Whether you have taken the first step to franchising your business or have multiple stores and are looking to expand further, taking on a new franchisee can be a risky business. Fortunately, with correct due diligence, well-drafted confidentiality agreements and deposit agreements, you can increase your chances of selecting a franchisee who will be an asset to your franchise and help increase turnover and profits.
Franchisee selection is a process under constant refinement by franchisors. This can include employing experienced recruitment consultants to profile candidates. Selecting the right person to join your franchise network will likely require an investment of time and capital, but getting it right will pay multiple dividends in the long-term if the franchisee is able to successfully promote the brand and network.
Some key qualities to look for in a potential franchisee include:
Aptitude – capacity to learn new things
One of the main advantages of buying a franchise is the fact that the processes and procedures concerning products and the delivery of services have already been established. Therefore, franchisors often look for someone who is committed to learning the franchisor’s proven system and keen to learn from others in the franchise network, so as to avoid common pitfalls.
Planning and organisation skills
All business owners need to be capable of organising not only their business, but also their employees. A successful franchisee is someone who understands that their main job is to work on the business rather than in it. Franchisors often look for a candidate who can demonstrate the ability to implement the franchise’s strategies and plan for unexpected events, such as long-term roadworks blocking access to the store, an economic downturn in the area or a competing business setting up next door.
People who can follow a model
Being able to follow a pre-set model is the golden rule of franchising. Candidates who demonstrate a strong entrepreneurial streak, having pioneered their own ventures, may in practice find it difficult to work within a well-defined structure.
Having experience in the business sector in which the franchise operates is useful, but may not always be essential. By contrast, an important quality for a franchisee is the ability to learn an established system and be able to effectively train and manage a team to follow that system.
Strong work ethic and self-motivation (having the ‘can-do’ attitude)
“The great thing about self-employment is you get to choose which 12 hours of the day you will work”. This classic saying applies to all franchisees – an applicant who wishes to clock in at 9.00am and clock off at 17.30pm and enjoy five weeks annual leave has likely failed to research the realities of self-employment. Franchisees need to be dedicated, committed, and prepared to put in the hours it takes to make their business succeed.
The applicant has researched the franchise business, its customers, and the industry as a whole
One way to gauge a potential franchisee’s commitment is to examine the level of research they have undertaken, not only regarding the franchise business, but the system of franchising itself, the industry, the local area where they plan to operate the franchise, and who the potential customers are.
A serious franchisee is also more likely to undertake due diligence checks on the franchise model and spoken to existing franchisees to ensure the business is the right fit for them.
When you decide to onboard a franchisee, you will need to provide the candidate with certain information so they can assess the viability and potential of the business. This process is known as franchise disclosure and the elements that the franchisee and their advisors will typically research as part of the due diligence process may include:
- the business and financial position of the franchisor;
- the main officers of the franchisor;
- details of the franchise business;
- details regarding the franchise network and franchisees;
- any financial projections or historical financial performance data
To manage risk and protect against unauthorised disclosure of confidential information, the franchisee can be asked to sign a non-disclosure agreement (NDA) (also known as a confidentiality agreement). The NDA will prohibit the potential franchisee from using confidential information for any purpose other than what is set out in the agreement. If the NDA is breached, it may be possible for the franchisor to bring a claim for any resulting damages and/or apply to the court for an injunction to stop the candidate using the information in an unpermitted way.
A franchisor and franchisee candidate may enter into a deposit agreement prior to concluding the actual franchise agreement. A deposit agreement sets out the deposit amount required from the potential franchisee, what the deposit will be used for and whether all or part of it will be refundable should the formal franchise agreement fail to conclude.
Under the British Franchise Association’s (BFA) Code of Ethics, if the franchise arrangement does not materialise, the franchisor may keep a portion of the deposit to cover any direct costs incurred from the due diligence process and/or negotiations such as professional advisor costs – solicitors, accountants, surveyors etc. The remainder of the deposit should be refunded to the franchisee.
Finding the right franchisee is not a decision that should be made in haste. Adhering to a thorough recruitment process and conducting detailed due diligence to assess the potential of the franchisee can increase your chances of selecting a candidate who can promote and help expand your established brand.
Saracens Solicitors is a multi-service law firm based opposite Marble Arch on the North side of Hyde Park in London. For information on any of the points in this article, please call our office on 020 3588 3500.
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