Prepare for Franchisee Screening Prior to Finalizing FDD
Sep 04, 2019
The Franchise Disclosure Document (FDD) is a federal requirement that franchisors must prepare in order to sell franchises. It is a document that requires disclosure to potential franchisees in every state, registration in some states, and filing in some other states. Many hours of time and legal fees are invested in its development.
One of the items that is determined during the FDD process is the franchise fee. Each franchisor has their own expectation for what their franchise fee should be. Unfortunately, too often one of the issues that is forgotten is the procedure for vetting a potential franchisee, specifically the franchisee background screening process and the components that it should comprise.
Proper franchisee background checks is one of the best investments for protecting the franchise brand. This is not only a benefit to the franchisor, but to each subsequent franchisee, who also is making an investment in that brand.
When properly structured, franchisee screening should cost the franchisor nothing, as the average fees associated with franchisee screening can either be added to the franchise fee, or simply disclosed in the FDD as a separate application fee or background check fee. Even though this paradigm passes the cost of franchisee screening onto the franchisee, it is truly a benefit to each successive franchisee, as they know that future franchisee owners will also be vetted, helping to exclude individuals whose backgrounds could pose a threat to the entire franchise brand.
What elements should be included in a proper "best practices" franchisee screening background check? Although there may be some variations based upon industry, typical features include:
- Credit report with a credit score
- Criminal database check, including the national sex offender registry, and various "watch lists" such as SDNs, OFAC, FBI Most Wanted, et.al.
- Federal Criminal Records Search on all names and legal aliases for past seven years
- County Criminal Records Search, on all legal names, aliases and addresses that are revealed for the past seven years
- Social Search/Social Trace product - to uncover the names, aliases and addresses of the individual for the past seven years
- Bankruptcy-Lien-Judgment Search on all names and aliases. This is particularly important, since tax liens and civil judgments have disappeared from all three credit bureaus ever since July 1, 2017.
Again, the cost of franchisee screening should be borne by the franchisee. However, this becomes possible only when the franchisor has been properly advised prior to creating their FDD. Hopefully this article will serve as the catalyst to all who advise franchisors.
Franchisors should either be counseled that the average franchisee screening cost for a thorough background check be added to their franchise fee, or have this expense simply disclosed in the FDD as a separate application fee or background check fee.
Posted by: Rudy Troisi, L.P.I., President and CEO, Reliable Background Screening
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