchise Disclosure Document).
To acquire a franchise in the USA, a complex analysis of the territory, the franchise, and additionally interview existing franchisees. This exploration process can take an average of 2-3 months to acquire a franchise (assuming you’re already 100% capitalized and intend to start a business).
In case a “franchise” in the USA tells you that they do not have a Franchise Disclosure Document or that “FDD is not needed” for whatever reason, I would tell you to run as fast as you can and don’t turn back.
If what I say seems like an exaggeration or sounds like a joke, I genuinely say no. I have helped dozens of people in these processes and many times people come with this type of story and it is because they do not know this simple fact. Thousands of dollars or in some cases millions could have been saved by fraud and scams of alleged “franchises”.
Some companies have done a lot of scams and fraudulent practices by taking advantage of the ignorance of foreign consumers. The key to not falling for these scams is to get the right advice and educate yourself on these issues.
2. All franchises have to let you talk to any of their existing franchisees.
No franchise should prohibit you from talking to existing franchisees. If you’re already talking to a franchise and they’re not letting you talk, it’s for a reason, and it’s usually a very big red flag. Within the franchise agreement you will be able to find the list of all franchisees with their contact information. So you have access to call any existing franchisee and even on the list are the franchisees who went out of the system.
If you need help finding the list of franchisees of any franchise in the USA we can help you.
In order for a business to qualify as a franchise in the USA, the business must have the following 4 components:
A) To give access to a registered trademark or a commercial symbol. You don’t necessarily have to own the brand itself, but you do have to have the authorization to license the investor.
B) Exercise some type of control over the operation in the business or have authority over parts of the operation of the business, for example:
- That the franchise has to approve the location of a store or how the store has to look.
- Hours of operation
- Rules of how you can use the brand, etc.
C) That any type of payment is required from the brand or the person who is granting the license. This amount can be, for example, the “royalty”, some deposit, entrance fee or any type of payment given to the brand.
D) Have an updated Franchise Disclosure Document (FDD) (in the next section we will explain the importance of this document). Every year franchises have to update their FDD with the most relevant information, if a franchise does not have it updated by law it cannot offer it.
What is the FDD (Franchise Disclosure Document) and why is it so important if I want a franchise in the USA?
The “FDD” or in Spanish the “Circular Franchise Offer” (also known as “Franchise Disclosure Document” in some LATAM countries) is a uniform document that ALL franchises in the USA must have. This document always contains 23 items in a uniform format, including Article 19 which gives us the financial figures of the franchisees. That’s right! It tells us how much current franchisees are earning!
Now do you understand why the “FDD” is the most valuable document when acquiring a franchise in the USA? Each of the 23 items are of utmost importance and each one tells us a different thing about the franchise.
By analyzing this document, I can guarantee that you will not easily fall into predatory practices and you will be able to analyze franchises as they should. One of the most important things we do is teach our clients how to read this document so that they can audit a franchise themselves and thus be able to do the proper diligence.
A franchise in the USA by law must grant the FDD a minimum of 14 days before asking you to sign any agreement with the franchise or ask for any franchise payment. Even if you want to sign the franchise agreement, you can’t until after 7 days after they have given you the official contract. I’ll tell you that no one Our client has acquired a franchise in the USA having the FDD for 14 days, since it must be done detailed analysis.
Guess which entity regulates all these rules and laws that I mention? If you thought about the FTC, you’re right.
5 Biggest Myths in the World of Franchising in the USA
Myth #1: Franchises in the USA run themselves/are passive for the owners.
Unfortunately, this is not the case. Many people think that by acquiring a franchise in the USA they will have a self-sufficient business, profitable from the beginning, and they will only be busy counting the money, and the truth is that this is not the case, at least at first.
Every franchise you acquire will need your time and dedication for the operation, some require more than others. Therefore, it is extremely important to be very clear about how much time you are going to be able to dedicate to the business.
This is an issue that we see in great detail with our clients, since we know which franchises require more attention and which can operate without so much attention from the owner.
The truth behind the myth:
The myth is born from the fact that there are indeed many franchise owners who are passive, but this happens after several years of having built the business and operating efficiently with a general manager, and this can sometimes take 5 years or more. A business becomes “passive,” once you build it in a certain way that it can run without you.
Another way that a franchise can be passive is that from the beginning there is a partner-operator and a partner-investor(s). In this scheme, usually the operator is the general manager who invests his time and perhaps a part of the investment and the investment partners fund the business.
Many of our clients create this scheme, but it does require a lot of planning with the whole group.
Myth #2: Any business can be a franchise in the USA
Following on from the above, in order for a business to be a franchise in the USA, it must follow federal and state laws. This requires lawyers, franchise consultants, marketers, and an in-house team to succeed. Just because a brand has 2 or 3 stores does not mean that it is a franchise.
If a business wants to become a franchise, it needs support from franchise brokers and associations such as the IFA, it is worth mentioning that it is a fairly rigorous process, since it requires tailor-made strategies and capital to sustain this brand expansion.
Many companies claim to be franchises without really being franchises, usually out of ignorance.
Myth #3: Franchises in the U.S. are acquired only by millionaires
No, franchises are not only for millionaires.
You can find profitable franchises for less than $50,000 USD, here what varies is that normally this type of franchise less than $100,000 USD will require the investor or one of the partners to dedicate more time and attention to the business. These types of franchise models, we call them owner operators, most of our clients invest in their franchise between $120,000 – $250,000.
In our years of experience we have seen many cases of entrepreneurs who acquired an economic franchise and expand their business to have several units of the same franchise.
One of the advantages that permanent residents or U.S. citizens have is that they can finance the project, on the other hand, for foreigners it is a little more difficult to request financing, since the capital must be from the investor or investors because they are looking to apply for the investor visa.
Myth #4: “X” is the best franchise in the U.S.
Many believe that there is “the best franchise” and the truth is that it is not so, if someone is offering you “the best franchise in the USA”, they probably only want to sell you that franchise.
Something valuable to know is that the franchise in which you are going to invest must be the best for you, that franchise in the USA that you choose must match your needs, investment amount, lifestyle, objectives and personal – family goals.
It is worth mentioning that there are several issues that have to be analyzed in detail before choosing and investing. We have mentioned a little about costs, times, but you also have to understand more things, for example, 30% – 40% of franchises in the USA do not work with foreign investors, for abroad this already eliminates many options, however, do not panic, there are more than 2,000 franchises in which you could still venture.
Myth #5: There are only food franchises and they have the most profitable numbers.
At Interlink we work with +750 franchises in more than +35 different industries, and here we debunk another myth that there are only food franchises and that they have the most profitable numbers.
I will tell you that only 10% of our customers enter the food industry and this happens because they understand the implications of the industry, the low margins, and various challenges that come with the industry. Because they have a big picture, most of our clients tend to leave for other industries.
As we have already mentioned, you will be able to venture into many very profitable industries and franchises, for example:
- Professional Services
- Beauty
- Spa
- Medical
- Remodeling and construction
- Lightweight construction
- Residential and Commercial Cleaning
- Painting
- Mudanza, among many others.
Each one will have a different investment range, a different return on investment and should be chosen according to your own economic reality, your medium and long-term goals.
Can I buy a franchise in the USA that does not operate in large cities?
If we were to continue talking about myths, we could add it up. It is commonly believed that franchises in the USA operate only in large states or cities. While it is true that there is a certain affinity between nationality and location to choose; for example: Florida is more refined by cultural terms with Argentines, Colombians, Spaniards and Chileans, and Texas with Mexicans; the reality of this is that you can operate in any state and city in North America, we have customers in several states.
Our goal as advisors is to get you a franchise model, an industry and a location that fits and matches perfectly with your profile, your goals and your investment range. At the same time, we will provide you with the appropriate education so that you can understand the general investment landscape and also the present reality of each industry and the market, especially after the pandemic, where businesses have been affected in different ways.
Can I access an investor visa with this business model?
The vast majority of our clients decide to start seeking advice and investing in a franchise in the USA with the ultimate goal of obtaining an investment visa, especially an E-2 visa to legally reside in the country together with their families.
It happens that franchises are excellently compatible with the requirements of the E-2 visa because this type of visa requires an active investment and the franchise is exactly that, a business where, depending on the way in which the company has been structured, one, several or all of the partners/spouses, are in person and active in the business, where they exercise some kind of leadership.
While it is true that the people we work with have different interests and reasons when contacting us, this business model will make your visa application look at with different “eyes”, since it is a proven model that is already in place.
This is where we recommend that you invest in a franchise in the first instance and then, when you know how business works in the USA and have your investor visa, diversify your investments in other business models if you wish.
If you are an American or you are already living in the United States, we also have many clients who have acquired a franchise in order to reduce their learning curve and have more tools to successfully undertake in the country.
How long does it take to acquire the franchise in the USA and for it to be in operation?
The point of acquisition and operation of a franchise are different times. Acquiring means signing the franchise agreement and paying the franchise fee. Usually, our clients, who are capitalized and intended, usually take between 2-3 months to acquire the franchise. In case it is not a priority for you or you are not capitalized, the acquisition of a franchise in the USA can take 5-12 months.
After acquiring the franchise, it remains to start the business. This start-up will depend on several factors, two of the main ones are, on the one hand, the liquidity of money you have to start buying the equipment, supplements or tools necessary to open the franchise, on the other hand, it will depend on the industry.
Example: if you acquire a franchise of a medical center, you must look for a large premises, undertake renovations, hire workers, painters, plumbers, equip it, then decorate it and finally hire a medical staff, this can take up to 6 or 9 additional months than it took you to acquire the franchise. If you acquire a franchise that only requires a normal commercial office and two employees, the business could start in less than 3-4 months.
Here it is crucial to understand your ideal times and this is part of our process, therefore, these issues must be evaluated together with our team, see here how we can help you.
Why choose a franchise in the USA?
Being a foreigner or an American, choosing a franchise is a safer way to start a business. It is not pure coincidence that there are more than 700,000 franchises operating throughout the USA, a franchise does not guarantee success, but it does improve your odds and significantly reduce your learning curve.
Another key factor in choosing a franchise in the USA is the support structure that these businesses provide, since, among many other issues, they will give you access to suppliers and national contracts that as an independent business will be very difficult to have.
Another part of the support is the franchisors themselves, many times, people believe that the franchisor helps them at the beginning and then bye, a good franchise does not work that way, on the contrary, it will always give you continuous support.
All these components are key to being able to succeed in a business, because it reduces the investment risk and the success rate increases in good franchises. But we emphasize that it is important that the franchise in the USA is suitable for you, because, as with everything, there are good franchises and bad franchises.
The importance of having Interlink FBC in the process
We as advisors know exactly what to pay attention to to see if the franchise in the USA is of good quality or not. When you are not advised, you do not know precisely what you have to analyze, what indicators you have to consider, it also happens that you cannot understand very well what numbers you are looking at because you do not yet have the tools to analyze it.
To conclude this section, I would like to comment that, while it is true that the investment in a franchise in the USA can be high, especially if we compare it with the investment of a business from 0, it is also true that the return on that investment will be much faster than in that of an independent business. And this happens because of all the factors we explained above.
We invite you to write to us to schedule a first free meeting and talk in depth about your interests, goals, objectives, investment amounts, industry affinities, among several other issues. Contact us.
