Franchising an Existing Business: Selection Criteria and Interviews for Prospective Franchisees

When franchising an existing business, accepting candidates simply because they have responded to your recruitment campaign can lead to cash shortages or disagreements over management policies after opening. A franchise is a community of independent businesses developing a shared brand. What a franchisor needs is not a sales process designed to rush contracts through, but a selection process that allows both sides to assess whether they are a good fit.

1. Define your ‘ideal franchisee’ around the actual work

Start by identifying the work that owners and managers carry out at your existing outlets. Rather than relying on abstract criteria such as customer service experience or enthusiasm, specify the responsibilities needed to keep an outlet running: recruitment, staff scheduling, cash flow management, complaint handling and hygiene management, for example. Then distinguish between the support the franchisor will provide and the responsibilities franchisees must take on themselves.

Grouping your selection criteria into the following three categories makes assessment easier.

• Requirements that must be met before signing: a credible funding plan, an identified person with day-to-day management responsibility, and a reasonable prospect of obtaining the licences and permits the business needs.
• Skills that can be acquired before opening: product knowledge, use of outlet systems, and standard customer service and operating procedures.
• Attitudes requiring mutual understanding: reporting problems rather than concealing them, managing staff appropriately, and understanding both shared standards and personal responsibility for running the business.

For example, if an inexperienced candidate can learn the practical tasks through training, there is no need to make a minimum number of years’ experience compulsory. On the other hand, if your operating model requires hands-on involvement but the candidate intends only to provide funding, the model itself may be unsuitable for them.

For each criterion, record why it matters, how you will verify it and whether any shortfall can be addressed. The important thing is to base your criteria on operational needs, not the personal preferences of the assessor.

2. Assess financial resilience after opening, not just total funds

Being able to pay the franchise fee and fit-out costs is not enough to pass a financial assessment. Check whether candidates could continue to meet their obligations if recruitment takes longer than expected, preparations overrun or sales build more slowly than forecast.

Ask candidates to set out their own funds, planned borrowing, existing debts and the living expenses they expect to draw from the business after opening as separate items. For corporate applicants, also check the funding needs of their existing businesses. Money in a bank account may already be earmarked for other payments and may not be freely available to fund the new outlet.

Limit supporting documents to what is necessary for the purpose, and explain why you need them. For loans, distinguish between preliminary discussions, submitted applications and approved lending. Make sure candidates do not confuse franchise approval by the franchisor with lending approval by a financial institution.

Useful interview questions include:

• If opening is delayed, what funds would cover the additional expenditure?
• If sales fall below expectations, which expenses could you review?
• If signs of a cash shortage emerge, whom would you consult, and when?

Rather than setting an arbitrary financial cut-off for every candidate, align your requirements with your outlet-opening conditions and payment schedule. If there is a shortfall, options include reconsidering the scale or timing of the opening. Do not encourage excessive borrowing to hurry someone into joining the franchise.

3. Use consistent questions and practical examples in interviews

An interview based only on informal conversation tends to favour candidates who speak confidently. Prepare a common set of questions for all candidates, and record both their answers and the reasons for your assessment. It is also useful to involve both recruitment and operational support staff so they can assess candidates from their respective perspectives.

Frame questions to reveal behaviour rather than enthusiasm. Instead of asking, ‘Are you good at managing people?’, ask, ‘When several staff members were unexpectedly absent, how did you reorganise operations?’ If the candidate has no relevant experience, present a hypothetical situation and explore how they would approach it and whom they would consult.

For example, if a customer requests something that departs from standard procedures, would the candidate refuse outright, make a change on their own authority, or identify which aspects require consultation with the franchisor? The aim is not to test whether they have memorised the right answer, but to see how they balance safety, customer service and shared standards.

Outlet visits are useful too, but distinguish observation from actual work. If candidates will perform practical tasks, check in advance how employment law applies to the arrangement, what safety precautions are needed and how accidents would be handled. Do not casually turn the assessment into unpaid labour.

At the same time, give candidates time to question the franchisor. Neither side can assess suitability properly if the selection process conceals the limits of head-office support or the demands of running an outlet. Do not treat questions or disagreements in themselves as evidence that a candidate is uncooperative.

4. Do not treat selection as a substitute for disclosure or contractual review

Japan has no comprehensive franchise-specific law applying uniformly to all franchises, nor a general franchisor registration system. That does not mean the sector is unregulated.

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’ under the Act to provide prospective franchisees with written information and explanations before a contract is signed. Whether a business qualifies depends on factors including the types of franchisees principally involved, the contractual arrangements, ongoing supply of goods or arrangements facilitating their sale, management guidance, use of trade marks and similar rights, and payments collected on joining. Do not assume that the answer depends simply on whether the business is labelled retail or food service.

The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act also explain how that Act applies. Franchisors and franchisees are independent businesses. False or exaggerated recruitment claims, or unfair disadvantages imposed through an abuse of a superior bargaining position, may raise legal concerns.

Passing the selection process does not remove the need for statutory disclosure or careful consideration of the contract. Avoid pressure such as, ‘Your approval will be withdrawn unless you decide now’, and allow candidates the opportunity to consult professional advisers. The Civil Code and other laws may also apply to the contract, while the collection and management of personal information must comply with the Act on the Protection of Personal Information.

When collecting financial documents or employment histories, define the purposes for which they will be used, who may access them, how long they will be retained and how they will be deleted when no longer needed. It is also important not to collect information indiscriminately, such as family details that are not directly necessary for the assessment.

5. Record approvals, deferrals and rejections, and use the findings after opening

Wherever possible, do not leave the final decision solely to recruitment staff: include operational and financial perspectives. If decisions rest entirely with people assessed on the franchise fees they bring in, there is a risk that potential problems after opening will be underestimated.

Classify outcomes as ‘approved’, ‘deferred until conditions are met’ or ‘declined’, and record the facts supporting each decision. For deferred applications, specify the conditions for reassessment and when they will be checked. These might include confirmation of additional funding, identification of the person responsible for management, or evidence that training standards have been met. Distinguishing internally between franchise approval, contract signing and authorisation to open helps prevent misunderstandings.

Pass any issues identified during selection to the opening-support team, to the extent necessary. For a candidate with limited recruitment experience, for instance, this could mean reviewing their recruitment plan earlier. Comparing the support provided after opening with the original assessment can help reveal which selection criteria are genuinely useful. However, do not attribute poor performance solely to the franchisee’s abilities or qualities: review the franchisor’s support and the conditions surrounding the outlet’s opening as well.

Practical takeaway: Before launching your next recruitment campaign, bring together your essential requirements, standard questions, supporting documents and decision-makers in a single assessment sheet. A sustainable franchise community is built not simply by increasing franchisee numbers, but by welcoming people who understand the responsibilities on both sides.