Start, buy or franchise: which business carries your E-2

The E-2 doesn't care whether you start a business, buy one or take on a franchise. What it asks is whether you end up with a real business that you have invested in substantially and that you direct yourself. Each of the three routes gets there in its own way, and each has its own pitfalls.

A café with loyal regulars, a workshop with a full order book or a franchise with a well-known brand: for many people heading to the USA on an E-2, an existing business sounds like the safe bet. Sometimes it is. Sometimes it's the most expensive route to a visa you could have had with a lean new start.

This guide shows how the State Department's rules measure the three routes, what counts as an investment, when your money counts as committed and which documents you should get your hands on when buying a business or a franchise. The visa basics are in our guide to the E-2 investor visa.

1Three routes, one standard

The FAM, the State Department's manual for consular officers, makes no distinction for the E-2 between businesses you start, buy or run as a franchise. It doesn't even mention franchises separately. For every business it checks the same points: whether you have invested or are actively in the process of investing, whether the business is real and operating, whether the investment is substantial, whether the business is more than marginal and whether you develop and direct it.

The difference lies in how it's measured. To judge whether an investment is substantial, the consular officer applies the proportionality test: your investment is weighed against the cost of the business. For an existing business, the FAM says that cost is generally the purchase price, normally the fair market value. For a new business, it's the actual cost of building the business up to the point where it can operate. The cheaper the business, the higher your share of that cost has to be. There is no fixed minimum dollar amount. How the test works in detail is explained in our guide to the investment amount.

2Starting new: lean, but with a plan

Starting a new business is the most common route, especially for service providers, consultants and traders. You form a US company with a place of business, an LLC or a Corporation, and build the business. What you spend on it counts toward the investment: under the FAM, equipment and inventory count in full. Intellectual property can count too, as long as its value can be reasonably determined.

On rent, the FAM is strict. Rent for premises or equipment counts only up to one month's rent, unless you've paid in advance. A full year's rent doesn't count, because it's usually paid out of ongoing revenue. By the way, having your own business premises isn't a requirement for the E-2. It can, however, help show that the business is real.

The weak spot of a new business is proving viability. A new business has no track record. So it has to show with a business plan that, generally within five years of launch, it will do more than provide a modest living for your family, for example by hiring staff. What belongs in that plan is covered in our article on the E-2 business plan.

3Buying an existing business

Buying has one big advantage: the business is already real and operating, with customers, revenue and often employees. Whether it's marginal can be answered with historical figures instead of a projection. And the FAM says explicitly: once the investment has been accepted as substantial, that criterion is generally not reexamined as long as the ownership doesn't change, for example through a further acquisition.

3.1Buying on condition of the visa

Many buyers don't want to pay before the visa is issued. The FAM offers a way out: a purchase made conditional on the visa being issued can still be an irrevocable investment if the money sits in an escrow account and is released to the seller only once the visa is issued. What matters is that you've signed a binding contract and firmly committed the funds. A mere letter of intent isn't enough.

3.2How you're allowed to finance

Loans secured by the business you're buying or its assets don't count toward the investment, even if you also provide personal collateral. The reason: with that kind of money, you aren't carrying any risk of your own. Loans secured by your personal assets, such as a mortgage on your home, or a loan on your signature alone, can count. It's also important to document where the funds came from. More on that in our guide to the source of funds.

3.3Check what you're buying

Ask to see the financial statements, tax returns and payroll records for the past few years, and have the purchase price valued. Among the evidence for the cost of a business, the FAM lists fair market value appraisals and audit reports. A price justified only by the seller is a weak foundation. If you buy the company's assets including goodwill rather than the company itself, IRS rules require buyer and seller each to report the purchase on Form 8594. And the seller's taxes can end up on your plate: in Texas, for example, the Tax Code makes the buyer liable for the seller's unpaid state taxes up to the purchase price if the buyer doesn't request a Certificate of No Tax Due from the Comptroller before closing. Buyer and seller file the request together, and it's free.

4Franchise: brand, system and documents

A franchise combines elements of both routes. If you open a new location, it's a new business with someone else's concept. If you take over an existing outlet from another franchisee, it's a purchase. The same standards as above apply for the E-2. Two points, though, deserve special attention with a franchise.

The first is your role. The E-2 requires you to develop and direct the business. A franchise agreement dictates a lot: product range, prices, purchasing, marketing. That's no obstacle as long as you genuinely run the business, hire staff and make decisions. Read the agreement with that question in mind. Your obligations to participate personally in the operation are in Item 15 of the disclosure.

The second point is the paperwork. The Federal Trade Commission's Franchise Rule requires the franchisor to give you its Franchise Disclosure Document at least 14 calendar days before you sign or make any payment. It has 23 set items. For your E-2 application, the most important are the estimated initial investment in Item 7 and the audited financial statements in Item 21. The franchisor may only make financial performance representations in Item 19, and only with a reasonable basis. If it makes none there, it can't give you any elsewhere either. One exception: if you're buying an existing outlet, it may show you that outlet's actual figures. The document is no seal of approval: no government agency has reviewed its contents.

Use those 14 days. Call franchisees whose contacts are listed in Item 20 and ask them about their actual costs up to opening and about their first few years. Compare their answers with the table in Item 7. If the numbers differ sharply, that belongs in your business plan, not in a footnote. The consular officer reads the plan as your statement, not the franchisor's. And check how much of your investment ends up with the franchisor as fees and how much actually works in your own business, for example in equipment, inventory and staff.

5Partners, ownership and control

Whichever route you take, nationals of your treaty country must own at least 50 percent of the business, and you must control it. Usually that means holding at least 50 percent, but control can also come from running the operations. Two equal partners with full management rights count as having control; under the FAM, three or more equal partners no longer do.

This matters when the seller keeps a stake after the purchase, or with franchises that have an American co-owner. If you buy with a US partner, you need a structure that puts the majority, or genuine 50/50 control, with the treaty country. Dual nationals have to choose one qualifying nationality. If your company at home buys the US business, its nationality is determined by its owners, not by where it is registered. You'll find the details under Requirements for the US business and Treaty country nationality.

6Company, location and taxes

Even buyers rarely buy as private individuals. Usually a newly formed US company acquires the shares or the assets. It has to be the company you run and work for: as an E-2 investor, you may only work for the business that gave you your status. If something fundamental changes later, such as a merger, another acquisition or a sale, you need USCIS approval or a new visa first.

Where you set up determines your state taxes, your business costs and your life. For the business account and your first payments, our US Bank Account Opening service has you covered.

7Which route is right for you

Starting from scratch makes sense when your business is built on your know-how and needs few assets. It's affordable, but it demands a convincing plan. Buying makes sense when you want a business with a track record and numbers you can check, and you're ready to pay a price that stands up to a valuation. A franchise makes sense when you want a proven system and can live with the fees and the rules.

All three follow the same order: structure first, then money, then the application. How long that takes is covered in our guide to E-2 processing times. At the interview, the consular officer will ask why you chose this particular business; how to prepare is explained in our guide to the E-2 interview. And if an application does fail, see our guide E-2 refused. If you have a company at home that can transfer you, look at the L-1 first.

In short

• For the E-2, what counts is not the route but the result: a real, operating business, an investment that is substantial relative to its cost, and your role as the one running it.
• When you buy, the purchase price generally counts as the cost of the business. You can buy subject to the visa being granted if the money is held in escrow.
• Loans secured by the business you buy don't count toward the investment. Loans secured by your personal assets can.
• A franchisor must give you its disclosure document at least 14 calendar days before you sign or pay. Item 7 and Item 21 matter most for your application.

How we help you

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