Franchising is a great business model and with so many concepts and brands out there to choose from, research and due diligence are a big part of your assignment.
Of course you’ll receive a wealth of information from the franchisor detailing and outlining almost every facet of the system and operations, but there is one other area of research that you owe it to yourself to uncover (many franchises even require that you do this).
Once you’ve narrowed your franchise brand choice, you’ll want to talk to some existing – and even former – franchisees about what it’s really like out there in the trenches every day running the business. This is part of your due diligence and it’s imperatively important.
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 and sit down and call them to inquire and discuss. You may even need to arrange a time to talk with them in more detail – remember, some franchisees are extremely hands-on and busy running their stores. But they will do their best to arrange to speak with you.
As you call and talk to franchisees, you’ll be able to ask any questions you have and you’ll most likely get frank and candid answers from them. It’s worth your time to contact these people to determine if they’re happy with their investment, the support they’ve received from the franchisor, and if they are happy with the income level they have achieved. Likewise, if they have left the system, you want to know why, and if they knew then what they know now would they still invest in the franchise system. Above all, don’t be afraid to ask any question.
This is your life and financial future you’re talking about.
To help get you started, here are some basic and fundamental questions you should be asking these franchisees:
1. How happy are they with their franchisor? Ask them to describe their overall level of satisfaction.
2. What type of business background, business experience, education, and/or skills did they possess before becoming a franchisee? How important was that?
3. How long did it take for them to realize a return on investment? This can help you determine, approximately, how long it would take you to start seeing real profitability – and help you analyze what you’ll need in the interim.
4. Did the franchisor properly estimate the amount of operating cash that was needed in the beginning?
5. What about unexpected or hidden costs? What were they and how did they affect the franchisee and their operation?
6. Have their earnings met with their expectations? This could be a delicate area of discussion, but it’s important for you to find out as much as you can.
7. Did the franchisor provide adequate and thorough training to get them up and running?
8. Were there any problems with the territory, cannibalization of sales, competition?
9. Any restrictions that have affected their business? Limitations on products and services that can be sold, vendor requirements, etc.
10. How has ongoing franchisor support been for marketing/advertising/employee training?
Start with these questions and you’ll probably have a few more of your own.
This due diligence is something that you will be glad that you did.