As you examine the pros and cons of a particular franchise opportunity, a critical step in your due diligence will be to contact existing Franchisees and ask them questions regarding their experiences. Item 20 of the franchisor’s Franchise Disclosure Document (FDD) will feature a list of both current and former franchisees. Pick a few of them to call. You may want to find out from the Franchise Development Officer who the top performers are and who just started a year ago to get different perspectives. Keep in mind many franchisees are extremely busy running their business, but be persistent because their insight will be important.
In talking with franchisees, ask targeted questions so you’ll get frank and candid answers from them. It’s worth your time to contact these people to determine if they are satisfied with their investment, the support they’ve received from the franchisor, and with the income level they have achieved. Likewise, if they have left the system, you will want to know why. Above all, don’t be afraid to ask any reasonable question that will help you to make a decision. The discussions you have with franchisees should result in illuminating what your financial future might be if you become a franchisee.
To help get you started, here are some suggested questions to ask franchisees:
About the Franchisor:
1. What type of business background, business experience, education, and/or skills did they possess before becoming a franchisee? How important was that?
2. What is their overall level of satisfaction with the franchisor?
3. How has ongoing franchisor support been for marketing/advertising/employee training?
4. Were there any problems with the territory, cannibalization of sales, or competition?
5. Does the franchisor listen to your concerns and accept input from the Franchisees?
6. Have you had any disputes with the franchisor and, if so, were you able to settle them?
7. Do you know of any trouble the franchisor has had with other franchises, competitors or the government?
8. Has the franchisor kept its promises?
1. Did the franchisor provide effective and thorough training to get them up and running?
2. Does the franchisor provide on-going training?
1. How effective are the operational procedures?
2. Have the operations manuals helped you?
3. How many hours a day do you work?
4. How many days a week do you work?
5. Will you describe your day?
6. What aspects do you like most about the business?
7. What kind of problems do you encounter?
About Products and Services:
1. Is the product or service you sell of good quality?
2. Is delivery of goods from the franchisor adequate?
3. Are you getting supplies cheaper from the franchisor than you could on your own?
4. How much freedom do you have to make decisions?
5. Are there any restrictions affecting their business like limitations on products and services that can be sold, or vendor requirements, etc.?
About Advertising and Marketing:
1. How much do you spend on advertising a month?
2. Is it the recommended amount the franchisor indicates is necessary?
3. How effective is the regional or national advertising?
4. Do you think you are getting good value for your advertising dollars?
5. Are you satisfied with the marketing and promotional assistance from the franchisor?
1. Did the franchisor properly estimate the amount of start-up costs?
2. Did the franchisor properly estimate the working capital requirements needed in the beginning?
3. What do you pay employees?
4. What does leasing space cost?
5. What are the costs from vendors?
6. What were the unexpected or hidden costs and how did they affect the ’s operation?
7. How long did it take to you to break-even i.e. become cash flow positive?
(This can help you determine, about how long it would take you to start seeing real profitability and help you analyze what you will need in the interim.)
About Profitability: (This could be a delicate area of discussion, but it’s important for you to find out as much as you can.)
1. What do you charge for your services or products?
2. Is your franchise profitable?
3. What are your gross revenues?
4. What have your pre-tax profits been for the past three years?
5. What is the salary you pay yourself?
6. Were the franchisor’s profit projections and earnings claims accurate?
7. Have you made the profit you expected to make?
8. Would you recommend buying this franchise?
Start with some or all of these questions and as the discussion flows you’ll probably have a few more of your own. It is recommended to keep track of the answers you get from the various franchisees so you can review them later with the franchise development officer. It is always helpful to get the franchisor’s response to any issues you uncovered. Talking with franchisees should help to crystallize your decision to either join the franchise or not.