How to Investigate a Franchise
The first thing you need to keep in mind in your investigation, is it is a discovery process designed to determine compatibility between you and the franchisor. Therefore you are both trying to determine if the fit seems right . If either party comes to the realization this is not the right match, simply inform your Franchise Consultant and the other party, and move on. Your Franchise Consultant may be able to show another brand which better suits you.
If at any point you wish to discontinue or put your conversation with a company on hold, simply inform your Franchise Consultant.
Step 1 – General Information
Once your franchise prequalification questionnaire has been received, your consultant will notify the franchisor of your interest and ask them to set up an introductory call. Your consultant will also arrange for the franchisor to send additional information on the company. This typically includes an introductory email, an invitation to their online portal, a brochure, video package, and/or webcasts.
The franchisor will ask you to provide them with additional information to determine if you have the general characteristics that align with their brand. Assuming that each party is still interested based on this information exchange, you will then proceed to the next step.
Step 2 – The Franchise Disclosure Document
The Franchise Disclosure Document (FDD) is a mandated by the government and provides a wealth of information about the franchisor. The form and composition of the document is standard with any franchisor and must include information on a variety of key topics. The major subject areas include:
- The history of the franchise and its officers and directors.
- A complete description of the business to be franchised.
- All costs and fees you will be subject to under the agreement.
- The obligations of either party to the other during the term of the agreement and thereafter.
- Any relevant litigation history of the company or its officers.
- Any business failures, ownership transfers, franchise agreement terminations, or other potentially adverse information relating to the success rate of the existing units in the system.
- Audited financial statements for the franchise company for the previous three years.
- A list of the existing franchisees.
You will want to carefully review both the FDD document, and the franchise agreement noting any questions or issues the material raises for further discussion with the franchisor. You may also choose to involve outside advisors such as a franchise attorney to help you review any unfamiliar language and gain a better understanding of your legal obligations in signing the franchise agreement. “Franchise Attorney Recommendation”
Step 3 – Franchisee Calls and Visits
The most valuable source of information on any franchise system is the existing franchisees. You need to plan on calling or visiting a number of the existing franchisees during your investigation. Make sure and cover the principle areas you want to investigate during these calls like the following:
- Training Programs – You need to determine how well the initial training programs and support prepared the franchisees for opening and running their business.
- Opening Support – How easy did the franchisor make the process of getting the first unit open and operating? Was there assistance in site selection, lease negotiation, construction and design assistance, financing assistance, permits, or any other factors unique to getting this business up and operating?
- Ongoing Support – You want to know how effective the ongoing support services of the franchisor are in terms of helping franchisees deal with the problems that come up in the running of their business.
- Marketing Programs – Most franchisors collect marketing dollars from every franchisee into a pool which is spent to promote the brand. You need to know how the franchisees directly benefit from this fee.
- Purchasing Power – Does the franchisor use the collective buying power of the total system to get discounts on supplies and inventory beyond what an independent operator could achieve? This factor is one of the biggest advantages of joining a well-run franchise system and should offset much of the fee cost associated with being a franchisee.
- Franchisor/Franchisee Relations – Determine what the franchisees feel about the franchisor in general. Is the franchisor supportive, caring, focused on their success, responsive, effective, organized, and trustworthy? Make sure you have a good feeling about the values of the organization and whether they are consistent with your values.
- Investment – The FDD will give you a wide dollar range for the investment required in the business. Use the franchisee discussions to narrow down to a reasonable and conservative estimate of how much capital you will need to be successful in this franchise.
- Earnings – It is critical you have a strong sense of just where the average unit is in terms of earnings. You should know the answers to the following questions: How much money does the typical unit make given a specified length of time in business? How soon does a typical unit start making money after opening? What is the range of answers for these questions from high performers to low performers? If you are simply not able to determine these answers to your satisfaction in your research, do not settle! Tell the franchisor of the problem and you cannot proceed unless you have these answers.
It is always a good idea to bring up the subject of earnings as the last point in your franchisee discussions. Some people are reluctant to discuss their income however they have all been in your position of trying to determine if this business is a good fit. Most franchisees will share their financials with you.
Step 4 – Review the System Documentation
A strong franchise company will have documented their systems, operations, and marketing programs in a concise and easy to use format for the reference of franchisees. Make sure such documentation exists. The franchisor will probably not give you a copy of their actual manuals, but they can certainly provide you with the table of contents or index of every support manual they have. This will enable you to confirm the documentation exists and will show the scope of the coverage of all their major business factors.
Step 5 – Meet the Franchisor
At some point in the process of investigation, you will want to have personal meetings with key personnel of the franchise company. This might be possible in your local market, or you may need to travel to the headquarters of the franchisor. Many franchisors facilitate this need by holding what is referred to as “Discovery Day or Meet the Team Day”. These are structured events where you can go to a specified location and meet all of the key people from the franchisor.
Be sure to get to know those people you will be working most closely with as you build your business and who will be answering your call when you have a problem. Find out who will be providing the operational support and training directly to you and form an opinion about their competence. Make sure any remaining questions or issues you may have are addressed at this meeting.
Step 6 – Make a Decision
If you have been diligent, the entire process outlined above will take about three to five weeks to complete. The franchisors only want the best owners in their ranks. If at the end of the process, they offer to award you a franchise, then you know they consider you the right type of partner.
It is now time to make a decision. You have all the information you need to determine if this will be your new business. Avoid wasting the franchisor’s time by waiting for weeks to make a decision. They will withdraw the offer after a short period of time because they cannot hold the franchise in reserve for any length of time.
Throughout the process, it is always beneficial to discuss your thoughts with your Franchise Consultant as they have industry experience which may prove helpful. Your Franchise Consultant respects this is a very big decision and wants to help you make the best one possible.