Franchises and the E-2, Treaty Investor Visa
Franchises may be a good investment particularly for the foreign investor lacking business and cultural experience in the United States. However, the investor must consider the high cost of membership, and avoid scams.
The franchise agreement
A franchise is a well-known form of doing business, in which the franchisor enters into an agreement with the franchisee. Depending on the terms of the contract, the franchisor may provide the following: (i) let the franchisee to use its name, logo, and other intellectual property contained in its brand, (ii) provide marketing (for example, media advertising, promotional activities and specific sales campaigns, (iii) provide access to its suppliers –which may in fact, be required (MacDonalds, for example, is very careful about its beef and french fries); (iv) educate and train the franchisee and its employees as to its specific methods and practices — “know-how.”
In exchange, the franchisee pays the franchisor a fee or variety of fees that go by different names, depending on the operation involved. But essentially they may arise from the costs of physically building and equipping the store, the use of intellectual property, the cost of supplies and other products, and the mere privelege of becoming a franchisee. In almost all cases, the franchisee will pay the franchisor a percentage of revenues or income.
Normally, the franchise contract results in the franchisee owning contractual rights, not physical property. These rights can be terminated.
Advantages to the E-2 visa investor
A franchise can benefit an E-2 investor in many ways, particularly one with little prior experience in the United States. In any endeavor, there is a learning curve. In business, the first part of that curve involves knowledge of your product, knowledge of your location and its demography, knowledge of the health and employment laws of your community, knowledge about what advertisement works and what doesn’t, knowledge about suppliers, and many other items. Franchises help franchisees skip the first part of the learning curve. If the franchisee diligently does everything the reputable franchisor says it must do, it is probable the business will meet its financial projections within a reasonable time period.
An agreement with a reputable franchisor can help the investor applying for an E-2 visa, by establishing financial and business credibility. In addition, most reputable franchises are thought to foster some local employment, Indeed, “minimum-wage youth employment” is almost synonymous with franchises in the minds of many Americans. While hiring is not an official condition of issuing an E-2 visa, it is consistent with the overall purpose and policy of the Treaty Visas to promote growth, and it never hurts to point that out.
There are some concerns
What you are really getting from the franchisor
Valuable brands like MacDonalds, Kentucky Fried Chicken, and Subway are valuable licenses because they have been developed and promoted over decades. A tired traveler changing trains in Mumbai walks into a Subway without wondering who the particular operator may be, in part for emotional ties fostered by repeated advertising, in part because of her near certainty that food quality, content, safety and service will meet well-defined, pre-established standards and expectations. That is one of the main things you are buying when you buy a franchise. Is the brand widely known? Does it give rise to a pre-defined set of expectations in the relevant customer base? If both of these questions cannot be answered with a yes, you might question the value of the franchise.
Let us give you an example. Some products are marketed and sold through personal distribution channels. This is the business model for many cosmetic and health products. Some of these businesses market themselves as “franchises.” The important questions for you to answer is whether the brand is already well-known in the marektplace; and, do your likely customers already have a pre-established set of expectations as to the product’s virtues? If you notice that you are being trained to tell your potential customers the name of the product, and what it does, then it is not really a franchise, whether or not the product has an attractive name or professionally designed logos.
If your customer buys your product more because of what they know about you (you live in their community, you dress well, you seem like a nice person), than about your product, you have not bought a franchise. In a real franchise, over 90% of customers will not even know you exist.
You may be a national of a country with a large community in the United States. It is natural for you to enjoy their company and rely upon them for advice. Businesses called “franchises” may be marketed in such communities. You may notice that these stores only appear in an immigrant community. Once again, ask yourself the question, are you buying a brand that is already established? Do your potential customers already have a pre-existing set of expecations (hopefully positive) about this brand’s products or services? If the answer to either question is no, you might consider owning and operating the store yourself, or with partners. Good franchises are not cheap. If you’re not paying for what they really bring to you, save the money and spend it on something else.
2. Crowding out
No matter the franchise, location remains a prime consideration. Over the years, the best locations may have been acquired by other franchisees, leaving less desirable locations to newcomers like you.
In addition, it may be difficult, for both legal and commercial reasons, to gain exclusive rights to a specific location, that is, you may not be protected if the franchisor wishes to grant franchises near to you.
3. Death of individual creativity and initiative
If you read above, you know that good franchises are those that establish pre-existing expectations, not just about the product itself, but about almost everything else: the type of parking outside, the exact positioning of signage, uniforms, bathrooms, even ambient music. Any deviation from these standards, no matter how brilliant or justified, diminishes the value of your franchise, and in fact may cause your contract to be terminated.
4. Cost
With the growth and success of franchises, the initial and continuing costs of acquiring and operating a franchise have grown tremendously. A good MacDonalds franchise location, for example, starts in excess of $2 million. A less well known, but still legitimate franchise brand, may start at roughly one-half million dollars.
Even at these high levels of cost, legitimate franchises might still be worth the investment. However, what you have acquired may be more similar to a decent rate of return on, say, a bond. But it may not be road to fantastic riches. And don’t forget the value of your time and energy.
The SIGNET Law Firm
We are dedicated to helping foreign business invest and operate in the United States successfully. As part of our services, we specialize in helping our clients procure the E-1 and E-2 visas, which enable them to live in the U.S. while they manage and operate their businesses.
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We hope you have found this information useful. If you would like to speak with us, we are available.