Reprinted from La A La Mode, DLA Piper’s Fashion, Retail and Design E-zine

By Dennis Wieczorek (Chicago), Philip Zeidman (Washington DC) and Tao Xu (Reston) 

The State of Franchising Industry

The United States is the birthplace of both the business model of modern franchising and the legal framework of franchise regulation.  Over the past 5 decades, American consumers have come to rely on franchised businesses in every aspect of their daily lives, including food, lodging, hair salons, automobile service, home care and children’s and senior services.  Franchised businesses consistently outperform comparable non-franchised businesses, creating jobs and economic activity in local communities across the country.  According to a recent study conducted by PricewaterhouseCoopers for the International Franchise Association Educational Foundation, there are over 825,000 franchised businesses in the United States, representing 300 different business sectors.  These franchises employ nearly 18 million Americans, accounting for 1 out of every 8 jobs.  The franchise industry contributes over $2.1 trillion to the U.S. economy, and has grown by 40% over the past decade. 

Types of U.S. Franchise Systems

Broadly speaking, franchise systems in the U.S. can be divided into two types: business format franchises and product distribution franchises.  Business format franchises provide for a license of a trademark, and a uniform business system for its franchisees, in the form of training, marketing support and materials, operation manuals, and ongoing support and supervision.  Business format franchises account for the majority of the franchise systems in the United States.  Product distribution franchises, on the other hand, are a special kind of supplier-dealer relationship.  In general, there is a license of a trademark, but seldom does the franchisor prescribe a uniform business system for its franchisees.  Product distribution franchises are prevalent in certain business sectors, particularly with respect to soft drink production and distribution, automobile dealerships and gas stations.  

Successful Foreign Franchisors in the U.S.

While the United States remains a juggernaut in exporting franchise systems that have become household names in foreign countries, many international franchise systems have also enjoyed  success in the United States, such as “Yogen Früz” (Canada), “Tim Horton’s” (Canada), “Kumon” (Japan), and “Action Coach” (Australia).  All international franchisors entering the U.S. market are treated just as U.S. domestic franchisors, and face the same regulatory and business environment.  

Laws and Regulations Applicable to Franchising

Franchising is a regulated industry in the United States, both at the federal level and at the state level.  The U.S. Federal Trade Commission has adopted a Franchise Rule that applies in all 50 states.  The FTC Franchise Rule requires that every franchisor deliver a “Franchise Disclosure Document” (“FDD”) to each prospective franchisee before carrying out a franchise transaction; and the FDD must contain certain prescribed information.  In addition,  more than a dozen individual states have their own franchise disclosure laws, which not only require the delivery of an FDD, but also that the franchisor register the FDD with the state before it can offer to sell franchises.   Finally, some states regulate ongoing franchisor-franchisee relationships, and have laws governing aspects of these relationships such as termination, renewal, and transfer.  While these myriad regulations may seem daunting to a prospective franchisor, federal and state franchise laws and regulations have sufficiently developed over the last several decades so that, in most cases, these legal hurdles can be overcome with appropriate guidance and counsel.

Business Challenges that the U.S. Franchising Industry Faces

Due to the slow recovery after the 2008 financial crisis, franchisors and franchisees in the United States face a number of economic challenges in expanding their businesses.  The most critical challenge in the past few years has been the lack of access to reliable sources of financing.  The International Franchise Association, the oldest and biggest industry organization in the world, has been at the forefront in advocating for a more franchise-friendly lending environment, and otherwise in assisting its members in finding new ways to expand their businesses.  As General Counsel to the IFA since its inception, DLA Piper has been involved in many such efforts.

The United States: A Fertile Ground for Foreign Fashion Franchisors?

Franchising in the United States is a developed industry with mature markets; American franchisees have tremendous entrepreneurial spirit; the economic environment is improving slowly but surely; and franchise laws and regulations are stable and quite manageable – perhaps these factors could form the groundwork for a successful fashion retail franchise program here in “the Land of Liberty.”  Unlike other parts of the world (such as the EU and certain Asian countries), franchising has not penetrated deeply into the fashion retail industry in the United States.  There may be an opening for non-U.S. fashion retailers to try to replicate in the United States the success that they have historically enjoyed in many other parts of the world, particularly because entering into a country via franchising can greatly reduce the cost of direct market entrance.