|Twenty Questions to Ask Your Franchise Sales Representative:
- What is the compelling story behind your franchise opportunity?
Franchises founded on un-met, real world needs of the average consumer (or business owner for service-related businesses) by creative entrepreneurs operating in more than one location over several successful years, have the greatest likelihood of success as they seek to replicate proven business models across the U.S. and abroad.
- Who are the founders and what is their track record in developing successful businesses in franchising?
The number of concepts successfully launched and still experiencing year over year growth after their launch, combined with talented, well-respected industry veterans in executive leadership positions in their brand organizations will ensure the continuous evolution of their offerings.
- What characteristics make your top-performing franchisees successful and what is it specifically about my background that you think makes me a good fit for your system?
This will let you know immediately if they have done their homework on you and think you are a good fit for their system or if they are just looking to sell you a franchise. The most successful systems are selective about who they accept as franchisees. Listen carefully to the franchisor’s response. Make sure they are addressing items specific to you and your background and not just generalizing common traits.
- What trends do you see in this industry that could have a negative impact on the business over the next decade, and what are you doing strategically to overcome these challenges?
Every business and industry has significant challenges to overcome in order to remain competitive. Look for honest and forthright feedback to real challenges. Ask franchisors how they’ve supported their franchisees during the recession and what strategic planning they’ve done to protect both their business and their franchisees in the future.
- What are the main reasons for departures of the franchisees shown in the back of the Franchise Disclosure Document?
All concepts and brands will experience attrition from time to time as franchisees retire or sell their businesses to new operators. Look for quick, explainable and reasonable reasons why specific operators have left the system.
- What is the size of addressable market in my geographic area?
Ask the franchise sales representative to explain how the franchisor determines the number of consumers (and/or businesses) in your proposed franchised territory, and how these population estimates equate to your income potential in the franchised concept.
- Why do consumers/customers choose to patronize a (fill in the blank) business versus that of the competition or competing brands?
A franchise concept with a clearly defined marketing plan will ensure that your location will enjoy its fair share of consumer (and/or business) spend.
- How will I benefit? What are the restrictions on my ability to promote my (fill in the blank) franchised business within my assigned territory?
If your marketing activities are constrained by a territorial definition in the license agreement, it is unlikely that you will be able to maintain 100% compliance all of the time given the global reach of the internet as the preferred advertising medium of choice. Additionally, print, radio, and television content publishers will rarely limit the number of advertising impressions delivered inside your territory according to the limitations contained in your license agreement.
- What are the procedures in place to resolve disputes among fellow (fill in the blank) franchisees?
Most successful franchisors will seek to have your disputes heard and decided upon by an advisory council of franchise peer operators who share the same or similar objectives as you. These advisory council leaders, usually among the most established operators and/or early franchisees of the concept, can be very effective in resolving disputes in a timely fashion for all operators of the system, and you are more likely to find their recommendations to be more reasonable than dealing with a member of the franchisors’ management team who have other priorities besides helping to resolve your disputes.
- Does the franchisor have an established Franchise Advisory Council (FAC) to collect franchisee feedback and requested improvements to the franchise system?
Franchisors that maintain direct and open lines of communications with their franchisees are more open to “real market needs” of franchisees.
- What does it take to qualify for the franchise?
Pay particular attention to the downpayment required and the amount of operating capital required for the first 90 days of operations while the business/site is launched. If you are not financially prepared to operate on your own reserves as the business matures and attracts new customers to a new location, prepare to borrow the required reserves from other areas of your investment and/or retirement plans.
- What assistance is the franchisor willing to offer if my fill in the blank) business is not performing as well as the rest of the system?
Most franchisors will take a vested interest in seeing struggling franchisees improve the performance of their locations during economic downturns and may offer concessions in the way of delayed or reduced royalty fee payments for a finite period of time in which the operators are allowed to reinvest their cash flows into additional marketing initiatives, operational training, or retirement of back due payments to vendors in order to bring the financial condition of the unit(s) up to par with the rest of the brand’s performance. Such concessions are often more desirable for the franchisor than to having to report the failure of a given location in the Franchise Disclosure Document for the mandatory reporting period of five years following a unit closure. However, such concessions must be requested by the franchisee early enough to have a positive impact on the successful improvement of the franchised location.
- Will the franchisor “buy back” my franchise or have a “right of first refusal” to buy my franchise should I decide to sell?
Most franchise agreements have provisions requiring a franchisee who desires to sell their business to offer it first to the franchisor, allowing the brand owner the option, but not the obligation, to buy back the franchised location from the franchisee. In practice, this buy back provision requires the franchisee to notify the franchisor of the desire to sell and exit the business. While the franchisee may be free to offer to sell the business to any number of interested third parties, the franchisee must allow the franchisor to first refuse to match any bona fide offer received by the franchisee. If the franchisor desires to reacquire the franchised location, the franchisor must meet or beat the best bona fide offer with similar or identical terms as that offered by any QUALIFIED third party seeking to acquire the business. Special attention must be paid to language of the agreement before execution as the franchisor usually controls what qualities (financially or otherwise) a third party must possess in order to be considered QUALIFIED to acquire an existing franchised location. The franchisor’s standards for third party qualification may be substantially different from the qualification process in effect at the time of the original sale of the franchise to the existing franchisee.
- May I buy one franchise unit or is there a requirement to buy multiple units and, if so, what are the requirements?
Prospective franchisees may be offered a discounted upfront franchisee fee in exchange for a commitment to purchase and develop additional locations within a specific geography over a specified time frame. Such agreements, if executed to secure an upfront discount, may contain unattainable development schedules and/or substantial penalties for non-performance according to the schedule.
- Tell me about the training program. Is on site assistance included in the franchise fee?
The length of time required for successful training of a new franchisee operator will vary considerably depending on the type of franchise offered, the nature of the business, and the length of time required to achieve competence in the operation of the franchised business. Most successful retail and service concepts will include training of the franchisee’s management team and support staff on-site at the franchisee’s chosen business location to ensure that all personnel are adequately trained in the environment in which they will be expected to perform their daily activities.
- Are there any lenders who have the franchise pre-approved for lending?
Many established franchisors will maintain a list of lenders that are familiar with the franchise concept, its executive leadership team, the expected financial performance in the local markets in which the franchisees operate, and have a short list of qualifications for new owners to mitigate their lending risks. In addition, many franchisors are also pre-qualified by the Small Business Administration’s (SBA) loan guarantee program to stand behind lenders who make loans for individuals to acquire a franchised business.
- I know that for at least the first few years I will be very dependent on you and your staff to help me succeed as a franchisee, and I think your fees are very reasonable given the support I will need. But in the future, when I am more self-supporting, where will I see the value from the fees that I am paying you?
One of the obvious values a franchisee receives from an established franchise system is the brand and system itself. But brand alone will not justify the ongoing royalties you will be paying over the long-term. Look for specific examples of programs and services that the franchisor is continually introducing to the system to provide added value for both new and old franchisees.
- Are the national/regional marketing or advertising dollars accounted for separately from the franchisor’s operating accounts? What happens in the event that management overcommits the advertising plan a given year? Are the franchisees responsible for any shortfalls in the following year?
Most responsible franchisors will segregate marketing and advertising dollars collected from the franchisees from their corporate profit and loss accounts, and maintain a separate accounting for the use of these funds for the benefit of all franchised operations in the system. Absent a formal Franchisee Advisory Council (FAC) to oversee and prioritize the expenditure of the funds in each fiscal year, the franchisor’s management team will make the determination of where these funds are spent and contract with the appropriate vendors to deliver the marketing and advertising programs throughout the system. Should a shortfall occur between the amount assessed/ collected versus the actual funds dispersed to vendors in any fiscal year, franchisees may be subject to additional assessments to make up the shortfall in the current or subsequent fiscal years covered by the franchise agreement.
- Who has the ability to modify the terms and conditions of the Franchise Disclosure Document and/or License Agreement?
The franchisor usually has little latitude to unilaterally assess additional fees; however, most agreements permit an “Advisory Council” made up of fellow franchisees to assess new fees as required by changing market conditions, and if they do so, you will be bound these fees for the life of your franchise.
- Do you have a franchisee satisfaction report that is publicly available?
For obvious reasons, we’re a big proponent of franchisee satisfaction reports, but we bet any franchisee who has used them to research an opportunity will tell you survey results were an important piece of their research. Survey results will highlight strengths and weaknesses in a system so you can focus your due diligence on the right areas. They will help you get better information from your own validation efforts.
Asking the 20 questions above of your franchise sales/development manager will ensure that you enter into one of the most important business relationships in your life with a full understanding of the roles and responsibilities each party is expected to provide over the life of your Franchise Agreement. Every business and industry has significant challenges to overcome in order to remain competitive. Real world situations which may occur in the future you will share with the franchisor.