Choosing the Right Franchisee

A tough decision franchisors commonly have to make is turning down a R500,000 cheque from an enthusiastic and aspiring franchisee, but it sometimes has to be done. Sandwich Baron CEO Sally J’Arlette-Joy has the following advice for franchisors: “Before you take that cheque, pause to remember that you're in this for the long run. You won’t be a successful franchisor until each of your franchisees are also successful in their own right.”

She lists the single biggest mistake a franchisor can make is to sell a franchise to a person who is not truly qualified.

“Being highly selective is perhaps one of the reasons Sandwich Baron has only 47 stores rather than a hundred, but then again it’s probably also the reason our franchisees are all stable and profitable. It is unwise for a franchisor to chase money and try to open too many stores. This may result in having unprofitable businesses which will be to the detriment of the group” she explains.

“A thorough assessment of the franchisee is always advisable. You have to sell a franchise only to someone you feel will be suited to your industry and who you believe will work according to your business system without significantly deviating. As a franchisor, one is responsible for the entire network, and so is duty bound to perform a comprehensive investigation on each person applying, and feel confident that they will be suited to the franchise.” 

Just as a franchisee must take the time to investigate the franchise thoroughly and not make a rash decision, by choosing a business which suits their lifestyle and aspirations – so must the franchisor. “One has to take everybody’s interests into account because a franchise system really is the sum of all its parts. We highly recommend a franchisee should be given the opportunity to spend time at a store before buying.”

From the franchisor perspective, an underperforming franchisee requires much more time and support than strong franchisees - so they cost you more. They also usually generate lower revenues, thereby paying less in royalties.

Part of being a responsible franchisor is ensuring that the franchisee does his own research. “A franchisee must do their due diligence and cash flow projections so that they can clearly see whether the business will be able to give them the returns they need. With a new franchise, it is unlikely that the money will immediately roll in, and the franchisee must take this into account. 

“We have a vested interest in having happy and profitable outlets, and use our long experience of assessing which people will and won’t make it. We like to make sure every franchisee is a success: choosing someone who you know is weak is a recipe for failure,” says J’Arlette-Joy.

For instance, people are often put into business by passive investors and Sandwich Baron’s experience is where a franchisee has no ‘skin in the game’ the enterprise is normally doomed to failure. She explains: “Only a franchisee who has put his or her own hard-earned money into a business will ensure it is a success.”

One of biggest factors to consider when choosing a franchisee is therefore capitalisation. Inadequate capitalisation is a common reason for franchisee failure, so the franchisor should closely examine the candidate’s net worth and credit score. Sandwich Baron requires a 50% unencumbered contribution.  “This is because if the franchisee took a loan instead of putting up his own capital, the higher level of repayments and interest could put the business at jeopardy.”

Another important attribute of a successful franchisee is a willingness to accept the franchise format as a tried and tested business model. Nothing sours the franchisor-franchisee relationship quicker than a new franchisee wanting to implement his own ideas and kicking back against the proven business system. “A franchisee should not necessarily be an entrepreneur, as entrepreneurs would be better suited to opening their own business. Our experience is that people who previously worked in other businesses and are able to take advice and instruction are better suited to being franchisees. The success of a franchise is thereafter achieved by on-going training, conformity and compliance.”

Other factors to consider in a franchisee include personal attributes and values such as intelligence, perseverance and a willingness to work hard.

She points out that the challenge of finding the correct franchisee is never more acute than when an already bad franchisee wants to sell his going concern. “Your choice is between the current bad franchisee and someone who you hope is going to do better. However, I feel that it is better to keep the current franchisee rather than replace them with a new person you have any doubts about. While no franchisor wants an unhappy franchisee to remain in the group they have to stand firm if the wrong person applies. I would hold on until I find the right candidate.

“Assessing the franchisee – to ensure the franchisee’s success - is the most important and difficult job of the franchisor,” concludes J’Arlette-Joy.