How to tell if a franchisee is not a good fit for your franchise
Whether you’re a startup franchisor or an industry veteran with a thriving multi-unit franchise system, the franchisees you onboard today will impact your franchise system for years to come.
From business performance indicators to the numbers disclosed in Item 19 of your Franchise Disclosure Document (FDD), your success as a franchisor depends on the quality of your franchisees. Because of that, selecting franchisees that are a good fit for your franchise system is critical. While it’s impossible to avoid signing at least one or two bad-fit franchisees throughout your career, knowing which red flags to look out for can improve your odds of choosing the right franchisee when you’re selling your next franchise offering.
Warning Signs a Franchisee Might Not Be a Good Fit for Your Franchise include:
They’re Not Properly Capitalized
They have Unrealistic Expectations
Their Mindset and Personality Aren’t Aligned with Your Brand
Their Attorney Makes the Deal Difficult
In this article, we’ll explore the warning signs every franchisor should know before signing a franchise agreement with a new franchisee.
1. They’re Not Properly Capitalized
Out of all the warning signs franchisors should be aware of, making sure a franchisee candidate is properly capitalized is the most important. Although many franchisors and franchise development professionals mistakenly believe that having the lowest estimated startup costs in a franchise category is an advantage, that’s not always the case. This is especially true when a prospective franchisee buys into a franchise system without the appropriate amount of reserve capital to maintain their new business before it reaches profitability.
Before signing a franchise agreement with a new franchisee, consider asking the following questions:
Is the candidate’s capitalization in line with the estimated initial investment costs described in Item 7 of your FDD – from build-out to reserve capital? (This should include liquid capital as well as the franchisee’s ability to finance.)
Does the candidate have enough reserve capital to maintain their franchise business after opening but before their franchise business becomes profitable?
Are the candidate’s investment expectations aligned with the actual financial obligations of operating a franchise business?
If the answer to any of these questions is no, it’s important to discuss realistic financial expectations with the candidate before making any decisions.
It’s also a good idea to consider extensively reviewing Item 7 of your FDD before offering or selling another franchise unit. If appropriate, consider increasing the amount of reserve capital required to buy a franchise within your system, as well as marketing capital requirements. Having higher reserve capital and marketing capital requirements than other brands shouldn’t put you at a competitive disadvantage – in fact, it can act as both a filter and a signal to well-qualified franchisee candidates that your sales process is thoughtful and your investment requirements are straightforward.
By making sure prospective franchisees are well-qualified and properly capitalized before bringing them into your franchise system, you can increase the likelihood that your franchisees will be satisfied with their experiences as business owners in your franchise system.
2. They have Unrealistic Financial Expectations
Another potential warning sign franchisors should be wary of is a franchisee candidate with unrealistic expectations about finances or income related to the franchise. It’s critical to sit down with prospective franchisees and evaluate their financial goals as business owners before signing a franchise agreement.
It’s important to remember that a franchisee candidate’s financial expectations are often shaped by the way franchisors market and position their franchise offering. Because of that, you must make sure your marketing and recruiting efforts provide prospective franchisees with realistic depictions of what opening and operating a business actually looks like in your franchise system.
Before selling a franchise, consider asking franchisee candidates the following questions:
Are the candidate’s income needs (for example, part-time supplemental income versus full-time income) viable for franchisees within your system?
Are the candidate’s financial expectations aligned with the reality of operating a franchise business?
Have you marketed and positioned your franchise offering in a way that accurately reflects the experience of franchisees in your franchise system?
If the answer to some or all of the questions above is no, you might want to consider discussing financial expectations in more detail with the candidate before moving forward. Straightforward, honest conversations about the differences between a prospective franchisee’s financial expectations and the realities of operating a franchise business within your system can help you determine whether or not the candidate is the right fit.
Additionally, understanding candidates’ expectations can also help you improve your marketing and recruiting efforts as a franchisor. By representing your franchise system in a way that’s authentic to your offering – whether you’re selling “lifestyle” based supplemental income businesses or full-time job replacement businesses – you can filter out the wrong franchisees while attracting candidates whose goals and expectations are aligned with your offering.
3. Their Mindset and Personality Aren't Aligned with Your Brand
As a franchisor, no matter how successful your brand becomes – and no matter how good your qualification process is – you will likely have conversations over the years about one or two franchisees that you probably shouldn’t have allowed into your franchise system.
While bad-fit franchisees usually aren’t bad people, they can still disrupt business by negatively impacting your brand’s culture, serving as a bad influence to other franchisees, or performing poorly compared to other franchisees in your system. In some cases, they might also never be satisfied – even after exhaustive efforts to provide them with additional support and resources to perform well within your system.
Because of those risks, it’s important to ask franchisee candidates questions about themselves and get a sense of their personality, mindset, and motivations before signing a franchise agreement. To avoid partnering with a franchisee that isn’t the right fit for your brand, consider asking the following questions to evaluate their level of interest and commitment to franchising:
Does the candidate’s personality align with the culture you’ve built your franchise system around?
Do they share your brand’s values and mission?
Is the candidate passionate about your brand’s products and services?
Do they have a franchisee mindset? That is, are they motivated to succeed as a business owner and committed to the success of the franchise system as a whole?
Is the candidate a team player that can work well with other franchisees?
Are they enthusiastic about business ownership and interested in learning business development skills?
If the answer to some or most of the questions above is no, the franchisee candidate might not be the best fit for your franchise system. To make sure, continue asking questions and get to know more about the candidate – including their reasons for buying a franchise. Even if a candidate isn’t a good fit for your system, make a lasting good impression by parting ways amicably.
4. Their Attorney Makes the Deal Difficult
Even when a franchisee candidate seems like the perfect fit for your franchise system – they’re well-capitalized, their financial expectations are aligned with your offering, and they have a great mindset and personality – other warning signs can sometimes pop up. Many times, this can include difficult interactions with a candidate’s attorney.
This is especially true in situations where a franchisee candidate is working with an attorney that lacks franchising experience. Because franchisees often reflect what they were advised to say by their attorney, regardless of experience, it’s important to know how to navigate those conversations when they occur.
Some possible red flags to look out for when dealing with a prospective franchisee’s attorney include the following:
The attorney’s challenges are aggressive but lack legal merit or substance.
They are uncommunicative or inexperienced in the legal negotiation process as it relates to franchising.
The attorney advises the candidate to make unrealistic requests or demands. This can include asking for exemptions from royalty obligations or marketing fund contributions (to avoid disparate treatment of franchisees within the franchise system, both fees generally shouldn’t be negotiated).
Although it’s possible to negotiate some terms of the franchise agreement, all negotiations should be conducted cautiously – and with the help of a seasoned franchise attorney – to ensure any changes made to the agreement are compatible with industry best practices as well as federal and state franchise laws.
As a franchisor, your attorney is also a reflection of your brand. Because of that, it’s important to make sure you’re working with an experienced franchise attorney. When selecting an attorney to represent your franchise system and navigate the challenges of the industry, make sure to look for a lawyer that is proactive, communicative, efficient, and well-versed in franchise law and negotiation.
Over time, as you continue to interact with more franchisee candidates, you’ll begin to pick up on unique red flags and warning signs that can indicate to you whether or not a franchisee will be a good fit for your franchise system.
Although it’s impossible to completely avoid bringing a few bad-fit franchisees into your franchise system over the years, you can mitigate the risk by developing a strong sense of what you’re looking for in a franchisee. By taking time to understand the warning signs and red flags to look out for when interacting with franchisee candidates, you can also strengthen your qualification process – and your entire franchise system.