11 October 2023

Selecting The Right Franchisees

Sotos LLP


As Canada’s leading franchising, licensing and distribution law firm, we provide a comprehensive range of franchise law, corporate, private equity financing, commercial, litigation, intellectual property, employment and real estate services. For over 40 years, we have been working with regional, national and international franchisors in every sector of the franchise industry from launch to exit including with their international expansion.
Selecting the right franchisee is one of the most important jobs that a franchisor has. The financial success of your system, the reputation of your brand, and your ability to increas...
Canada Corporate/Commercial Law
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Selecting the right franchisee is one of the most important jobs that a franchisor has. The financial success of your system, the reputation of your brand, and your ability to increase your market share or number of units all depend on selecting the right people. Choosing the wrong franchisees can lead to wasted time, significant expenses, and even significant harm to the brand.

To find the right franchisee and safeguard your brand, it's critical that, as a franchisor, you have a strategy that you can put into practice to help you identify your future franchisee partners. This article will help you identify the right franchisees for your specific system, and provides practical advice about how to assess if a prospective franchisee has what it takes to succeed in your system.

  1. Business experience. Franchisees are essentially small business owners. Prior experience operating a business, even if it's a business type different than the franchise business they may operate, will help to set a franchisee up for success. Remember, your new franchisee is going to have a lot of learning to do when they are onboarded to the system: learning your system standards, understanding your brand values and how those are expressed in your daily operations, and any specific or special skills that may be necessary to operate their franchise business. A franchisee with an understanding of small business fundamentals, such as basic accounting, budgeting, cash flow management, reporting, sales, marketing and hiring and management of employees is already one step ahead. Franchisees with no business experience may be completely overwhelmed if, at the same time they are completing their system training, and also have to learn everything about operating a business.
  1. Alignment with brand values, mission, and culture. "Fit" is going to mean something different to every franchise system, but it's one of the most important things that franchisors need to consider in evaluating potential franchisees. A prospective franchisee who otherwise "ticks all the boxes" but has a fundamentally different view of your brand, or of the system and its overall goals and direction is, at best, unlikely to succeed and, at worst, may create significant problems for you and the system, in general. What's the best way to identify the elusive "right fit?" Here are some practical tips:
  • Your initial screening and application processes should include at least some questions that directly address your brand's values and mission. For example, ask some questions about why they are interested in your brand, in particular, and why they think they are right for the system.
  • In interviewing a franchisee candidate, ask historical, behaviour-based questions that will help to reveal their personal characteristics and qualities. For instance, if one of your brand values is customer satisfaction, ask them to give you a specific example of a time in their past when a customer satisfaction issue arose, what it was, how they handled the situation, and what the result was. These types of questions and answers will likely be very helpful to you in assessing whether the franchisee candidate is the person you're looking for. Past experience is often the best indicator of future performance.
  • You may want to hold a discovery day or other workshop where the prospective franchisee can learn about your brand and also interact with existing franchisees. Not only will the franchisee learn about whether your system is right for them, but you can observe the candidate and assess whether you think they are right for the brand. For instance, do they seem excited about your brand? Do they seem engaged? Do they get along with existing franchisees? Are they asking good questions? Your existing franchisees may also be able to provide you with insight on whether the candidate is compatible with your brand.
  • You may wish to conduct reference checks. You might speak to previous employers, business partners or colleagues to gain insights into the candidate's abilities and alignment with your brand values. Another good idea is to check publicly available sources (a "Google" search, social media feeds, etc.) to see whether the franchisee candidate has a public presence and, if so, whether it reveals anything about them that is in conflict with your brand.
  • You may wish to employ good profiling technology and related services. There are services available that will identify the qualities and characteristics of the most successful franchisees currently in your system, and then analyze franchisee candidates to determine whether or not they possess these same qualities.
  1. Sufficient financial resources. No matter how much business experience a candidate may have, or how much they seem to fit into your brand's culture, that franchisee is virtually certain to fail if the franchisee doesn't have sufficient financial resources to operate. A new unit that opens and then rapidly closes may harm the reputation of the brand, as may a unit that opens and then has to cut hours or reduce staff to stay afloat. Franchisors should set clear financial criteria for prospective franchisees. In particular, franchisors should ensure that prospective franchisees have a sufficient amount of unencumbered liquid assets to meet initial capital expenses, and sufficient initial operating capital to sustain the business until it is able to generate adequate profit. The creditworthiness of the franchisee's principal should also be explored.
  1. Ambition and dedication. What are the franchisee's expectations around business ownership and operation? Do they intend to personally devote their full time and attention to the franchise business? Do they understand that opening a new business, even a franchise business with excellent franchisor support, can be hard work? Or do they think that, because the business is a franchise business, it will essentially "run itself"? Do they believe they can just "hire a manager" to perform all business functions? It's important to assess a candidate's expectations around these important issues. Most franchise systems require franchisees to devote their full time and attention to the franchise business. Individuals who understand this from the outset, and are keen to work hard to build a great business, are best placed to achieve success.
  1. Understanding of the franchise relationship. While many franchisees are ambitious, want to be "their own boss", and often have an entrepreneurial spirit, it's very important for a prospective franchisee to understand the role of a franchisee within a franchise system. A franchisor should assess whether a candidate understands that a franchisee will need to carefully follow the franchisor's standards, methods of operation, management techniques, and business practices. Success as a franchisee depends on the successful execution of these existing practices and standards. The reputation of the system also depends, in part, on franchisee compliance with system standards. For example, while it may be that restaurant franchisees can source individual items for prices lower than those offered by a franchisor's approved suppliers, buying supplies only from approved suppliers is important to ensure consistency across the brand, manage health risks from food-borne illnesses, and achieve overall lower supply costs that are the result of volume discounts and product bundling. Those candidates looking to "innovate" or "improve" upon the system need to understand, from the beginning, that their aspirations may not be compatible with the role of a franchisee. It's important for franchisors to explain to franchisee candidates the role of the franchisor, the role of the franchisee, and how their different functions work together to create the conditions for system success.
  1. The right attitude and realistic expectations. It's critical that the franchisee candidate has the right mindset. Misalignments between expectations and reality is a recipe for unhappy franchisees and negative brand publicity. A candidate should have genuine enthusiasm and passion for being a franchisee in your system, and understand what they can achieve with a franchise business. It's important that the franchisee candidate have a realistic understanding of the potential profitability of the franchise business. In particular, it may be a red flag if a franchisee seems interested only in how much money they can make. Franchisors who elect to directly provide financial information to franchisees must be very careful to do so in accordance with relevant franchise legislation. Providing earnings claims or historical financial information in the wrong way may lead to significant claims against franchisors in future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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