Last year at the ABA Forum on Franchising Annual Meeting, the programming included a seminar entitled “Between You and Me: A Toolkit to Counsel in and to Smaller Systems.” The purpose of the session was to provide new in-house lawyers an overview of some of the day-to-day legal conundrums that growing brands face and instructions on how to face such issues.
One of the most interesting and important issues addressed during the panel discussion was the franchise application process. Growing brands are often eager to welcome any prospect willing to pay the initial franchise fee. However, all franchise systems have a reason to be selective in the application process. Once a brand meets that critical mass of 50-100 units, it can often afford to be more discerning. Below are some tips to ensuring that a franchise system only accepts the best:
- Confirm supporting documents for financing. A financing arrangement may be straightforward if the franchisee is obtaining traditional financing from an institutional lender. However, if a franchisee is expecting a capital investment from friends and family, then you should still require documentation. You do not want a situation where a franchisee is a few months into development and the investing sibling or uncle backs out of the deal.
- Do not just run a background check and throw it in a file. Make sure you thoroughly review the results. The panelist described some war stories about clients ordering a background check on owners but failing to analyze it. The background check revealed some serious red flags about the prospect. The franchisor then faced issues with the franchisee down the line that could have been avoided had the franchisor just reviewed the results in the first place.
- Always conduct a search of the lists maintained US. Treasury’s Office of Foreign Asset Control (OFAC). OFAC maintains a list of all people and entities whose assets are blocked by the US government as a result of sanctions. You can conduct your own search at no cost online and it takes under a minute.
- Request supporting documentation such as tax returns and account statements to verify assets. Dig deeper when evaluating a prospective franchisee’s financial wherewithal.
- Don’t forget to determine the applicant’s citizen or immigration status.
While there is no surefire way to avoid all problem or underperforming franchisees, developing a comprehensive screening process is one method in decreasing the number.