21 Powerful Questions to vet out a Franchise offering

When most people think franchises they think McDonald’s. A global multinational brand which almost can’t fail. However, for much of the industry that is far from the case.

According to a recent IFA conference there are more than 2,000 active Franchise systems under 20 units and almost 3,000 Franchise systems under 50 units.

But how do you identify which of these emerging franchise systems will be the next Quiznos Sub or the next McDonald’s?

Keep these questions in mind when investigating a Franchise offering:

1. When was the business started? What year did you start franchising?

Longevity of the Franchise is a critical consideration. Is there a life cycle to the brand?

2. How many company owned stores does the Franchisor have?

Can the Franchisor operate their own stores successfully? Are they continuing to develop corporate units?

3. How many Franchisees do you have? Can I speak with your current Franchisees?

Ask the Franchisees about the economics of the business, support they receive from the Franchisor, and if they could do it over, would they purchase this Franchise again?

4. What is the total investment of the Franchise including working capital?

Is this Franchise in my budget? Does the potential ROI make sense? How long till I will be cash flow positive?

5. Is the Franchise SBA approved?

Know your financing options.

6. How many states is the Franchise in?

Is this a national? regional franchise?

7. What is your royalty and marketing fund?

Know your numbers before you sign on the dotted line.

8. Describe the concept.

What is the core competency of the business?

9. Describe your industry.

What industry are you in? What are the trends? What are the current conditions?

10.Who is your competition?

Learn what the competition is doing and why they are doing it.

11. What are the brand differentiators and what are the competitive advantages of your product/service?

What makes this brand better than the competition?

12. Is there an Earnings claim in item 19 of the FDD?

I would strongly caution purchasing a Franchise without an item 19. What are average sales? COGS? Can this business flat out make money?

13. Please describe the backgrounds and skill sets of your most successful Franchise owners.

Do these Franchise owners sound like me? Is there an assessment I can take?

14 Describe the typical day of a franchise owner.

Could I do this work day after day?

15. How many and what type of employees do you need? Are any certifications needed?

What challenges may I face from an employment standpoint?

16. Who is the customer/demographic of your Franchise?

Franchises must understand their demographic when selecting real estate & marketing vehicles.

17. What is the protected territory radius?

Am I comfortable with my radius? Do I feel neighboring franchisees will cannibalize sales?

18. Describe the typical location. What challenges do you face finding this real estate?

Location, Location, Location! Does the Franchisor help me find this real estate?

19. What is the management teams backgrounds and strengths?

Who am I going into business with? Are they qualified to lead a Franchise system?

20. What are the typical objections of prospective franchisees?

Am I missing something?

21. Can I see the FDD?

The FDD (Franchise Disclosure Document) is a standard format document which allows you to learn more about the Franchisor. I would recommend reviewing the FDD with a Franchise attorney.

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Ryan Rao is a Principal of Apex Franchise Development Group and is a franchise development expert who has grown multiple franchise based businesses into national and international brands. Franchising has allowed him to help individuals realize their dreams of business ownership, while permitting them to experience the independence, flexibility, and freedom that comes with being a business owner. He also serves as a franchise consultant, and is a personal growth advocate.

Follow or Connect with Ryan on LinkedIn at https://www.linkedin.com/in/ryan-rao/

The Franchise Partnership Puzzle: Avoiding Disillusion

The modern franchising model can be traced back to Isaac Singer, founder of the I.M. Singer and Company, manufacturer of sewing machines.  Singer and his business partners sold rights to businesspeople who were interested in selling his sewing machines within specific geographical areas. This system served as a win-win for both the company and the businesspeople that chose to invest. The company generated revenue to fund its business endeavors and the businesspeople had a business of their own, selling a product much in demand.

Because of Singer’s modern day franchising model many business people have found a great opportunity to not only bring an idea to life through franchise and licensing agreements, but also give entrepreneurs like themselves an opportunity to own a piece of the pie. While franchising is a great opportunity for an entrepreneur to own their own business, not all franchise opportunities are the same. A potential franchisee would be wise to evaluate franchise opportunities against the following components that serve to makeup those things that will be key in determining whether a strong business relationship develops.

Key Components

  • Vetting – From inquiry to ownership a franchisee should experience a rigorous vetting process. It is through this process that a strong relationship begins to develop. It is also through this process that the franchisor and the franchisee should learn a lot about each other. While it may be the desire of the franchisee to fly through the process, a thorough process is better in the long run for everyone. After all, it is better to know up front if the fit is right then to find out after thousands of dollars and hundreds of hours have been invested. A weak vetting process can be an indication of the strength of other processes. A strong franchisor is after a strong long-term relationship. A weak franchisor is after the franchisee’s money.
  • Training – Many times a franchisee’s success can be attributed to their level of preparedness from the start. Part of that preparation takes place long before the doors open for business. Strong training on operational systems and processes is critical to the implementation of the franchisor’s business model. The same holds true for strong business practices. A franchisor worth its weight will make sure a franchisee has all the tools necessary for success. The franchisor’s primary goal should be setting up the franchisee for long-term growth and an even lengthier relationship.
  • Multi-Unit Offering – The ability to engage in multi-units is beneficial for both the franchisee and the franchisor. The franchisee has the option to compound wealth growth, while the franchisor can engage with fewer franchisees as they work to reach their unit goals. A franchisor who adds many one unit franchisors may be after the money more than the shared interest of exponential business growth.
  • Territorial Protection – A franchise agreement should clearly describe the territory covered by the agreement. Vague and uncertain language does not help the franchisee. A strong franchisor wants clarity and understanding in all business dealings. Vague language in a Franchise Disclosure Document (FDD) or Franchise Agreement (FA) should be considered intentional and a red flag.
  • Rebate Sharing – Almost every franchisor has some form of a rebate deal with distributors and suppliers. A strong franchisor will not only disclose these, but many will share a portion of those rebates as franchisees acquire multiple units. Again, a strong franchisor has a shared success and wealth building mindset.
  • Renewal Terms – Clear and fair renewal terms protect both the franchisor and the franchisee. 180-day notification of intent to renew is the ideal. Stated increases in royalty fees upon renewal of the agreement are not an ideal situation for the franchisee. While it sounds great to know what your increase will be, there is usually no value added with the increase. An increase in royalty fee at renewal typically puts more money in the franchisor’s pocket and less in the franchisees. In most cases the increase will not result in an increase in service. A strong franchisor will grow revenue through their support of the franchisee.
  • Franchise Agreement Renewal – The franchise agreement should state whether the franchisee has the option of rolling over the current agreement or state that the current agreement will be replaced by a new agreement. Either way, the franchisee needs to know which it is going to be.
  • Alternate Channels of Distribution – While territories may be mapped out and clearly stated, it is important to know whether the franchisor has the right to enter alternative channels of distribution within your territory. Alternative channels could be concert venues, amusement parks, shopping malls, air ports, etc. While these venues may not directly impact your target market, they could take away opportunities for expansion within your existing territory. A strong franchisor will make sure that this is clearly known up front.
  • Gift Cards – While gift cards don’t seem like a big deal, they can be a revenue boost or drain. Gift cards purchased in one location and redeemed in another can be a boon for one location and a drain for another. Clarifying the redemption system upfront may help to avoid future issues. Outside of the gross revenue they generate, a franchisor should not be taking a cut from the sale of gift cards.
  • Advertising Fund – Almost all franchisors require the franchisee to contribute to an advertising fund. This fund is different than the local advertising requirements placed upon the franchisee. The advertising fund is used by the franchisor to fund marketing related activities for the franchise group. This may mean that some markets see more advertising than others, as the marketing tends to follow market penetration. A strong franchisee will provide audited financials of the advertising fund for the franchisees to review.
  • Curable Versus Non-Curable Events – Every franchisee needs to understand what makes up a curable and non-curable franchise violations. Curable violations are usually minor and immediately fixable. Non-Curable offenses need to be clearly stated. A strong franchisor is not franchise agreement termination happy. Again, strong franchisors are interested in franchisee success. They will work to rectify situations and not allow situations to ruin the relationship. However, they will terminate franchise agreements for failures that jeopardize the brand and put the franchisor and other franchisees at risk. This level of leadership is important. Doing business with a franchisor that actively protects the brand is crucial to the long term success of the franchisor and their franchisee partners.
  • Accountability – Accountability is something many franchisees struggle with. A strong franchisor will hold franchisees accountable for operating their business within the established standards. A franchisor that does not hold franchisees accountable is not concerned about brand and product integrity. That is a major red flag. The best franchisors are sticklers for adherence to the systems and processes they have developed. They know what it takes to succeed. They also know that franchisee failure is usually connected to the franchisee’s failure to operate their business within the brand standards. While a franchisee may not like accountability, they need it. It is neither good nor acceptable to have failing franchisees. Bad and failing franchisees harm the brand and place all franchisees at risk.

Avoid Dissolution

Selecting the right franchisor is not an easy task for the potential franchisee. However, it’s also not an easy task for the franchisor. If it is easy for either party, then neither is doing their due diligence. A franchisee and franchisor relationship is a long-term commitment. It should be treated in much the same way as selecting a partner for life. There are some behaviors that can be tolerated and lived with. However, there are others that cannot. It is the responsibility of each party to identify behaviors and determine which are acceptable and which are not. Like a marriage, franchisees and franchisors that don’t go through the due diligence process usually end up divorced from one another. That situation is neither good nor healthy for anyone.