As a prospective franchisee, it’s important to get acquitted with the franchisor and ask the necessary questions before investing your money in a franchise. The relationship between the franchisor and a franchisee is a unique one, and every company as its own way of educating would-be franchisees about their concept. In this post, we’ll discuss what you can expect during the franchise discovery process and share some important questions you need to ask a potential franchisor.
During the discovery process, you will assess the franchise opportunity to know whether or not it is suitable for you, depending on your preferences and requirements. Simultaneously, the franchise development representative will also be assessing you to determine if you will make a good franchisee. The franchisors would like to know if you will be able to generate the profits expected from a territory assigned to you, if you won’t deviate from their system, and if you are a good cultural fit for the franchise company. Franchisors determine how willing a candidate will be to follow their proven system by keeping an eye on them during the franchise development process. The representative will observe your actions and compliance while undergoing the process (attending appointments, filling out forms, watching videos, going to websites, getting ready for calls, and so on).
The Relationship Between a Franchisee and Franchisor
The franchisor and franchisee need to have a good relationship for both parties to be successful. Franchisors don’t just “sell” out franchises to anyone who can afford it. If that’s the case, they will only care about the monetary gains. For a franchise to be “awarded,” it implies that the person suits the franchise culture and model, has the business sense, and the other factors that are essential to the parent company. During your conversations with the franchise representative or any other member of the franchise team, remember that they are searching for a person that will operate the business successfully. They have a vested interest in your success as a franchisee. The higher the profits you make, the more money the franchisor also makes through royalty fees. If you see a franchise that you are interested in and the franchisor chooses to “sell” the franchise to you, both of you will have a relationship for the entire duration of your franchise agreement, which is typically 10 years. So, you must have built some trust with the franchisors during the evaluation process before going ahead. Otherwise, 10 years could seem like an eternity for you.
The Franchise Discovery Process
The franchise discovery process begins with an introduction to the potential franchisor. The first call between both of you will last between 30 minutes and 1 hour. You will probably be assigned some “homework” that you need to do before the phone call, which will begin the education process. The franchise rep will provide further explanation about the franchise concept during this call, so make sure to jot down points. You may or may not be able to ask questions during the first call, but it’s good to have your questions available, regardless. This will be followed by a second call and some extra homework for you. You can expect to receive additional calls every 3 to 7 days. The franchise representative will ask you questions about yourself to know your experience, work ethic, motivation, people skills, etc., to determine if you are a great candidate. The franchise discovery process is a two-way street where both parties learn about each other.
The Franchise Disclosure Document
The franchise representative will provide you with their franchise disclosure document (FDD) early in the process. This is an important document that the Federal Trade Commission (FTC) requires franchisors to give their potential franchisees. It includes 23 items in total. Item 23 is the franchise receipt you will be asked to sign, date, and submit back to the franchisor. Signing Item 23 does not mean you are committing to buying the franchise or anything. It only indicates that you have gotten the FDD. The FTC requires that franchisors have this receipt.
Once you have checked the FDD and undergone the validation process, a Discovery Day will be fixed. It can occur personally at the franchisor’s main office or online via video conferencing. This will give you the chance to meet the franchise corporate team. You may also be able to see how the franchise operates in real life, ask questions, and so on.
Questions to Ask a Potential Franchisor
It’s important to have your questions ready when it’s time to speak face-to-face with the franchisor. Below are 25 questions you should ask a franchisor, but you will probably have your own questions that are peculiar to the franchise brand.
- What do I need to know about joining your franchise system?
- What are your franchise’s strongest points?
- What do you see this franchise system becoming five years from now, and what steps are you taking to realize that goal?
- Who are your competitors in this field?
- What do the consumers think of your brand?
- Can you give me an overview of the costs needed to start your franchise?
- Can you please tell me the contractual obligations of signing up with your franchise system (e.g., terms of the agreement, renewals, and more?
- How much money can I expect to make if I join your franchise system and do you disclose this amount in your written materials?
- What is your training program like and what kind of ongoing training do you provide?
- How much extra capital will I need after opening my franchise?
- What services or products do I need to buy directly from you and can I look around for a better deal?
- Is there a marketing fund that I need to contribute to? What rights do I (as a franchisee) have regarding auditing that special fund?
- What is my franchise territory and how is that area defined?
- How many franchises of the company have been awarded in my state and have all of them started operations? If some are yet opened, what is the reason?
- What plans do you have in place to develop my state and how will that affect my franchise business?
- How many franchise locations are unsuccessful and why?
- Will you be able to assist me with financing, real estate, and construction?
- Has your franchise company been sued or is being sued and why?
- How did you resolve disputes with your franchisees in the past?
- How did most of your franchisees find their current franchise locations? Did they make use of the resources you have provided?
- What are you going to do to make sure I am properly set up to operate the franchise business?
- What will occur when I want to exit or sell the business?
- What is the major complaint you get from franchisees?
- Do I require permission if I wish to advertise my business using any trade groups?
- If I eventually sell off my business and exit the franchise system, what are the things I am not allowed to do?
If everything goes as planned and you are okay with the answers, you can proceed to sign the franchise agreement. However, before investing in any franchise, it’s important to speak with a franchise lawyer and have them go through the franchise disclosure document (FDD) and franchise agreement. Hiring a franchise attorney is money well spent. You may also want to seek the services of a CPA to check the brand’s financial statements and any financial projections.
