In this article, we explore investing in a franchise as a way to obtain a E-2 visa for the United States. A franchise agreement is a contract between a company known as the ‘franchisor’ on the one hand, and a company or individual known as the ‘franchisee’ on the other hand, whereby the franchisor grants the franchisee the right to sell its products and/or services using the franchisor’s brand, structure, know-how and method of operation.
The franchisee is allowed to conduct business under the brand of the franchisor upon payment of a fee, known as a ‘royalty’. The royalty generally constitutes a fixed sum or a percentage of the franchisee’s revenues. The franchisee, also, is required to pay an entry fee when signing the franchise agreement.
The franchisor usually exercises significant control over the franchisee’s business management. This is because a poorly managed franchise may have a negative impact on the overall reputability and goodwill of the franchisor’s brand. Therefore, it is understandable that the franchisor tends to retain a higher degree of control on its franchisees as opposed to other kinds of business relationships (e.g. licensor and licensee).
One major upside of acquiring a franchise is that you don’t need to reinvent the wheel: the franchisor will provide you with everything you need, such as the idea, the concept, the structure and the method of operation. Furthermore, expertise in that specific industry is not required: the franchisee, most of the times, is only required to undergo training courses offered by the franchisor.
Also, it is important that there is a uniformity of appearance amongst the units that make up the franchise. This means that the franchisee will have very little discretion as to, for instance, choosing the décor of the store or the employees’ uniforms, as all these aspects have to strictly comply with the guidelines set forth by the franchisor.
The franchise formula is very popular in the United States. It definitely is the goal of quite every entrepreneur to create a viable business and develop it nationwide through a franchise. Businesses usually take advantage of the United States’ vast territory, large population and cultural similarities: if a product or service performs well on the West Coast, chances are it will perform just as well on the East Coast. As a result, the possibilities of developing a franchise business in the United States are virtually unlimited and if you really want to invest and work in your own business in the United States there are so many franchises to choose from.
Investing in a franchise is a convenient and practical way to obtain a E-2 visa for the United States of America. For an overview of the requirements and characteristics of the E-2 visa for the United States, read our article: Immigration to USA, E-1 visa and E-2 visa. Always keep in mind that not all the countries have the E-2 visa option available for their nationals. For a list of the Treaty Countries which nationals may apply for a E-2 visa for the United States of America, click here.
The good news for those who seek opportunities to invest and work legally in the United States, is that the purchase of a franchise qualifies as a valid investment for the purpose of obtaining the E-2 USA visa.
An undisputed advantage of purchasing a franchise is that the cost of starting the business – e.g. the entity of the investment for E-2 visa purposes – is considerably lower than the cost of starting the same business from scratch. This provides lots of opportunities to make investments that qualify for E-2 visa, which might have been not accessible otherwise due to budget restrictions.
Typically, the consulate in charge of reviewing the application will evaluate whether the investment is substantial, e.g. of a magnitude to support the likelihood that the treaty investor will successfully develop and direct the enterprise (also known as the “proportionality test”). Also, the consulate has to make sure that not only will the proposed enterprise provide a living for its owners, but also, and most importantly, that it will contribute to the creation of employment and business opportunities for Americans companies and individuals (marginality requirement).
The evaluation of the above requirements is usually not as rigorous when the purchase of a franchise is involved, because:
1) The business structure of the franchise is already tested and has proven to work;
2) The purchase price is usually the same for all franchisees. Such price is non-negotiable and has proven to be an investment that meets the proportionality and marginality requirements.
When applying for E-2 visa through an enterprise that is not part of a franchise, the applicant is required to show expertise in a given industry. In a franchise, however, the expertise requirement is not strictly enforced because the franchisor provides the franchisee with the required know how.
Possible challenges in obtaining E-2 visa through a franchise investment
Control by the franchisor
When applying for a E-2 visa in connection with a new business, the beneficiary must demonstrate that he or she will be able to exert a certain degree of control over the business. This requirement is typically met by acquiring at least 50% of a company. However, in the case of a franchise, the U.S. Consulate may object that the degree of control exercised by the franchisor over the franchise business is too high. Responding to this kind of objections may cause delays in the process and may eventually result in the disapproval of the application. For this reason, it is best to have an immigration attorney review the franchise agreement prior to closing the deal.
Typically, marginality does not cause issues in the case of a franchise. However, when purchasing a franchise you should make sure that it is suitable to create employment opportunities for additional workers (mostly americans) other than the applicants.
Contingencies in the franchise agreement.
Foreign applicants seeking to obtain a E-2 visa through the purchase of a franchise are advised to include a specific contingency in the franchise agreement, whereby if the E-2 visa application gets disapproved, the franchise agreement will be terminated. However, many franchisors do not accept this contingency and therefore refuse to do business with foreigners unless they hold a US passport or a Green Card.
The contingency may also create issues with the U.S. consulate in charge of reviewing the E-2 visa application. The reason is as follows: one of the requirements for a successful E-2 visa application is that the investment in the US business must be put “irrevocably at risk”. This means that the funds deposited in the US company’s bank account and invested in the business cannot be recovered should the enterprise fail. Therefore, in case of a contingency which conditions the franchise agreement upon the obtainment of a E-2 visa, the funds invested in the business may not be considered “irrevocably at risk”.
To overcome this obstacle, it is better to enter into an escrow agreement, which provides for the funds to be deposited into a US attorney’s escrow account. Pursuant to the escrow agreement, the lawyer, known as the “escrow agent”, shall disburse the funds to the franchisor should the E-2 visa be adjudicated. This way, once the funds hit the escrow account, the franchisee can no longer exert control over the funds, which may be returned to the franchisee only in the event the visa application gets disapproved.
For further information on obtaining the E-2 visa through purchase of a franchise, or if you would like to speak to one of our attorneys, kindly fill out our contact form here.
Signing a distribution agreement with a local distributor in the United States of america is one of the most common ways for foreign companies to enter the American market. It is also a great way to test whether a product can be marketed in the United States, without taking too many risks.
The relationship between distributor and supplier is often such that the distributor acquires ownership of the goods, except in cases of consignment. They will be obliged to pay consideration for the goods even if they are unable to make satisfactory sales. This shields the producer from possible losses. In this situation though, it is natural that if the products do not sell as expected, the distributor will stop making orders.
Working with a local United States distributor also allows the foreign manufacturer avoid the significant costs associated with setting up its business in the United States, such as costs for hiring personnel, buying or renting a warehouse etc. While this will be an inevitable step once a certain volumes of sales have been reached, the more sensible solution prior to that will be to stick with a local distributor.
A hybrid solution, halfway between a distribution contract and direct sales in the United States, may be to enter into a partnership with the American distributor. This represents a way to earn more profits, as well as exercise close control over the distributor’s operations.
Foreign manufacturers that contract with American distributors quickly find that there may be significant risks in the relationship. Issues of distance, linguistic barriers and cultural differences may pose unique challenges. At times, it may even happen that the distributor, confident in the fact that a foreign customer cannot exert a lot of control, may violate the terms of the agreement.
Distributors may violate exclusivity or non-compete provisions, unlawfully appropriate brands, patents or domain names or commit other types of contractual violations. More, the distributor may simply fail to properly promote the product or employ adequate resources to create or enlarge the product market.
Due to this, it becomes essential to regulate the relationship with the distributor through a written agreement that will detail the rights and obligations of the parties, and the remedies available in the event of default. This is appears even more necessary given that the United States do not have a civil code to rely upon in case of gaps in the regulations in place between the parties.
A federal body of law referred to as the Uniform Commercial Code (UCC) may be applied to certain distribution agreements, although such law was enacted to primarily regulate the sale of B2B and B2C goods. Foreign suppliers may find themselves at a disadvantage, as the American courts in some cases have held that the element of sale prevails over the element of distribution (which is ultimately an agreement on future sales), under such code.
Key provisions in distribution agreements in the United States
This clause guarantees the distributor’s right to be the exclusive reseller of the products in a given territory. For obvious reasons, an American distributor will be reluctant to accept to sell suppliers’ products without being protected by an exclusivity provision.
This clause establishes the distributor’s geographic range of action. It is important to be cautious though. Before assigning the American distributor too large a territory, it is good practice to make sure they have the organization means and resources to cover that territory.
In general, it is good to start by allowing the distributor to operate in only one or few states. If the relationship continues satisfactorily for both parties, supplier may then look to extend the activity covered by the contract to additional states.
The possibility of selling via the internet generally conflicts with geographical limitations. As such, online sales must be strictly regulated within the distribution agreement.
Duration and termination
It is necessary to establish the duration of the contractual relationship and the instances in which the distribution agreement may be terminated. It is never advisable to rush into a long-term relationship with the distributor, at least initially. It is often best to start with a one-year duration contract, automatically renewable unless canceled, or with two or more years of contract including a provision which gives the right to terminate without cause, applying from the second year onward.
Likewise, it is crucial to establish the conditions allowing termination due to distributor’s default. For instance, if the distributor is not sufficiently performing, sells competitive products despite a non-compete clause, declares bankruptcy or enters into another insolvency procedure etc., the supplier should have the option to terminate the agreement.
Minimum price, orders and quantities
The price of the products, the method of payment and other payment terms are obviously among the main elements of the distribution agreement in the United States. The supplier must reserve the right to change prices upon appropriate notice to the distributor.
A minimum price per product can be established as per these terms, ensuring that is not considered an anti-competition practice. In some cases, establishing a minimum price can be justified in order to protect the prestige of the product.
It is also possible to establish a minimum quantity of purchase orders that the distributor must make in a given period of time. If orders fall below this threshold, certain remedies may be triggered, including termination of the distribution agreement.
Shipment and transfer of risk
It is particularly important to establish the terms and conditions of shipment in international distribution agreements entered with United States companies. The supplier should try to include an Ex Works clause (incoterm EXW) into the contract.
Based on such provision, shipment of the goods takes place at the expense of the distributor. Also, the risk of damage or destruction of the goods passes to the distributor once the goods are received or delivered at the supplier’s premises ready for shipment.
However, in cross border contracts, the Ex Works clause presents some practical difficulties, given that the manufacturer must somehow remain involved in the customs clearance process once the goods enter the United States.
It is of the utmost importance to proceed with registration of your trademark before entering into any distribution contract in the United States. Countless examples can be cited of American distributors who have unlawfully started to use a trademarks belonging to foreign suppliers who failed to duly register them.
Once the supplier has registered its trademark in the United States, it is possible to limit the use of that trademark by the distributor, both in traditional commercial practice and in online sales. For this purpose, it is necessary to include a clause in the distribution agreement that defines with certainty the ownership of the trademark and also establishes that any display of the trademark must occur with the prior approval of the supplier.
For an overview of the process of registering a trademark in the United States, please read through our articles on How to Register a Trademark in the United States and Trademark Registration in the United State and Likelihood of Confusion.
A distributor in the United States should be prevented from selling products that compete with those of the supplier, as well as starting another business directly or indirectly involved in the sale of competing products both during and after the termination or expiration of the contract, within certain territorial limitations.
However, care must be exercised in drafting non-compete clauses. Certain clauses that are too extensive both in terms of time and geographically may not pass the scrutiny of the court if challenged. They may be deemed to unlawfully limit competition.
For instance, a clause that would prevent the distributor from conducting competing activity throughout the whole of the US for a period of 10 years starting upon expiry of the contract may be considered illegal by an American court.
In certain distribution arrangements, the distributor may come in contact with manufacturing processes, trade secrets, know-how, customers lists etc. that are central to the supplier’s business. It is therefore absolutely crucial to include a confidentiality clause in the distribution agreement to prevent the distributor from misusing or disclosing confidential information.
As a deterrent, it is also appropriate to include a liquidated damages clause in the distribution agreement, pursuant to which, the distributor will be required to compensate the supplier with a predetermined amount of money in the event of breach. The supplier will be not be required to prove the actual amount of damage (but only the breach of the said clause).
Applicable law and jurisdiction
It is also extremely important to provide which law will apply to the United States distribution agreement and which court shall have jurisdiction over disputes arising therefrom. We recommend that the laws of the state in which the distributor is based be applicable. Jurisdiction should be attributed to judges of such state and an arbitration clause, whether national or international, should be included in the agreement.
It is a common belief among foreign manufacturers that the law governing a distribution agreement with a United States’ business partner should that of their country. However, commencing a lawsuit against an American defendant in the supplier’s country of origin makes little sense, from a legal standpoint as well as from a practical one. There are many reasons for this.
Even assuming that your company will be able to secure a favorable judgment, most of the times after several years (during which the American distributor will have probably opened and closed a dozen companies), if the American distributor does not comply voluntarily with the foreign judgment, it will still be necessary to get the decision recognized as valid in the United States and the enforce it. This must be done through a special proceeding that is often lengthy and may not even result in the desired outcome. Overall, you may waste several years and still get nothing out of it.
The best solution is, therefore, to keep jurisdiction in the United States where lawsuits, although more expensive, are also faster, more effective and can be immediately enforced against the defaulting party.
If you need a consultation regarding a distribution agreement in the United States or if you have any other questions, get in touch with us at Bardazzi Law by filling out our contact form.