Did you know there are certain words that cannot be used in the marketing materials of a franchise? Words like success, unique, proven – and many more — can take your beautiful marketing materials out of compliance. Did you know that disclaimer language should be present on every marketing piece, and that proper language can vary by state? 

It is imperative that you share with us all marketing pieces, including your website, used toward prospective franchisees. This goes back to the “four corners rule” that you be careful not to over-disclose or under-disclose, as well as attach any prescribed disclosures required by some states when needed. 

The purpose of a Financial Performance Representation (FPR) is to give a franchisee accurate insight into the revenues and possibly the related costs of operating a franchised location.  Just like we recommend you over-estimate the costs of opening a location so a franchisee is properly capitalized, you should be conservative in presenting revenue figures, so a franchisee has realistic expectations.

The first question many franchise prospects ask is “how much can I make?”  And although it’s an important question, it’s one of the least important questions.  A prospect first needs to understand the relationship they have with you.  They need to understand your culture and vision and be sure they embrace your concept 100% before they worry about how much they can make.  If they move forward based upon how much they can make before feeling 100% comfortable with everything else, it can easily turn into a bad situation for both of you. There is a reason why the FPR is Item 19 of 23 in the FDD — Items 1 – 18 are more important!

So how do you answer the question “how much can I make”?  You tell the prospect that it is entirely up to them. If you have an FPR, those numbers are for locations that have different operators and have been open for variable amounts of time. You, as the franchisor, created a system. Your job as the franchisor is to provide the product, systems, processes, recipes, marketing materials, training and continuous support and improvements to the system. The franchisee’s job is to utilize those products, systems, processes, recipes, marketing materials and training and support to make their business successful.  It’s your brand, but it’s their business. Remind them that the required minimums are just that, minimums. The more they put into their business, the more they will get out of it.

If you do have an FPR, it speaks for itself. You don’t need to go into any additional detail. As you grow, a prospect can ask more detailed questions of existing franchisees.

When going through the process with a prospect, stick to the facts that are in the FDD. Don’t review their pro-forma. Don’t try to help them come up with revenue figures by saying if you have X number of customers and each spends an average of X dollars… Follow up any conversations with an email to document what you discussed.

FPRs are a highly litigated area in franchising. The best thing you can do if you are unsure is to err on the side of caution.

We recommend that your first few franchisees be people who are already familiar with your brand. The best first franchisees are already in your circle, they are your network managers, former partners, friends, customers, and family. They are more likely to understand the culture of the brand and will be more forgiving if you make mistakes. They believe in you as an entrepreneur and professional leader and recognize that running a startup franchise is very difficult.

There are a wide range of places to find franchise leads, such as franchise sales websites, business websites and even customers. Your first couple of leads, if generated through franchise sales websites, are likely being chased by other concepts as well, so until you have a couple of existing, happy franchisees, you must be intentional about your growth strategy and lead generation.

We encourage you to think about what traits a good franchisee would have. Who do you think would thrive running this business? What characteristics would be unique to a franchisee versus a competitor? Then, where do you think those people are? Focus on quality versus quantity. Your lead generation strategy should be scalable. To get 50 units, you wouldn’t sell 10 franchises per year for five years, you would sell 2, 4, 8, 16, and 32, incrementally.

Most franchisors overestimate their initial growth, while the most successful franchisors underestimate their future growth. We’ve found that most franchise owners who have hit that apex are surprised at how big they get.

Internal sales or the do-it-yourself approach can be effective if you have a founder who is a great salesperson who’s also not pushy. But if you’ve never done sales before, specifically franchise sales, it can be a disaster. Hiring a good franchise salesperson is expensive, and if you are just starting out, and there aren’t a lot of leads being generated, a salesperson on staff may be premature. However, be careful if a founder or CEO is going to lead the initial franchise sales. People that are personally invested in the brand tend to over-sell which can have repercussions. It also will make the size of your organization appear smaller than you’d like. The founder/CEO can be a step within the sales process, but it is not recommended to have the founder/CEO conducting the preliminary/evaluating type calls. Those types of qualifying intro calls can be done by a less experienced (within your brand/industry) salesperson.

Generating organic leads for your internal sales team can be done in a variety of ways. However, some basics that should be immediately built or put together are a strong franchise sales website or webpage and a social media presence. You should have a profile on all major social media platforms: LinkedIn, Facebook, Instagram, etc. Connecting your franchise (client facing) pages to your franchise sales (franchise candidates) pages to help feed from each other. There are different marketing suppliers available to help build more social media presence, but they are not needed to get started. Your organic marketing will also come from your personal franchise website, or franchise info page on your company website. There should be a form or contact option to help drive the candidates to your appropriate personnel to follow up with the lead. Your franchise information on your site should be informative, detailed, and visually impressive. The content on your website should be reviewed for compliance by your legal team, we recommend sharing the links for review before they are published or whenever changes are made. The combination of an informative and well-functioning franchise website and a semi to loud presence on social media is going to be one of your most powerful lead generating strategies.

Many franchisors are very competent franchise salespeople, especially with franchise sales training, but don’t necessarily have the time to run the business and chase leads. We encourage you to take an honest assessment and ask, “Am I the one who should be selling this franchise?” If you are not up to the job, or don’t have the time, an outside sales company is necessary. Just because you can, doesn’t always mean that you should. Doing a cost versus time analysis will often help with that decision.

The outside sales company can be a combination of broker networks and your internal salespeople. Typically, they charge a flat monthly fee and/or a success fee for every deal that closes. Some companies will charge a percentage of royalties on all new franchisees. We do not recommend that you share royalties. The salesperson’s job is done when the sale is completed. They are not performing any of the support that generates the revenues. Think of it this way, if the franchisee were to close or file a claim against you, would they be sharing in that loss? If not, they should not be sharing in the revenues.

DIFFERENTIAL BROKERS TO CONSULTING COMPANIES

Broker networks do not exist to sell franchises. Broker networks exist to matchmake. Their job is to align appropriate candidates for your brand with your franchise sales team. Brokers talk at length with prospective franchise buyers to help them find a franchise concept that best suits them. A broker lead has a higher closing rate than other types of leads because there has been much prep work done ahead of time, including initial query forms, financial qualification processes, and criminal background checks. However, most broker networks don’t work with emerging franchisors. They look for systems with 10 or more locations open and operating. While some may offer programs for emerging franchisors, they can be costly and not yield results for 6 – 12 months. We recommend you do a full analysis prior to entering into any agreements.

We recommend you only work with reputable companies. There are some established networks that will add emerging brands to their catalog, contact your Client Relations team member for more information. The cost per lead will be high, averaging between 40-60% of the franchise fee, so it’s wise to weigh the pros and cons of working with franchise brokers. As mentioned before, we recommend taking a step back to evaluate your time and effort needed to perform the sales yourself, in-house, or with a hired sales force. Take the time to research your options, a network that works for your friend’s franchise concept might not work as well for yours. All the options mentioned have their own set of pros and cons, call them all, do your research and don’t rush to options just to get started; many franchisors wait to have a few franchisees before joining or working with others.

At Spadea Lignana, we have relationships with many brokers, consultants, and sales companies, and we encourage you to reach out to the Client Relations team, who will be happy to personally introduce you to some of these options. We love to make these matches, and we will follow up with you to ensure you’re going to be successful!

No matter the salesperson, every candidate should be brought through the same sales process steps. If your concept will require any type of licenses, certifications, or a type of background check, be sure to properly incorporate that as a discussion or step as early on in the process as possible so it does not slow down or prevent a sale. Be sure any of those types of “requirements” are made clear to your salespeople so it never comes across as a “surprise” during the process. 

A franchise sales process is not predetermined in any way. Every franchise will have its own unique set of steps so do not feel pressured to follow another model’s process – make it your own based on your brand requirements, goals, and ideals. A retail type franchise model will have a very different set of sales steps then a service based or an at-home model. You also do not need to keep the process in the same order for each candidate forever. The sales process should grow and evolve along with the growth of the franchise; so, treat everyone as a separate individual – feel them all out as a new or different person and evaluate your process accordingly. Not every candidate will fall into the same bucket – a sales process is a set of guidelines, not laws. Always remember that you are SELECTING franchisees, NOT SELLING franchises – this means you’re looking for the best candidates.

Therefore, before beginning the sales process with a potential candidate, they should be required to complete some sort of Franchise Application form. You want to collect their basic information, background, experience, financial data, etc. You need to be sure that this candidate meets your skill set and financial requirements before spending countless hours with them. 

The initial first call is like your first date; you’re prequalifying your prospect. It’s recommended to have a “scripted”, but natural flowing, call with the prospect and perhaps their consultant or broker. We recommend conducting these calls as a video call so it’s more personable and each party can get a better “feel” for each other. The purpose of this call is to gain and share basic information with them which will help determine if they are suitable for your concept. If they had an application or form completed before your call, now is the time to go over it with them and probe or delicately poke at any “red flag” answers but now is NOT the time to dig deeper (keep to your schedule or script and don’t just sell to sell).

After the call you should provide your prospect with branded marketing materials for their review. As long as you have a good feeling about the prospect you should also share your FDD with them. However, if you are NOT “feeling” them, drop them (the right way) so neither of your time is lost on trying to “make the shoe fit”.

• If your brand has other applications or forms (like a candidate profile form) you’d like completed, now is a good time to send them along as well – making the completion a “test” of sorts to see how well the prospect completes them.
• If you pass along your FDD, make a date and explain the FDD Receipt and make it a piece of “homework” to have collected or completed before your next scheduled call. 
• Depending on how well your call went, if the discussion of territory came about, a good homework assignment could be for them to start scoping out where they might find a good location that they could see themselves in. They could drive around on their lunch breaks or weekends to see the different patterns of business/clientele. Getting these creative juices flowing will help down the sales process road to keep their onboarding at a good pace. You could recommend that they reach out to a real estate agent for some research to be done or tours to be scheduled. Keep in mind this is only a suggestion and should only be recommended if there is definite compatibility and interest in one another. 
• Territory Discussion: The discussion of a potential franchisee’s location or territory could be discussed after the initial call, but should only be discussed in detail (with their location specifics) after they have been qualified and are applicable for your offering. It’s recommended that the topic of a franchisee’s personal territory is discussed before or during the Discovery Day so it does not wait too long and risk slowing down the sales process. 

The FDD Review Phone Call (or video call) is to go over the FDD together, explaining any “tougher” items (without going into minute detail), being sure to cover the major items as well: Items 3 and/or 4 (if needed), items 5, 6, 7, 11, 12 (if needed or not yet discussed on previous call), items 17, 19 (if you have one) and touching on the tables in item 20. If needed to not overwhelm the candidate, you can break the call up into two sessions, but if not necessary – do not drag out this call, too much unnecessary detail can also kill a deal. 

• Only qualified candidates should progress to this step in the process
• “How much can I make if I buy your franchise” – Can only be answered if you have an Item 19 (an earnings claim). Consult with your attorney how to answer earnings claim’s questions appropriately.
  • Item 19 or No Item 19 – you can provide a cost sheet, a blank P&L with the line items, the only things you cannot do is mention margins, percentages, or gross profits if you do NOT have an Item 19.
  • If you do not have an Item 19 but want to add one or seek more details on what you can and cannot say regarding your Financial Performance Representations, reach out to your legal team for guidance. 
• All principals should sign their own FDD Receipt, however guarantors are only typically needed for the Franchise Agreement signatures.
• Go over FDD Receipt, its meaning and the importance of required signatures.
  • FTC (Federal Trade Commission) Rule requires a 14-day “waiting” period once the receipt is signed to be able to then sign an agreement and purchase the franchise. (Signatures of a Franchise Agreement would happen only on or after the 15th day after the waiting period.)
    • Through CAP and DocuSign you have access to send your personalized link to candidates to be able to get them disclosed on your most up-to-date FDD. 
• Collecting the receipt earlier (rather than at the Discovery Day) will create less of a delay later on in the process
• Once the receipt is received, that starts their 14-day waiting period which is their window of opportunity to hire an attorney for them to review the FDD/Agreement. Encourage making this a point of mention so a review/comments does not slow down your franchise agreement signing down the road. 

Having a broker on the FDD Review Call can be helpful because they should be FDD savvy and can jump in with assistance at any point needed. But approach the broker invitation to this call with caution – some brokers/consultants could overstep their legal responsibility and should not be on the call; and it is possible that less experienced brokers/consultants could interfere with the call, asking too many questions, which could end up hurting the sale. The decision to have a broker/consultant salesperson on the call is yours, you can invite them to the Initial Call and calls after the FDD Review Call, they should normally excuse themselves from this particular step but if the candidate wants them on the call they can be. A good broker/consultant would have already spoken to their candidate before their FDD Call to help prepare them with generic questions to ask and items to be more detailed about. Feel out the steps prior to see how you wish to proceed with this.

Having an FDD Review Call is not a required step – the document needs to be sent to the candidate for review and receipt signatures must be collected, but an overview/breakdown of the FDD is not required to be had. However, it is good practice to offer an FDD Review Call – it will show transparency, strength and confidence within your model and brand. 

Once your Franchise Disclosure Document is drafted and you’ve launched your franchise, you will be granted access to be able to login to DocuSign. DocuSign is where you will have access to view all pending and signed documentation kept within our records. When you have a candidate to disclose, please use the templates and links shared with you from your paralegal. When your link is accessed by the candidate, they will see a picture of the US Map, they will select their state and then will be asked to sign the FDD through DocuSign. When a candidate completes the DocuSign, you will get an email notification that it was signed/completed. 

Your personalized disclosing links will take a candidate to the US Map, once the state is selected, it will pull them to the DocuSign, which means that the map data is being pulled directly from our sites which is always automatically being updated. Therefore, the link will remain the same for you. We recommend bookmarking the link so you have it nearby and quickly whenever needed.

Even though you have access to the documents through your DocuSign login, the collection, organization and follow up is the responsibility of the franchisor.  Many franchisors use sales management programs, (i.e. Salesforce or eMaximation). If you want to learn more about sales management programs, reach out to Client Relations.

Sometimes candidates will want to speak with franchisees before attending a Discovery Day – depending on how many franchisees you have at the time of a candidate entering this stage in the process – you might be comfortable with a candidate performing validation before a Discovery Day, or you might let the candidate know that after attending a Discovery Day that they will be permitted to start reaching out to franchisees for validation. When this step is within a client’s journey is up to you, based on the candidate meeting your qualifications and financial requirements. 

Regardless of when validation is started, you are NOT allowed to designate or assign which franchisees a candidate can call. They are legally allowed to contact any or all of your franchisees. However, depending on the number of franchisees and any possible commonalities that the candidate and a franchisee might have, you can suggest that a candidate focus on contacting a particular franchisee based on time in the system, location, background, etc. 

Upon reaching this step, we suggest reaching out to the franchisees to prepare them for incoming validation calls – letting them know who the candidate is, where they might be hoping to locate, any fun background details about them to help strike up conversation and to let them know that they can ask questions back to help get to know the candidate. You should request that any franchisees that get a validation call or a visit, after to provide you with feedback about their “visit” with the candidate. This will provide you with excellent feedback to be able to learn more about your personal performance and about the franchise as a whole. You should use this incoming data to help strengthen any loose ends that are uncovered.

Things to Remember about Validation:

• Validation is designed for the prospective franchisee to discover: 1) franchisees not doing their job 2) if the franchisor is not doing their job 3) circumstances beyond the franchise’s control and how the franchisor reacted.
• The candidates get to choose who they call or VISIT (encourage visits) – you CANNOT restrict them on whom they may call.
• You can suggest a short list of questions for the candidate to ask the franchisees
• Explain and request that calls are to be kept to no longer than 15 minutes – the franchisees have their businesses to run and their time is valuable.
• Follow up with the candidate after their calls to address any questions or concerns
• You should also let the franchisees know that email should only be used for the means of scheduling, not to have validation discussions through written emails.
• Don’t have franchisees yet, so what do you do for validation? Rest assured, there is not much you can do until you have franchisees. However, if you have a designated salesperson and at this stage in the process the candidate has not yet spoken to your founder, CEO or a leader on executive team, scheduling a video call with the founder could serve as an opportunity to still show transparency and grant the candidate the chance to meet with the leadership team before traveling for a Discovery Day. 

Discovery Day, Decisions Day, CEO Meeting Day – whatever you might want to name it, they all mean around the same time. It’s a full day scheduled at the franchisor corporate headquarters or rented temporary office (if home-based). The day is a series of meetings that will provide information on the franchise system and opportunity offering, a tour of the headquarters or local franchisees’ storefronts, and/or the corporate call center. During the day’s events, be sure to discuss a day in the life of a franchisee, details about training and support provided from the franchisor, training for any employees, technology used to run the business (CRM, POS, protection programs, etc.), marketing, their income potential (only if you have an Item 19) and answer any questions the candidates might have. 

Franchisor executives and other team members will meet the attending potential franchisees, explaining their roles and how they will work with them and the company (all while evaluating how they feel about the prospect for later discussion with the internal team or salesperson). People that should attend a Discovery Day: founder, franchise development rep(s), VP’s, trainers, a zee, etc.

These events do not need to necessarily be an in-person meeting either, however, it is recommended to be in person. Additionally, depending on if an attending potential franchisee will be investing into the franchise with a partner or a spouse, it’s recommended that they too attend your Discovery Day, even if they are not going to be a leading role in the business. If a “behind the scenes” partner or spouse is unable to attend, it is still recommended that a portion of the Discovery Day be shared with them through a possible means of a conference call or a video call for the most important portions of the event.

These events can be scheduled based on an “on demand” basis or depending on the number of candidates within your sales funnel, it could be a grouped event. There are pros and cons for both scheduling types, so you should weigh out this decision with your executive team. You can always adapt and grow into a different frequency; you are not committed to the format you started with. 

The Franchise Agreement can only be signed by someone after they have signed the Franchise Disclosure Document Receipt and they have completed waiting the mandatory 14 day waiting period. During that 14-day period is the time that the candidate should’ve had the agreement reviewed by their own legal representative. The agreement is within the FDD, so when the time comes to sign the Franchise Agreement, they’ve already had time to review, develop questions, etc.

If a candidate has any change requests, those should be submitted and shared with your Spadea Lignana legal team so it is reviewed, approved, an addendum can be drafted and it can be recorded properly. If over time you start to get multiple same requests for changes within the document, let your legal team know so it can be reviewed at renewal time to see if those frequent changes could become part of the document in the following year to help prevent frequent changes, reviews and addendums to be made. 

• Once your documents are completed by your legal team, you will receive two email templates containing links to share with candidates for access to your Franchise Disclosure Document and FDD Receipt (through your registration map), and the Franchise Agreement Request Form which will then notify your legal team to draft and send the candidates agreement. For FDD receipts and Agreement Request Forms, you will receive an email when a prospect accesses and another email when the prospect signs. 
  • The first step to getting an agreement signed is for the candidate to complete an Agreement Request Form. This form is accessed with the link shared with you within the template email. This power form will ask the candidate to complete questions on the following: contact information, spouse and/or partner(s) information, location details (if applicable), and dated signatures (by the candidate). 
    • The Agreement Request Form should only be shared after a Discovery Day, not before, to only qualified candidates. 
    • Once the form is completed/received your legal team will send the full personalized franchise agreement, including any state specific items needed, to the candidate using DocuSign.
    • Common circumstances that can hold up an agreement’s processing is if the entity for prospect is not in their state systems yet; you want them signing as their entity and as an individual.
• Through your DocuSign account access, you can check the status of pending signatures at any time. You will also receive an emailed copy of the agreement when it has been fully executed. 
• After your fiscal year end you have up to 120 days to continue to use your then current FDD before it is stale under the FTC. Some states have a shorter window of time in which you can continue to use your “old” FDD. You should start thinking and working towards completing updates for your FDD prior to your fiscal year end and we urge you to work closely with your Spadea Lignana team in order get your new FDD ready for renewal as soon as possible. Once you have an updated FDD, you will then file in the registration states for the first time or with renewals. 

Even though Signing the Franchise Agreement may be the last step within the Sales Process – your next steps will roll right into Franchisee Onboarding. Many of these onboarding steps will follow the materials within your Operations and Training Manuals.  There are companies in the industry that will create or help with the sales process, manuals, and will have a variety of best practices ready to share. If you’re interested in learning more about those types of services, contact the Client Relations team for introductions. 

The franchisor/franchisee relationship is more than a legally binding one. This is a professional relationship that has the potential to last years, even decades, so the importance of the selection process cannot be understated. Before you disclose, which is to say, before you offer your Franchise Disclosure Document, you need to make sure you know who you’re giving it to. Some general questions to ask:

• Are they financially qualified?
  • The number one reason small business owners fail is because of a lack of working capital. Prospective franchisees who do not meet the minimum financial requirements set forth in the FDD should not be disclosed, unless they have given significant evidence of available secondary funding should the need arise. The last thing you want to do is set someone up to fail. You can mention to a candidate that loans, rollovers and buying assistance are available and that they should do their personal research and inquire to see what they are applicable for and what would best suit them. Ask your Client Relations Manager for funding referrals if needed.

• Do they have experience in the appropriate field, or at least possess the professional qualities you seek?
  • New franchisees should come to training with a reasonable amount of general knowledge to run the business, which will differ greatly depending on the industry. For example, having a licensing requirement for a plumbing franchise is different than needing a general understanding of customer service in a retail environment. 
  • Some franchisors require licenses to be held by the franchisee. Others permit them to “borrow” from a broker. Others allow a hired manager to be the one licensed. Whatever it might be, have all options determined from the start, because what you allow for one franchisee, you’ll have to allow for all franchisees.

• Are they interested in the type of franchise ownership you are offering? Single unit owner-operator, multi-unit developer, or area representative?
  • Candidates often already have a mental picture of themselves and their ideal day to day work life; it’s vital that they align with the model you’ve designed that will make you both successful. Compromising on this to just get a franchise sale can be detrimental. 
  • For new franchisors, it may be better to start small to make sure you can offer optimal support to your first franchisees. Thriving franchisees are your best resource during the validation process of prospects. Many emerging brands start growing with single unit owner-operator models then graduate to additional offerings. If starting out with multi-unit or area representative opportunities, make sure you are prepared for franchise owners to grow at a rate equal to or faster than your own. Are you ready to grow at a speed that you’ll have less control over? In other words, is the pond deep enough for more than one big fish?
  • For more detailed information regarding different kinds of offerings, refer back to Chapter 1.

• Where are they planning to operate their franchise unit? Is it in a location that is feasible to offer appropriate franchise support and growth potential?
  • In addition to basing target markets on market research to support the business, a good franchisor will choose geographic locations where they can be available for onsite support when needed. Therefore, targeting new franchisees who are within “arms reach” to start is recommended. As you’ve read in Chapter 2, selling throughout each state will get pricey; so starting in non-registration states or only filing in your closets (or best demographic) registration states would serve better in your wallet for the beginning stages of growth.

• Do they align with your franchise’s culture or overall philosophy of doing business?
  • This may be the most important consideration of them all. Even if you’re a work from home model, franchising is a “people business.” In addition to entering a long-term relationship, you must trust your franchisee to carry through your business and brand philosophy to customers, employees, vendors, contractors, and others. It’s your name on the door, protect it with a franchisee who wholeheartedly believes in your business, someone who will be your best cheerleader or mascot.

As a franchisor, you should be enthusiastic about a franchise candidate. This is the time to feel confident that they are preliminarily qualified to run the business, in a desirable geographic market, with a shared professional vision for your brand. 

Much of the recruitment process is commonly metaphorically compared to dating or marriage. With dating, you and the other partner want to be sure that both parties like each other inside and out before continuing in a relationship together – like dating, or in our case candidate qualifying, it needs to be remembered that this is a two-way street, the candidate needs to like you as much as you like them to have a successful and long-lasting relationship together.

Preliminary screening is the first step to comfortably disclose a franchise prospect and approve them to the next level of the franchise awarding process. Later, or at a time of your choosing, you may decide to vet a candidate even further by way of credit check, criminal background check, personality testing, etc. If you do not already have a Candidate Information Form, reach out to your Client Relations Team to brainstorm on creating your own.

A franchise sales process will look different for every franchisor, it will be more or less detailed depending on your offering, operation style, industry, etc. Many of the steps a candidate will go through will have sub-steps for both them and the salesperson. A typical sales process will resemble the following (an in-depth breakdown of the sales process can be found above in Chapter 4):

1. Pre-Discovery/Qualification
2. Discovery/FDD Review
3. Validation
4. Discovery or Meet the Team Day
5. Agreement Signing/Closing

You may be wondering why there are so many steps? If a candidate has the money and is ready to launch a franchise, why not just give them the keys? Awarding a franchise is not a decision to make lightly, or because you need that franchise fee check to make payroll. Back to the dating metaphor, Dating 101, you don’t move-in together on the first date nor do you walk down the aisle on the second date; so take the time needed to make sure this franchisor franchisee marriage will not end in divorce. 

It is true, a franchise agreement contains strict language that enables franchisors to remove franchisees from their network when they don’t abide by the agreement. However, if somebody wants to remain a franchisee and they keep paying their royalties, it’s tough to get rid of them. A bad franchisee in the system can do a lot of damage. Franchisees create a reputation for your brand, good or bad. They are someone future candidates will call to validate the business. In the end, failing to vet a prospect properly and thoroughly for franchise selection can cost exponentially more than the franchise fee they are handing you the day they sign. 

The number one reason new franchisors fail is because they pick the wrong franchisee. The right franchisee, however, can bring growth to your brand, positivity to your work culture, even lifelong friendship to you and your organization. Choose wisely because the choice is yours! 

Prospective franchisees must have enough start-up capital and working capital to sign a franchise agreement. There are a variety of financing options available for new franchisees.

SBA loans are a great option that allow franchisees to use their 401k rollover to finance their franchise. Franchisees should only use a reputable, experienced company to complete this transaction. 

After leaving a former employer, a franchisee can take their qualified 401k and start their own company/entity. That company will offer a retirement plan, and the franchisee will buy shares of their own company with their retirement. They aren’t actually pulling money out of their retirement plan even though they’re using the money. They’re using the money as an equity investment. So instead of buying Disney, Comcast, or Tesla stock, they’re buying their own stock. 

There’s a short-term advantage in that they aren’t paying the withdrawal fee and current income tax on the money, but they are creating a long-term vehicle in which they can then reinvest the dividends. There are some tax advantages, and if they hit it big, there are tax advantages to get all that money back into their 401k.

While there is a risk to rolling over one’s 401k, this is a valid way of financing for your franchisees. As a franchisor, you should be aware that this is a legitimate and quite common option. You can suggest this as an option along with funding or accounting recommendations. If you do not have any, it is not uncommon for a candidate’s consultant to have referrals. Reach out to the Client Relations team for personal referral introductions. 

It is a good idea to develop relationships with banking establishments and/or sources that understand your brand. Your job is to make these connections and have these alternative options available for prospects.

Be wary of overleveraged franchisees. You don’t want to be in the business of taking people’s houses! If a prospect must mortgage their house to finance the franchise, you probably don’t want to sell to them.

As mandated by the Federal Trade Commission (FTC), franchisors must disclose potential franchisees and all affiliated partners. It sounds official because it is. This is the first step in a prospect’s due diligence and sets the stage for the business relationship between the franchisor and franchisee. When a franchise candidate is given the FDD, they must sign for proof of receipt. Only then can the process of franchise exploration truly begin. Let’s talk about the process of disclosing. 

Disclosing is the process of delivering an up-to-date, validly registered, and unexpired Franchise Disclosure Document (FDD) in the state of residence or the state in which the franchisee will own and operate their franchise. Once the receipt is signed by all principals, a 14-day waiting period begins, which is the time that the candidate should seek legal counsel review if desired and then the Franchise Agreement can be signed as early as the 15th day.

You must disclose everyone who will have an ownership interest in the business, whether it’s a business partner who will be active or behind the scenes in the business. To have an enforceable guarantee, there must be a valid, signed receipt page of anyone who will be a party to the franchise agreement. For whatever reason, signing the FDD sometimes throws people for a loop. Be sure and offer a little extra reassurance that by signing the FDD, they are simply acknowledging that they have received the document, and in no way are agreeing to a transaction. 

The Spadea Lignana map system enables you to efficiently deliver a current FDD through DocuSign. This is good practice for a franchisee who is adverse or uncomfortable using technology for digital transactions. Getting them comfortable with the process during disclosure will be helpful later, when they use the same format to sign the franchise agreement. Utilizing our system is not a requirement but is strongly encouraged in order to protect our clients from sending incorrect/outdated data, making this record keeping one less item on your to-do list. 

Once your franchise documents have been drafted, approved and you’ve launched your franchise opportunity. You will be sent an email from your legal team with two template emails that can be used to be sent to a franchise candidate at the FDD and Agreement stages. Within the email you will be given your own personalized Map Link. This link will pull users to a map of the United States, showing states green and red – representing the states you are available within. Once a state is selected this will bring the user, or your candidate, to their state specific FDD to review and sign the FDD Receipt. You will be notified by email, through DocuSign, that this link was accessed and a second time once the receipt was signed.

When a candidate has signed the FDD Receipt, and has completed waiting the required 14 days, they can then complete an Agreement Request Form, through the use of your second provided link. At this time, you and your Spadea Lignana team will be emailed with a notification from DocuSign. Once the agreement request form is received, you should send any other specifics about the candidate that needs to be added to their franchise agreement. Once all the information is complete and correct, your legal team will draft the personalized franchise agreement, upload it to DocuSign and send to the candidate to sign.

After the candidate signs the agreement, it will be sent for review/signatures to the franchisor. A franchisee should submit payment with the signatures and the franchisor should not countersign until funds are received. The final step after the franchisor submits final signatures, your legal team will do a final review and outreach to ensure that the franchisor received the funds to then be able to release the signed documents to all parties.

Through a DocuSign template link, you will email the prospective franchisee, and we will gather all pertinent information needed to prepare the franchise agreement. We recommend the prospect fill out the questionnaire him/herself, rather than the salesperson they are working with, to ensure accurate information is presented. This is important if there are any claims of misrepresentation filed later. 

When you’re ready, reach out to Client Relations; we’ll share with you a link to send to the prospect. It’s that easy! 

Entering into an agreement with a new franchisee is arguably the best part of becoming a franchisor. Franchise Agreement signings are super exciting! Each Franchise Agreement you sign grows your business and is a step closer to reaching your goals, all while giving someone else an extraordinary opportunity to become a business owner. Let’s go over the steps to getting to the Franchise Agreement signing. 

Ensure the prospect understands that at this point they have only signed an acknowledgment that they received the FDD and are in no way committed to the franchise. This signed receipt of the FDD is the trigger of the 14-day clock so that you know you have fulfilled your obligation as a franchisor to give them a document before they can move forward.

You may receive an addendum from a prospective franchisee’s attorney which contains many requests for changes. Your goal is to have as uniform a document as possible. You should only consider changes when the franchisee will have difficulty complying with the provision—and in that case, you should explore why compliance will be difficult. 

Justifiable reasons to request a change, for example, is if someone has another business that might be seen as a competitor, or if their franchise will be located in a more difficult market, with lengthier processes or logistics that keep them from getting up and running in the time allotted. 

When you negotiate too much, your FDD becomes less accurate, which is why we encourage you not to make changes. You want all your franchisees to be treated fairly for many reasons, but certainly because they will talk to one another. As stated earlier, you need to be conscientious of a change you make for one franchisee might need to be made for all franchisees – current and future.

Ask yourself if the change is something you could defend when confronted. Imagine standing at the bar at your annual convention and having a franchisee ask, “Why did Steph get a better deal?” Be prepared to account for any inconsistencies between franchise agreements. For example, you would answer, “Steph owns 100 units and you own one. She did a 20-store deal.” That’s reasonable, it’s defensible, and it’s better for the system. Always think about the entire system, not just one deal. 

A strong franchisor cares about consistency, brand standards, and has developed a system that is good for everyone. This doesn’t mean you shouldn’t be open to negotiation, just exercise caution. Once you have built up credibility with a very large franchise network, you can take negotiations off the table. 

Be aware candidates might or might not be working with an attorney. They might be working with an attorney who does not specialize in franchising. Any comments sent to you by the candidate are always advised to be reviewed by your Spadea Lignana legal team before accepting any comments/changes.

We will draft the agreement in Word, save a copy of the agreement as a PDF, and push it through DocuSign. This ensures everyone – you, your new franchisee, and your Spadea Lignana team – has a fully executed copy of the agreement. We file our copy of the executed agreement within your client file folder for safekeeping.

Amendments do happen and can be needed for various reasons: a franchisee has trouble finding a site and needs more time or they may be adding an entity. Make sure that you run all amendments through our team so that we appropriately attach them to the franchise agreement. You should have transparency and we need to have access to the agreed upon changes to the franchise agreement and you should always have proper recording of any changes. An agreement is incomplete if you create it and proceed without our knowledge. 

Why is this important? For example, when you are ready to sell the business, and the potential buyer is doing their due diligence, they could find amendments that aren’t in the file. This puts the integrity of the agreement in question. If something is missing, the question becomes, “What else is missing?”.

When a franchisee asks for an amendment, even though we’re not obligated to fulfill their request, when we do make a change, we want to take the opportunity to add into the amendment a release statement that the franchisee has no claim or issue with you, the franchisor. This eliminates any uncertainty regarding the intention of the request.

Depending on the requests, it’s also a possibility that the change might become an update that could become permanent for future updated FDD and/or agreements. Therefore, even though you might not accept the change, all requests should still be discussed with your Spadea Lignana team to maintain the ability to strengthen your next year’s documents. 

Section 4.10 covered more of the basics of getting a franchise agreement signed. It covers your 14 Day Waiting period, negotiated changes, drafting and amendments. It’s recommended to be familiar with that chapter while reviewing Chapter Six. Chapter Six will cover more specific details of a signed agreement: important dates, when to collect a franchise fee, assigning territory, real estate, etc.

Depending on any financial assurances the collection of the franchise fee should occur immediately after the franchisee signs the franchise agreement, before the franchisor countersigns. Depending on the state in which the new franchisee resides might change how and when you will be paid your franchise fee in full. You can look at your map in CAP to see if and where you may have a financial assurance in certain states. To learn more about financial assurances review with Chapter 3.3.

There is more than one way you can collect your franchise fee, although most nowadays collect funds though an ACH. Some franchisors still collect checks. Be aware of the timing for processing with whichever collection process you choose. You will learn more about ACH usage within 4.14.1 when royalty collection is discussed. 

There are CRMs and portal programs that can assist with the organization and collection of fees. Reach out to your Client Relations team for referrals and introductions to learn more.

Once the franchise agreement has been signed by both the franchisor and the franchisee(s) it should be downloaded from DocuSign. A copy will be sent to the franchisee (which is done automatically by your SL team through DocuSign) and then your copy should be filed and maintained within your CRM or named file for the franchisee. 

Each franchisee will have different important dates that they will be obligated to observe. Their “Effective Date” and their “Opening Date” might be different if your opportunity requires a physical location. Additionally, depending on how your model is structured, you might have training dates and time requirements for all of these different important dates. 

The “Effective Date” is the date that a Franchise Agreement is fully executed, and it is the date that the Franchisor and Franchisee are bound to their respective obligations (confidentiality, non-compete, pre-opening obligations, etc.). The date that the franchisor completes the final signatures becomes the Effective Date. Even though this is generally the case, sometimes a franchisor and franchisee may want to delay the Effective Date of an Agreement, for example, if it is a Successor Agreement that will not become “effective” until the expiration of the current term.  

The “Opening Date” is the date that the franchisee commences operation of the Franchised Business. This date might be a final day of training, or the first day a location is operational (like a grand opening). In many cases, the Term of the Franchise Agreement will expire a certain number of years following the Opening Date.  This way, the Franchisor will receive a full term’s worth of royalties. Accordingly, considering the Terms of each, the Franchise Agreement will commence on the Effective Date. The Expiration Date of the Franchise Agreement will vary, depending on when the Franchisee opens for business.

There are factors that might alter these important dates, depending on the franchisee’s location, required training, state regulations or if the franchisee holds a particular Visa or Green Card. Each should be reviewed and discussed before the signing of an agreement to ensure transparency and to properly plan ahead for all parties involved.

Within the following sub-sections, a variety of real estate related topics will be covered to help guide you placing, approving and managing your franchisee’s territory. Upon signing, you and the franchisee might have designated a series of zip codes or a certain city, but now it’s time to assign a location, address, and territory. Even though you are not the one leasing/buying the location, you should maintain records, contacts and important dates for each franchisee.

You will want to review the lease to make sure that there are provisions to protect your brand. There are various provisions you may want to include, but most importantly, have permitted use and conditional assignment of the lease. You will also want to make sure the term will be adequate for the duration of the franchise agreement. Approval of the lease is for the protection of the brand and your benefit, not for the franchisee’s benefit.

Upon approving a lease, be sure to collect: the landlord’s name, contact information and address, the business address, lease start/end dates, lease renewal details, the date and a copy of the Contingent Assignment of Lease, and any special lease terms. It’s highly recommended to track all these things within a CRM set with reminders to be sent to you and the franchisee so all important dates are on record and honored.

If you’re going to provide site selection guidelines, have those guidelines drawn up so that when the franchisee meets with their real estate broker to find sites, they know what they’re looking for. 

Consider leveraging third-party vendors. Many national broker networks specialize in franchise real estate selection and will give you a very professional face without costing you money. We encourage you to find people to help you throughout the process. You might be an expert in your city or state, but you’ll need professional help with franchisees in other states where you are not familiar with their real estate market. If you need referrals or recommendations, reach out to your Client Relations team.

Assignment of territory doesn’t happen until after the franchisee has selected a site. They sign the franchise agreement with a broad site selection area, and once they find the real estate, they ask you to approve. 

Our site selection guidelines say that you, as the franchisor, are approving it for brand standards, not success, so the franchisee still assumes the risk. When you approve the location, you determine their territory, based on what Item 12 of the FDD states. The franchisee will have a certain number of days to object, depending on how your agreement is written. Once their territory is assigned, that gets amended to the franchise agreement as an exhibit that does not need to be signed, simply filed. The specifics of the territory should then be updated within your records for tracking and monitoring of the franchisee and future franchise sales.

Item 11 contains your pre-opening obligations. This is your checklist of what you have agreed to supply. Make sure you perform all the items listed. We recommend you review your obligations within Item 11 regularly and create your own checklist system from that list in order to make sure you’re meeting your pre-opening obligations as a franchisor.

The conditional assignment of lease is very likely the most important document in the signing through opening process, if you have real estate. A franchisee has agreed in advance, by signing the franchise agreement, that they will get their landlord to sign a document that says if they don’t pay the rent, the landlord will notify you. If you choose, you can cure the fault, and before they get evicted, step into their shoes through the default and become the tenant. At a minimum, commonly in franchise agreements, non-payment of rent is considered a default of the agreement and you as the franchisor should then send the franchisee a notice of violation.

A conditional assignment of lease can also be used as a brand defense strategy. In this case the franchisee says, “I don’t want to be part of your brand anymore. I don’t want to be ‘Joe’s Place’. I want to be ‘Tom’s place’.” Having the conditional assignment allows you to exercise the right to kick the franchisee out of the retail location, so you can go in and over control. And if you terminate the franchisee and default them, you can then take over the lease and territory.

As you begin developing new franchise locations, it’s essential to make sure you have the mechanisms in place for approval. Make certain franchisees are hiring approved vendors, you’re monitoring the costs, and you’re holding your designated vendors accountable. 

Work with your franchisees when there are delays in construction. Your agreement may lay out a notification process regarding construction delays, so as long as your franchisee is communicating with you about such delays. It’s generally going to be the best practice as the franchisor to be understanding and to be flexible with the franchisee about date/time to open accordingly.

This might seem repetitive, but make sure everything matches Item 11 in your FDD. Make sure that you, at a minimum, provide the hours that you promised in your FDD. Your training program is an investment, not a cost. Training is a very tangible experience, and you’re probably going to spend more hours with your franchisee in training than you’ll ever spend with them again. This is perhaps your best and last opportunity to set the course for their future. If you have a franchisee that fails, one of their claims in the lawsuit is almost always that you didn’t train them well enough, if at all.

Depending on your model and opportunity, you might be offering training in-person at a corporate location, on site at the franchisee’s location, virtually, or a combination of these. Even if a franchise model does not require brick and mortar, it’s recommended to still spend some in-person time together to create a strong bond between the franchisor and the franchisee(s). Renting a room to be able to host the franchisee for in-person training is always an option if the franchise model is a work from home business.

Many franchisors also develop and/or offer training for a franchisee’s employees. How you set this up is up to you and will be laid out in your FDD, but it is something to consider. There are companies and programs available that will allow you to create and edit training modules, including tests/quizzes, monitoring, and interactive programing. To learn more about some of these services, reach out to Client Relations.

You should have someone responsible for keeping a file on each franchisee and ensuring that it contains all the required documents and approvals required to open a unit. The items on a pre-opening checklist should be discussed and gone over with the franchisee during training so there are no surprises along the way. This checklist can be managed and kept track of in a variety of ways, but it is recommended that you keep all franchisee checklists and collected items from the list within a safe and secure place, like a CRM. A Sample Abstract can be shared with you by contacting Client Relations.

Business License:

There should be a copy of the franchisee’s business license in a file you maintain (the same file/location you’d manage their Pre-Opening Checklist).

Entity Name Approval:

You should make sure that your franchisee’s entity name is approved by the state, is valid, and doesn’t have your brand name in their entity name. Never allow a franchisee to include your name in their entity name because they do not own the name, you do. They’re licensing the name from you, and if you allow these entity names to be used, it starts to weaken your mark, and you start to lose your ability to enforce and protect it.

Proof of Insurance:

Make sure you have a copy of each franchisee’s current insurance certificates and that it contains the proper amount of coverage that you require and state within your FDD. If a type of insurance you require involves regular policy updates over a period of time, be sure to set yourselves reminders so you can obtain copies of any new insurance certificates for your records. 

Automated Clearing House (ACH):

An ACH form authorizes your access to draw royalty and other fees from the franchisee’s account, directly. The information you use for an ACH when collecting your franchisee fee might be different from the one that you will be collecting on-going royalties or fees. Confirm the routing numbers you have, to start billing the franchisee, is accurate to avoid financial record keeping issues. Once confirmed, make sure this data is on file, remains current and protected.

Your franchisee is probably more exposed to trade secrets escaping locally than you are. However, you won’t automatically have a signed agreement from a franchisee’s manager, so it’s up to the franchisee to get a signed non-compete. Within the exhibit section of your franchise agreement, we provide the franchisee a non-compete form which can and should be used for their managers. Not all franchise models involve having a manager; they might be hired once the franchisee hits a milestone within their performance, amount of customers/business being serviced, etc. So, whenever a manager is brought onboard, or a new one is hired, non-competes should be collected. If your franchise model does not involve a hired manager, then this section does not apply to you, but the information is still educational and beneficial. 

By requiring non-competes, we’re extending the protection of your intellectual property. You’re going to have your agents perform work for you, but really, they’re all part of this whole greater brand. We want to ensure that you at least have an action against them if they go off the deep end.

If you ever want to be acquired by private equity, having up-to-date non-competes from franchisees’ managers shows that you take your intellectual property seriously. 

If you don’t have a standard chart of accounts, you should work with your accountant or bookkeeper to develop one that can be used across your franchise. When you have franchisees not performing, reviewing real numbers early on can help you recognize the issue and provide guidance or additional training. 

You should have access to those numbers perpetually. If a franchisee is uncomfortable with bookkeeping, have them go to their CPA or bookkeeper. You may even want to provide a preferred vendor that will do the books for them for a monthly fee.

Once the franchisee opens, you should go back through the entire file and ensure that everything is in order. Make sure: 

• The franchise agreements are in order
• All the names are matching
• Addresses are correct
• Lease is correct
• Entity information is correct
• Everything is properly signed
• FDD receipt page for each principal is included
• Franchisee training is scheduled/complete

Once the franchisee opens, you’re essentially taking that entire file, putting it in a box, and burying it. The next person that’s going to dig it up will be the private equity treasure hunter. And what they find in that box is going to be exactly what that box probably looked like the day your franchisee had a grand opening. Now you might have transfers and renewals and things that will affect the box, but for the majority of franchisees, you’re never looking at those franchise agreements again.

If you have a deficiency in your franchisee’s file, it’s much easier to solve at this point when the franchisee is new and happy, rather than down the line.