Before signing an agreement with a new franchisee, franchisors often want to make sure the franchisee has the knowledge, skill, and investment necessary to be successful. While many people are interested in buying franchises, not everyone qualifies for every type of franchise. A franchise application is one tool that can help franchisors weed out potential franchisees who may not be the best fit for the system. An application can include questions about a franchisees experience in a particular industry or about the franchisees’ goals, including whether they would be interested in owning multiple locations. Additionally, obtaining a background check and credit report on potential franchisee can give a franchisor some comfort that the prospective franchisee has the ability to properly invest in the new franchise. While obtaining these checks may be a good practice for a system, a franchisor cannot simply request a background check or credit report without first seeking permission from the franchisee.
In addition to basic biographical information, an application could ask for references, past employers, as well as educational experience. These questions should be tailored to the specific system at issue. For example, an education-based franchise may have more questions about the franchisee’s schooling background than others might. The franchisee application could includes questions about whether the franchisee will devote full-time to the operation of the franchise, whether the franchisee has any management experience, and whether the prospective franchisee is willing to re-locate if a territory is not available where the prospective franchisee currently lives.
If a franchisor wishes to perform a background or credit report, it must comply with the Fair Credit Reporting Act and obtain the consent of the prospective franchisee, and likely the franchisee’s spouse. This consent should be clear and explicit, with specific reference to the FCRA. For example, an application could include a disclaimer with the following or similar language:
In connection with my or my spouse’s franchise application consideration by FRANCHISOR, I understand that Investigative inquiries may be made on myself or my spouse as to background, experience and immigration status. Further, I understand that FRANCHISOR may use an investigative agency (“Agency”) to request information from various federal, state and other agencies which maintain records concerning my past activities, criminal history, driving record, educational history, employment history, and finances. I authorize, without reservation, any party or agency contacted by the Agency to furnish the above mentioned Information, and I consent to the Agency and/or its agents from any claims or liability resulting from the reporting of this background information. I and my spouse authorize FRANCHISOR and its designated agents and representatives to check my/our credit with a credit bureau, conduct a background and criminal investigation, and conduct whatever investigation as permitted under the Fair Credit Reporting Act (FCRA). I agree that a copy of this authorization release is as valid as the original.
This disclaimer must be signed by the prospective franchisee and the spouse, if the check will also include the spouse.
Franchisee applications can be a useful tool for a system to create standards for franchise applicants as well as giving the franchisor more information about the prospective franchisee. If a system wants to employ an application process, it must be done in a uniform manner and any review process must be standardized and fair.