Published November 22, 2016
By David Bassin, Senior Director, Franchise Relations, Boefly
About a year ago, I was speaking with a franchise development executive for a popular QSR brand when he recounted the following story to me…
He had received a franchise application from an exciting candidate who appeared to meet all the requirements for franchise ownership. He listed a significant amount of liquid assets, a robust net worth, management experience within the industry, a savvy understanding of the brand’s business model, and his conversations with the development officer gave every impression that he was a perfect fit.
The sales process went smoothly: discovery day attended, franchise agreement executed, franchise fee paid. So far, so good.
When the time came to start building out a selected location, however, the brand discovered that their new franchisee did not have the assets he represented on his application. His liquid assets, in fact, had been completely depleted by his payment of the franchise fee, and his net worth had been artificially inflated by a series of inaccurate valuations.
The new franchisee, unsurprisingly, was not able to secure startup financing, and the franchisor was faced with the unenviable position of determining how to move forward with an undeveloped territory and a franchisee unable to capitalize his newly awarded franchise.
This story is illustrative of the potential downside of failing to verify the assets of franchise applicants as part of a brand’s diligence process. And the benefits of asset verification are more varied than simply making sure a candidate has the financial wherewithal to properly fund a newly awarded franchise. One client I work with often describes such a benefit as the “soft analysis” that comes from having a third party engage an applicant in a process-driven exercise early on: Were they responsive? Do they follow directions well? Can they stick to the process outlined for providing validating documentation? (Etc., Etc.)
Boston’s Pizza, for example, verifies the assets of new franchise applicants as part of their development process to ensure that potential franchisees meet the brand’s liquid asset and net worth requirements. Rick Lauro, VP of Finance at Boston’s, describes their asset verification procedure as “a crucial and invaluable step in helping us not only confirm the financial viability of a potential franchisee but also gain the comfort and confidence we seek to move forward with a new partnership.”
Another benefit of asset verification inures to the financing process, so that the partners can secure the small business loan they may require. When lenders meet new franchisees whose assets have already been verified as part of the development process with the brand, they can move faster and more consistently. As brand executives should know, franchisee liquidity and net worth are just as important to the lender as they are to the franchisor. (I suspect, in fact, that many brands have established their liquidity and net worth hurdles to satisfy those future lenders.)
In light of the importance of asset verification, I’m troubled that 74% of franchise executives report that they do not verify assets (according to a poll conducted by BoeFly in late 2015). As the franchise industry continues to sharpen and streamline its approach to franchise candidate assessment, I expect that asset verifications will become the gold standard of a diligent vetting process — and for good reason. Some brands will opt to own the administrative task, while others will opt to outsource the non-core, yet critical, function
Learn more about Boefly’s franchise lending services at boefly.com.