Understanding the Franchisor’s Approval Process

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By Paul Giggi

As you research information regarding the franchised concepts you want to consider owning, you will eventually pare down your choices based upon a number of factors.  More than likely, these factors will include the concept’s financial requirements, the available markets, your comfort with the concept, your background in operating the specific type of business and other components we will cover in future blogs.

Once you reach the point of having chosen a concept to pursue ownership with, you will have an initial discussion with the Franchisor; I covered some of the base questions you should plan on asking in a previous blog (click here).

One of those questions was to ask for details regarding the particular Franchisors approval process and hurdles for new franchisees.  This is important area to understand as meeting these hurdles could potentially require an investment in your time and  some sort of financial investment. 

Typically, the approval process will cover the following areas and you should be prepared to discuss them during your initial discussion with the Franchisor:

·       Background & Experience – There may be a requirement of a certain amount of experience in the industry you are investigating or in not direct experience, some background in running a business enterprise.

·       Financial Resources – You will be required to submit an Application covering your background and your financial resources, but this will come up in your initial discussion and you should be one and honest about this important matter.

·       Industry References – If you have a background in the industry you should be prepared to discuss that experience and supply names of people you have worked with that would provide a reference on your experience and successes.

·       Franchisor Financial Hurdles – There are typically minimum Liquid and Net Worth hurdles for financial approval.  The Liquid area is the money that you can readily access and is available for you to invest. This could be cash investment or equity. The Net Worth is the difference between your total financial assets and your total financial liabilities. This speaks to the depth of your financial resources. You should also be prepared to discuss how you will be financial the investment beyond your liquid cash infusion.  If your financial resources do not meet the hurdles or are very close to them, you may not meet Franchisor approval and may want to consider a partner to join in the investment.

·       Personal Financial Resources – Be sure to understand the financial requirements of the concept from the entry fees you will be charged, royalties, build out costs and any costs that are not included in the build out cost range you should receive from the Franchisor. You need to be sure to enter into your due diligence phase with your eyes wide open to all potential costs you will incur.

·       Interview / Discovery Day – One of the requirements that most concept Franchisors will have is you and your partner’s attendance in a Discovery Day. This event is normally held at the Franchisor’s corporate headquarters and is typically a day of discussion.  This event serves a number of purposes. It allows the Franchisor to meet you and you should consider this an interview of you as a potential Franchisee.  In turn, it is your chance to meet the members of the Franchisors staff and the people who will be supporting you and your business going forward… it is your chance to interview them. You should attend prepared with questions of all areas of the support you will be receiving and of the concept itself.  Additionally, in many cases you will have an opportunity to visit one of the concepts that are local… be sure to attend.

We will discuss the Discovery Day in more detail at another time, but this is an important component of the approval / research process and not to be overlooked.