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Building the framework for an emerging franchise system can easily require months of hard work and an investment of $100,000 or more before a franchisor can even begin to recruit new franchisees.
Not only that, appropriately structuring such a program can be a daunting task. It requires in-depth business and financial analysis, diligent documentation of all pertinent business operations and procedures and the careful development of compelling and legally compliant marketing and sales tools. It’s not for the faint of heart and is typically best done with the guidance of experts to avoid making costly mistakes along the way.
But finally getting over these thresholds and becoming a legally viable franchisor — one that’s ready to offer a valuable opportunity to the marketplace — can be exhilarating.
So, when a prospective franchisee comes to the table, eager to pay an initial fee of $30,000 or more to become one of the first owners of a brand, franchisors need to remain sufficiently clear-eyed about one key thing: when there isn’t an ideal fit between the potential franchisee and the franchise brand. For a variety of reasons, sometimes the best step to take, however paradoxical it may seem, is to walk away.
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Why? Because accepting a check from an unqualified candidate has the potential to be a massive and enduring mistake, and an easy one to make. And the first sale is often the hardest one, because although a franchisor may have a track record with company-owned locations, its franchisee success stories are yet to be told. Plus, the sales cycle is notoriously long (averaging 14 to 16 weeks), and confidence can wobble. Self-doubt can make even the sturdiest of franchisors question whether they will ever sell one.
So, when a marginally-qualified prospect willing to sign an agreement and pay the initial fee comes along, temptation can set in. A franchisor could easily think there is little harm in accepting a less-than-ideal candidate, especially if it will help them kick their program into motion.
There are numerous reasons why this is not the right move — one that could lead to monetary and organizational problems down the road.
Related: What Is Franchisor Financing? Here’s Everything You Need to Know.
Job #1: Determining the right candidates
Historically, franchise lead-to-sales closing rates have hovered around 1% to 2%, but in the past couple of years, they have been closer to 3%, according to industry studies based on feedback from mature franchisors. This figure should give newer franchisors some encouragement as demand after the pandemic is still growing and the candidate pool isn’t shallow. But at the same time, having more candidates doesn’t automatically mean better candidates. Franchisors still need to do ample due diligence while actively recruiting and evaluating.
Before accepting money from a potential franchisee, franchisors should understand that they are in this business for the long run and that they cannot be successful without their franchisees also being successful. The first one to join a system can often set the tone for all who follow: They will not only help attract others but will also directly impact development and support teams, and that impact needs to be positive.
Underperforming franchisees require more support than strong ones, of course, and therefore can cost a franchise system more in both dollars and hours. At the same time, they generate lower sales revenues, which means less royalties for the franchisor. Worst of all, failed franchisees are much more likely to bring litigation, and lists of terminated/failed franchises and lawsuits must be disclosed in legal documents.
Related: The 9 Provisions Every Franchise Agreement Needs to Have — and What They Mean
Finding diamonds doesn’t have to be rough
Though the process may be challenging, there are proven ways of identifying franchisees more likely to be successful. Some skill sets are more easily identified, such as mechanical expertise, food service experience or other related professional skills. Uncovering and targeting these “hard skills” should be high on any franchisor’s priority list.
It’s also important to offer the right type of ownership options. When franchising was first gaining traction in the 1960s, companies such as McDonald’s only took on owner-operators who were in the store every day. Now, however, for certain industries, “passive investors” can be successful, as long as they have a vested partner with experience in the industry involved in day-to-day operations.
Although a strong skill set and business acumen are important, perhaps the most critical candidate requirement is sufficient capitalization, and thankfully, it is relatively easy to measure. Franchisors should request detailed financial information and take a close look at prospective franchisees’ overall net worth, available liquid capital, credit scores, other sources of income and their current financial obligations.
Then there are the “soft” skills. It bears repeating that the franchise relationship is a long-term one, so it’s important to go into business with people who can demonstrate intelligence, honesty, reliability, integrity and adaptability. A solid work ethic and a certain amount of entrepreneurial spirit (along with a willingness to follow the system) are also key characteristics.
In order to assess these hard- and soft-skill criteria, franchisors may want to utilize the various assessment tools on the market to determine compatibility. This is also a good time for franchisors to check in with trusted advisers to be sure they have both effective marketing materials and stellar training programs to ensure they are appropriately targeting and supporting the right candidates.
Assessing the qualifications of the franchisee, and ultimately doing what’s needed to assure their success, is one of the most important priorities for any franchisor. But that comes second to knowing something more vital: when opting not to sell is the better decision.
This story originally appeared on Entrepreneur
