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Advice & TipsAsk an ExpertSeptember/October 2019

Q: How does the franchisor’s approval process help both the franchisee and the franchisor make the best decision?

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The Franchisee and franchisor relationship begins long before a franchise agreement or lease agreement is signed. The relationship begins when the franchisee first reaches out with interest in joining the franchisor’s brand. At this point, the franchisee is involved in an investigative process and wants answers to questions so they can make an informed decision about investing in the brand. On the other side of the table, the franchisor also wants answers to questions so they can make an informed decision about whether to grant a franchise to the applicant.

This is called the approval process, and it is put in place for a reason. It tests the franchisee’s ability to comply with the franchisors rules before becoming a franchisee. An applicant who tries to circumvent the process will not be welcome in a well-structured system, as this behaviour is an indication that in the future, they will try to circumvent other processes that the franchisor may have established.

The approval process is a time investment on both sides to qualify whether the investment in the brand and the applicant are worthwhile. This time investment can take weeks or months, depending on the franchisor’s process.

This process takes place before an applicant makes the decision to sign a franchise agreement or lease. It can be staged out with a deposit agreement so both parties know that there is a serious commitment involved. Deposits prior to signing a franchise agreement are rarely refundable.

The reason this process takes place is to give both the franchisee and franchisor a chance to do their due diligence on the other party. A franchisee requires a certain amount of knowledge before investing in a franchise system, and the approval process is set up to achieve that goal. A franchisor requires a good amount of insight into the character and financial wherewithal of an applicant before approving them for a franchise system. By going through the approval process, both parties get the comfort they need to proceed.

A typical approval process begins with an informal interview between the franchisor’s sales representative and the applicant. This can be followed by a request for financial information on the applicant and maybe a personality assessment, as well. After this, the applicant is invited to evaluate the concept and get a tertiary understanding of what it takes to own and operate a location. This is typically followed by the applicant receiving the franchisor’s disclosure document, which gives them access to all the legal agreements they will need to review prior to moving to the next step. Included in the disclosure document is a list of current and past franchisees, and applicants should be encouraged to contact these individuals for validation of the franchisor’s system, business model, and the claims that have been made during the sales process.

After reviewing the agreements and speaking with the existing franchisees, the next step is typically an executive interview. This is an interview wherein the franchisee is evaluated by a member of the key leadership team of the franchisor’s system. It is a dual interview, as the applicant is trying to get answers to any outstanding questions, as well. It is normally after the executive interview that location and site selection enter the discussion. These are usually presented with feasibility studies, build out quotes, and sample lease agreements for the applicant’s review.

At this time, the applicant is likely engaging a lawyer, as well as financing options. They have enough information to present to their professional advisors, and are in a good place to make an informed site-specific decision about proceeding with the franchisor. Once the lawyer is done their review and financing is approved, the applicant can sign their franchise agreements and schedule a start date for training and opening for business!

Shawn Saraga
The Franchise Academy