Franchising an Existing Business: Assessment Criteria and Approval Procedures for Prospective Franchisees

When franchising an existing business, someone who can pay the franchise fee is not necessarily someone who can run an outlet sustainably. Franchisee assessment is not simply the final check in a sales process: it is a way to establish whether the franchisor and the applicant can work together over the long term. Before recruitment begins, put a framework in place to assess finances, operating arrangements and business judgement against consistent criteria. This will help build a healthy franchise community.

1. Identify entry requirements from how company-owned outlets actually operate

The first step is not to draw up a wish list of ideal personal qualities. Instead, establish who actually does what in your company-owned outlets, and how much work each role involves. If certain tasks depend on the founder’s experience or additional help from head office staff, do not design a franchise model that expects applicants’ enthusiasm alone to fill those gaps.

For example, recruitment, ordering, cash management and decisions about complaints still need attention while the outlet manager is serving customers. The experience and staffing required will depend on whether owners must work in the outlet themselves or may appoint an employed manager. If you accept both models, prepare separate assessment criteria for each.

It helps to divide the criteria into three categories:

• Essential conditions for franchise approval: matters to verify before deciding whether to enter into a contract, such as evidence of funding and confirmation of who will be responsible for managing the business.
• Conditions to meet before opening: matters to check against an agreed deadline, with a named person responsible, such as recruiting an outlet manager or setting up accounting arrangements.
• Desirable attributes: strengths that are not essential but may support operations, such as experience in a similar business or local business relationships.

Vague statements such as “preference given to experienced applicants” leave room for inconsistent assessments. Replace them with verifiable activities, such as “has been responsible for recruitment and attendance management” or “can review monthly income and expenditure and explain proposed improvements”. Record why each condition is necessary.

2. Assess the flow of funds through opening and beyond, not just bank balances

A financial assessment needs to go beyond adding together bank balances and proposed borrowing. Check separately the funds needed to prepare for opening, the funds that will remain available once trading begins, and the funds needed for personal living costs. In the applicant’s plan, distinguish facts the franchisor has verified from assumptions that have yet to materialise.

Area to check	What to verify	Points to watch
Own funds	Amount, account holder and when funds will be available	Check whether the balance includes temporary borrowing
Planned borrowing	Application status, terms and expected drawdown date	Do not confuse discussions with a lender with an approved loan
Opening expenditure	Fit-out, equipment, recruitment, training and other costs	Check payment dates and any costs not yet confirmed in quotations
Working capital	Payments and loan repayments due before receipts arrive	Also assess what happens if sales fall short of the plan
Personal living funds	Amount the applicant will need to draw from the business	Do not count the same funds towards both living costs and outlet working capital

The funding required will vary with the business model, lease terms and timing of receipts and payments. Rather than imposing an arbitrary fixed amount, base your criteria on actual expenditure at company-owned outlets and the proposed opening plan. Also check which costs would increase if opening were delayed or recruitment had to be repeated.

Do not treat a funding shortfall as resolved simply because the sales forecast has been replaced with a more optimistic one. If loan drawdown remains uncertain, put the application on hold and check whether the plan can be scaled back or additional funding is firmly supported by evidence. Make clear that franchise approval does not guarantee either financing or profitability.

3. Use interviews to assess business judgement, not just enthusiasm

Interviews should go beyond asking whether applicants like the products or identify with the brand. The franchisor and franchisee are independent businesses. Establish whether applicants understand that they will be responsible for recruiting staff, managing payments and making the necessary decisions themselves.

Prepare a common set of questions for all candidates, using realistic scenarios.

• If the manager suddenly resigns, who will run the outlet and recruit a replacement?
• If sales fall below the plan, which records will you examine and what will you review first?
• If you have doubts about a proposal from head office, what information will you prepare before discussing it?
• If you will be running the outlet alongside another job or an existing business, how will you make time for management decisions?

When assessing answers, do not give high scores solely for willingness to follow head office instructions. What matters is whether applicants can report problems early, check figures and facts, and distinguish their own responsibilities from the support they should seek from the franchisor. If an applicant expects head office to provide staff whenever difficulties arise, clarify the scope of support and then check their understanding again.

Outlet visits can also help applicants understand the realities of running the business. Explain less visible tasks such as cleaning, stocktaking and checking records, rather than showing only busy trading periods. After the visit, ask applicants to identify which tasks they can handle themselves and which will require recruitment or outsourcing. This can reveal gaps in their preparations.

Interview records should capture the questions, answers, supporting documents and reasons for the assessment, rather than comments such as “made a good impression”. If documents and answers conflict, seek further explanation and establish the facts rather than rejecting the application immediately.

4. Separate approval from recruitment and contracting

If approval rests solely with staff whose targets are based on franchise sign-ups, unresolved issues can easily be deferred. As a basic process, recruitment staff should compile the documents, operational support staff should assess feasibility, and a separate decision-maker should give approval. Even a small franchisor can separate application handling from the final decision and record the reasons for that decision.

Use clear outcomes such as “approved”, “conditionally approved”, “on hold” and “declined”. For conditional approval, specify the conditions, evidence required, deadline and person responsible for checking compliance. Explain the outcome carefully so that applicants do not assume they may sign a contract or incur substantial expenditure before those conditions are met. If you allow an exception, record the reasons and any additional measures required, so that the decision can also be explained to comparable applicants.

Japan has no single comprehensive statute governing all franchising. However, Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business requires franchisors whose operations qualify as a specified chain business to provide written disclosure and an explanation before a contract is concluded. Passing the franchise assessment, or an applicant saying that no explanation is needed, does not remove that obligation.

The Japan Fair Trade Commission’s guidelines on franchising under the Antimonopoly Act also apply to franchise recruitment and dealings, not only in retail and food service. The Civil Code applies to contractual relationships as well. Approval is the franchisor’s decision and is separate from the applicant’s decision to enter into a contract. Do not use an approval notice to pressure applicants into a quick decision. Ensure the process gives them an opportunity to review the necessary information and consider the contract.

After opening, compare the arrangements verified during assessment with actual operations. If funding shortages or gaps in management recur, do not simply attribute them to individual applicants. Review the assessment criteria and the explanations provided by the franchisor.

Practical takeaway: Start by bringing together “essential conditions, supporting documents, reasons for the decision and approving officer” on a single assessment form. Before increasing franchisee numbers, establish a process that ensures the same facts are checked regardless of who makes the decision. That is the starting point for a lasting working relationship.