There are a number of steps when you research a franchise. Once you have identified a concept you feel is right for you, it’s helpful to understand the steps required. While each franchise is unique in their approach, the process typically involves a series of steps over the course of several weeks where you learn about the business, review documentation, validate with franchisees, and visit franchise headquarters (Discovery Day).
While the order of steps and time frame may vary, the ideal experience should feel comfortable, candid and lack pressure. This is a mutual discovery between two parties looking to form a profitable partnership. The franchise should focus on determining if you have the financial resources and ability to own and operate the business. You should be seeking information to determine if the business is viable and can provide you with the income needed to support your lifestyle.
Ask Detailed Questions
The most successful business people ask A LOT of questions. While there are no guarantees, you want to have a clear understanding of your responsibilities. When you’re asking questions the goal is to feel comfortable with the answers provided.
Is it helpful?
Is it candid?
Can I generate a suitable return on my investment?
Will I be happy?
The challenge is a franchise has certain legal restrictions in terms of what it can disclose to a potential franchisee, particularly when it comes to details on income and expenses. This can be found in what is called an Item 19 in the Franchise Disclosure Document (FDD). The problem is franchises are not required to provide an Item 19, and even if they do, there is no set standard so the data might not be helpful. This is one of the reasons why speaking to current franchisees, a process called Validation, is the most important part of the due diligence process.
More than Simply Numbers
In addition to financial questions, the validation process can provide important details about what it’s like to work with the franchise.
Is the training and on-going support helpful?
Does the franchisor quickly respond to questions?
Are they truly interested in creating a profitable partnership?
In any business, a good working relationship is a key factor in your success. The validation process will reveal an inside perspective and working relationship between the franchisor and the franchisee.
A Working Relationship
A franchise is looking to make money. Their income sources include franchise fees, royalties and the potential resale of products or equipment. The more locations they open, the more money they generate. While it’s perfectly acceptable to be in business to make money, it should not be the only reason. The most successful franchise systems have a vested interest in the success of their franchisees. They should be looking to establish a profitable partnership with their franchisees.
A Vested Interest in Your Success
The best franchise concepts will focus on information flow, transparency and mutual discovery when speaking to a potential franchise candidate. The franchisor should be open, candid, and willing to answer questions. The validation process can really help you determine if the franchise truly has a vested interest in building profitable partnerships. Here are some helpful questions to ask existing franchisees during your research:
1. Does your original investment meet your original expectations?
2. How long do you plan to remain with this franchise?
3. Is the franchisor committed to your success?
4. Do you trust and respect the franchisor?
5. Do they provide you access to guidance, advice and support?
6. Does the franchise provide you with valuable marketing tools that you can apply directly in your area?
7. Is the business model well suited to the demands of a changing market?
8. Do the financial results provided by your franchise compare with your original expectations?
9. Would you invest in this franchise again?”
Listen Carefully
Be an active listener. Is franchisee happy? Do they enjoy owning the business? Would they do it again? How do they sound? Are they energetic or do they seem down? While there is no magic number, I would speak with at least 7 to 10 franchisees during your research. Keep in mind, if you speak to 10 plus franchisees, chances are you will run into some that are unhappy. If it’s one or two that might not necessarily be a bad thing. If, however, the majority of those you validate with are unhappy it’s an indication that the franchise has a problem.
Take Action
Owning a franchise can be a great way to earn a living and build wealth. There are thousands of available options and a number of factors to consider before making an investment. If you’re seriously considering franchise ownership, be sure to do your research carefully. It’s best to seek counsel from a qualified franchise attorney, your CPA and Financial Advisor. They can help you determine if the investment is suitable and also address questions you are unsure of. The process should be methodical, comfortable and lack pressure.