21 Feb Ten Questions Franchise Candidates Shouldn’t be Afraid to Ask
Comment from Tom West:
Although Ed wrote questions that franchisees should ask – they are also questions that business brokers should ask franchisors before they represent them. I know that business brokers, in many cases, represent fairly new franchisors. But, ask the questions anyhow. The answers that the franchisors provide can help you decide whether you want to represent them or not. Representing an owner of a ‘going business’ provides sufficient information so that a prospective buyer does receive full disclosure. A new franchise, however, is not able to do that as there is no track record for a prospective buyer to review.
Although, technically, the broker is not representing the franchisor, or the buyer, but just referring one to the other; and, although the franchisor must provide a lot of documentation to the prospect, no one wants to be involved in referring a buyer to a franchisor without doing their own due diligence. Ed’s questions do just that. They allow you to do due diligence on the franchisor, just as the franchisor wants to do their due diligence on the buyer. The success of the franchise is totally dependent on the success of the franchisee, especially in the start-up process.
Before signing on that dotted line and paying the franchise fee there are certain questions that the franchisor should be asked. If you’ve already considered asking these questions kudos to you, however, chances are you’ve missed these.
Despite the amount of resources available to franchise candidates, mistakes continue to be made and franchisees can and do fail. Although there are no guarantees to success, individuals can lower the risk of failure by adding certain questions to their franchise evaluation process. Here are ten questions that a prospective franchisee should ask the franchisor. I would suggest you ask these questions during various phases of your evaluation and don’t be reluctant to ask more than one member of franchisor staff the same question. Some questions are open ended and as such you should pursue until you’re satisfied with the answer. If you observe hesitation on the part of franchisor staff to answer or provide an adequate response these can be red flags. Finally, try to confirm the answers when you speak to franchisees.
- Do you disclose franchisee financial results? If not why? Although the franchisor won’t acknowledge it, a reason could be related to poor franchisee performance.
- Do you have an independent franchisee association? If no then why? (note: start-up or small franchisors are most likely to say no because of their small size)
- Have you assisted any franchisees financially? If yes what steps did you take?
- If I do what I’m told to do when operating my franchise and find myself having financial problems can I expect some assistance from the franchisor?
- Why were the franchise agreements listed in the FDD terminated?
- Can you give me a time frame when you expect a new franchisee to reach breakeven?
- What are the key 3-5 requirements for operating a successful franchise?
- What is the source of franchisor working capital? My accountant didn’t see any information in the financials indicating a credit line or possible other sources.
- Have you done or do you conduct a market study for franchise territories? If not why? As a franchisor shouldn’t you be knowledgeable about your major competitors?
- How is the advertising fund administered? Are there franchisees involved? If no then why not? If yes who are they?
Since the franchise evaluation process can be critical to your future success as a franchisee it’s important to gain as much information as possible. If you fail to get a satisfactory response to these and other questions consider walking away from the franchise.
© 2011 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at email@example.com