One of the most important steps in the franchise buying process is a thorough due diligence examination to be sure that you are making the right choice. In this post, we’ll provide a list of top questions to ask a potential franchisor during the research process. Let’s dive right in!
Here are questions to ask when speaking with prospective franchisors:
- How did the franchise brand begin, and what is the background of the executives? Who founded the company? What motivated them to launch the business? Then ask yourself if you have the same skills and a passion for the franchise industry. To find the right match, you must not only feel that the franchisor has enough experience, but the business must also resonate with you on a fundamental level.
- What do you look for in a franchisee? Every franchisor has a set of criteria and personality traits that suit their brand. It’s crucial that you find out these requirements and determine if you think your skill sets and personality match those the company is looking for.
- How much do I need to spend to open a franchise? The upfront investment for opening a franchise can range from a few thousand dollars to over a million. You will find the initial franchise fee in Item 5 of the franchise disclosure document (FDD), while Item 7 includes information about other expenses, like real estate, licenses, equipment, etc. Make sure to discuss these in detail with the would-be franchisor to be clear about the investment and how much it will cost you to set it up.
- How much liquid capital do I need to run the business until it breaks even? In addition to the initial startup costs, franchise owners need to have enough liquid capital to sustain the business for the first couple of months until it reaches the breakeven point. Hence, it is crucial to research the amount of time it typically takes the company’s franchisees to become profitable, so you can be better prepared financially.
- What are the recurring fees? How do your royalty fees and marketing fees work? Spend enough time to learn about your financial obligations to the parent company, including whether or not you will have to pay royalty fees or other recurring fees like advertising costs, for example. It’s important to understand this, so you can better manage the finances of your franchise business.
- What is the financial health of the franchise company? You can check the franchisor’s latest financial statements in Item 21 of the franchise disclosure document (FDD). This will give you a clear picture of the financial status of the parent company. Ask the potential franchisor to explain how the company has grown consistently over time and their plans for further growth in the future. Also, you’ll want to find out whether the franchisor makes most of its revenues from royalty fees or the sales of franchises and whether they re-invest enough money into the system.
- How many franchise units do you have currently, and what is their success rate? The number of franchise locations shows how big the company is, but that does not necessarily reflect their success. Does the franchisor provide adequate support to existing franchise owners? A large franchisor may not be able to offer enough support to all the units under them, whereas a new franchisor may have limited resources. So, you need to ask the franchisor what their franchisees’ success rate is and why some units did not succeed.
- How much money can I expect to make? While a franchisor may not be able to tell how successful you will be in the business, they should know the amount a franchisee typically makes and your income potential. Bear in mind that the franchisor may provide information about gross sales, which does not consider other investments like the real estate costs and other expenses necessary to run the franchise.
- What differentiates you from other similar franchisors? Some companies are in an overcrowded and highly competitive market, while others are in a unique and innovative market. Ask the potential franchisor where their brand falls in the spectrum. What type of competition exists in the market, and who are your main rivals? Ask the franchisor to tell you their specific selling points and their edges over their competitors.
- What support do you provide aside from the initial training? The majority of franchisors provide initial training to help you start the business, but you will need to determine the kind of ongoing support that is offered and compare it to what other similar franchisors provide. Which support team member will be available to you every day? Will there be opportunities for continual training? Do you offer on-site assistance? Be sure you are okay with the level of support you will get after opening the franchise.
- How do you handle disputes or disagreements? Reviewing the franchisor’s litigation history is a crucial part of the due diligence when buying a franchise. You will find information about the franchisor and its executives in the Item 3 section of the FDD. If a franchise has many claims against them, it could mean that they don’t tend to abide by the franchise agreement. Ask the potential franchisor how they resolve issues with franchise owners and what could lead to the termination of your franchise agreement if you don’t fulfill your contract obligations.
- What expectations do you have of your franchisees? When you start a franchise business, the franchisor will have certain expectations of you regarding fees, operations, and other obligations based on the franchise agreement. It is crucial that you discuss this with the would-be franchisor to know for sure what’s expected of you as a franchise operator.
- What will my territory be, and how is it going to be protected? You need to find out how the franchisor defines territories for its franchise owners and the rights you will have under the contract. Does the franchisor have the right to approve or disapprove your franchise location? Are you going to have a protected or exclusive territory? Determining whether or not you will be protected from other competing units can have a significant impact on your success as a franchisee.
- What type of contribution will I need to make when it comes to marketing and advertising? You will probably need to pay some money for local, regional, and national advertising as agreed upon in your franchise contract. Ask the would-be franchisor if you can help decide how that money is spent and what marketing opportunities are available in your area.
- What does “a day in the business” typically look like for a franchisee? Knowing about the daily tasks and goals of a franchise owner can give you an idea of what your daily work life will be when you open the franchise. It’s also crucial to ask about the biggest challenges that franchisees experience, so you can determine whether the franchise opportunity will suit you.
- Can I talk to existing franchise owners about their experience? You need to ask this important question while investigating the franchise to buy. Franchisors are mandated to provide information about their existing and previous franchise owners. When you talk to both parties, you will have an honest view of how the franchise system works, as well as the advantages and disadvantages. Beware of any franchisor who wants to deter you from contacting other franchise operators.
Note that no two franchises are the same, so it’s crucial to know what you are investing into. Comprehensive franchise research should consider all the parts of the franchise system and include information from the franchise company existing and past franchisees, as well as 3rd-party sources.
Think about the right questions to ask prospective franchisees?
You need to look for multiple franchise owners to speak with before putting your money and resources into a franchise system. Don’t invest in a franchise unless you have the necessary details and answers to these important questions.
