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What Do Franchisors Look for in a Franchisee?

May 17, 2023
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When looking for a franchise to buy, there's a good chance you're searching for specific information about each one.

Such as the franchise costs, what the franchisor sells or provides, how much training is involved, proven sales records, reviews from existing or past franchisees, whether or not you have a protected territory, and so much more.

However, you're not the only one looking for specifics and detailed information.

After all, the franchisor-franchisee relationship is a two-way street, and they want to learn about you as well. Having said that, you're probably wondering what franchisors are looking for in a franchisee to see if you fit the bill.

Franchisor Meeting Potential Franchisee Shaking Hands, Evaluating His Qualifications To Own a Future Franchise
Well, first, you need to consider that there are many requirements the franchisor has outlined in their franchise agreement. Other qualities and traits have more to do with you as a potential candidate.

Let's start by going over the general terms and conditions typically found in the franchise agreement. We'll be covering some of the core sections that outline what franchisors look for in a franchisee.

What To Generally Expect in the Franchise Agreement

Before we dive into it, here's what a franchise agreement is, according to Cornell's Legal Information Institute:

"A franchise agreement is a contract under which the franchisor grants the franchisee the right to operate a business, or offer, sell, or distribute goods or services identified or associated with the franchisor's trademark. In exchange, the franchisee makes one-time or periodical payments to the franchisor in the amount, terms, and conditions established in the franchise agreement."

No two franchise agreements are alike, so the obligations and rights outlined in them may vary.

However, here are the most important sections in the franchise agreement that your franchisor might expect from you.

A Pen on a Franchise Agreement Document Highlighting Fees and Payments Required by the Franchisee
  1. Fees and PaymentsHere, you will find the initial start-up costs your franchisor will require of you to join the franchise system.

    You might find other mandatory charges such as royalty fees, ongoing miscellaneous expenses, and when such payments are due. Royalty fees are based on percentages of your monthly revenue and can range from 4% to 12% on average.

    And these royalty fees may go towards the marketing budget, operational assets for franchisees, or maintain and expand the franchise system.

    Most franchise agreements have clauses that can include late fees and accruing interest penalties when payment due dates are missed.

    Not all, but some franchisors will expect you to pay for training and the travel costs to attend training sessions for either you or your employees.

    The fees and payments required of you will vary per franchise agreement. But there's always some sort of reoccurring expense they'll expect of you.
  2. Restriction on Goods and Services OfferedThe franchisor will require you to uphold the highest quality of standards when selling their products or offering services. They want you to run your business accordingly since it's their brand name at the end of the day.

    In this section, you will find detailed instructions on what you can and cannot do to ensure your franchise meets said standards. Including the suppliers you are authorized to use, approved advertising, pricing, and more.

    Sometimes the franchisor will have you purchase your own goods if they're unrestricted.

    Unrestricted items are the essential items you'll need to maintain and operate your business and/or facility. This could be anything from stationery office supplies to paper towels used by employees.
  3. Renewal, Termination, and Transfer of the Franchise AgreementThis section includes the length of the franchising contract and the terms and conditions for renewing or terminating your franchise.

    The average length of a franchise agreement is ten years, but some can last between five to 20 or even 25 years. Often, the duration of the renewal term is the same as that of the initial period you agreed to.

    Franchise Agreement on Table Next to Hourglass With Pen Pointing to Contract's Length of Ten Years
    This section outlines the legal rights of both parties to terminate the contract and what the conditions are for discontinuing it early for whatever the cause may be.

    Most of the time, you don't have the right to end a contract early. The franchisor has more authoritative power to terminate the franchise agreement.

    And there are clauses you'll have to adhere to, which specify what to do after the franchise contract has ended early or naturally when parting ways with the franchisor.

    General clauses such as to refrain from using their branding, marketing collateral, paying debts, returning operational assets, and clauses specifying that you cannot operate a competing business near your former franchise location.
  4. Obligations and Duties of the FranchisorRemember how we said the relationship between franchisor and franchisee is a two-way street? Well, this section outlines what the franchisor needs to provide for you and what they expect from you as well.

    As we mentioned earlier, most franchisors offer training to help you learn beforehand and throughout to ensure the franchise is operating successfully.

    The same can be said when you hire and train your employees. The franchisor may provide the training material, but it's still your responsibility to ensure that they're properly trained and fulfilling their roles and job duties successfully.

    You'll also see information here in this section regarding advertising and promotions.

    Some franchisors will help you with the costs and even fully support their franchisees financially to take care of the marketing and advertising strategies to promote the brand.

    There are some franchisors who will require you to spend a small percentage of your gross sales on promoting your franchise business without their help.

    Here's another thing the franchisor may expect from you.

    The location of your future franchise sort of falls on you. Franchisors may help you, but they want you to strategically seek out a proper location, figure out the leasing agreements, and evaluate the area you intend to open the business, etc.

Five Franchise Labeled Location Pins on Map Symbolizing Your Future Franchise Location Falls on You
There are more general items that a franchise agreement covers, and these are a few of the core sections found in them.

Always remember that the franchise agreement, along with all legal documents, should be reviewed with a franchise lawyer. They'll explain the rights and obligations in a way that makes sense to you without all the legal jargon.

Let's move on to the desirable traits that franchisors look for in potential franchisees like you.

4 Traits Franchisors Look for in a Franchisee

These traits are a mix of personal qualities about you, and some are necessary to convince the franchisor that you fit the bill to represent their brand.
  1. Adequate Capital or Financial CapabilitiesAll franchisors want their franchisees to show commitment. And, for some, like The Groutsmith franchise, one of the things that an ideal franchisee can do to show dedication is to put a solid amount of money from their own pocket to finance their franchise.

    Franchisees Clearing a Gap Between Two Ledges Representing Their Commitment to Their Franchisors
    All franchises require up-front capital from the franchisee. And there's nothing wrong with outside funding or pulling out a loan. However, potential franchisees that can provide capital on their own will be seen as a good risk.

    Still, it's not only about having enough to fund the initial fees. Having enough money can help you sustain your franchise until you start seeing a return on investment.

    David McKinnon, CEO of Service Brands International, which includes franchise brands like Molly Maid and Mr. Handyman, explains what they look for in a franchisee.

    For McKinnon, an ideal franchisee needs to have a bit of extra money in the bank to get by while the franchise gets established and starts generating profits.

    Otherwise, they could run out of money, and banks may refuse to give them loans because they will be considered high-risk candidates.

    Talking about banks, having a good credit score is also a great plus for a potential franchisee. A good credit score is important to the franchisor because it shows that you handle your finances well.

    Scores usually over 700 are a safe bet if you're applying for a franchise. However, not all scores under 700 are disqualified, and people with great credit can be unapproved.

    Franchisee Holding Phone Showing Excellent Credit Scores in Front of a Laptop, a Quality Franchisors Prefer
    Franchisors are really looking to see if you can handle your finances. Having a credit score of 800 but huge debts and several bankruptcies listed on your report isn't a good sign.

    While some people may have a good reason for having less than perfect scores, showing a valid reason for it may help convince the franchisor to do business with you.

    If you're someone who manages their finances well enough, you'll probably do great handling the franchise's finances too.
  2. The Ability To Follow the Franchise SystemFranchises are built on systems. That's why franchisors want you to adhere to the business model they've built over time.

    In an Entrepreneur article, the CEO and co-founder of the Philly Pretzel Factory explained that they are looking for an entrepreneurial franchisee who understands the importance of following their proven business model.

    One of the most significant advantages of franchising is the system and business model where things like what products to sell and the equipment that will be used have already been determined.

    This also includes tested and proven marketing strategies with the best messaging to reach their target audience.

    In the end, franchisors want you to follow their standard operating procedures and business model. However, that doesn't mean you have no control over running your business.

    The franchisor-franchisee relationship is a two-way street. Even though you have to follow a system, you can also make suggestions to improve it.

    Franchise 500 by Entrepreneur has an article that explains how the Department of Labor's new federal franchise rule concerning joint employment affects you. As a franchisee, you have control over who you hire, their schedules, and pay.

    Franchisee Having Control Over Their Business and He's Shaking New Hire's Hand With Employees Behind Him
    Furthermore, depending on the franchise, you may have some additional freedoms permitted to help each franchise adjust to the market of each city or state.

    For example, McDonald's gives its franchisees the option to shrink all-day breakfast offerings. They realized it didn't make sense to have all the breakfast items in every location across the country because the popularity of each item varied by location. Therefore, their franchisees control which items they offer based on demand.

    Depending on the franchise you choose, there might be some rules you will have to follow. Others are more flexible, and some offer complete freedom when it comes to running your business.
  3. Communication and Interpersonal SkillsCommunication and interpersonal skills are the basis of being a team player, which in turn makes you a person capable of leading a team.

    Franchisors look for franchisees that can communicate effectively with their corporate team, employees, and future customers. By developing these skills, you will be able to solve problems efficiently and provide superb customer service.

    These skills are key to making your franchise a success, which benefits you and the franchisor.
  4. Passion and EnthusiasmLast but not least, franchisors look for franchisees that are passionate about their business or industry and can't wait to become part of the franchise family.

    A Potential Franchisee Holding a Paper Heart Representing Her Passion, Which Franchisors Look for in Franchisees
    It should come as no surprise that passion makes people go the extra mile, and at times, you as a franchisee will need to do so to ensure your franchise is successful.
Now that you know what franchisors look for in franchisees, do you feel like you fit the bill? If so, it's time to check out some great opportunities.

All USA Franchises Is a Great Place To Start Looking

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We are here to match franchisors with potential franchisees and help you get out to a great start.

Also, we provide you with an informative AUF blog full of helpful articles and tips for both franchisors and franchisees. On All USA Franchises, you'll find the latest franchise news and information about the franchise events you won't want to miss.

Our resources section is where you can find help with any additional inquiries. There, you can locate franchise advisors, franchise brokers, franchise consultants, franchise financing, franchise developers, franchise lawyers, and franchise training services.

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