After you have completed the initial qualifications, it’s now time for you to speak directly to the franchisor. As you prepare for this conversation, you need to keep in mind this is the time for you to really learn about the company and get a feel for if this is the right business for you.
Also remember that this is not only an interview for you to size up the franchisor, but vice-versa as well. They are trying to get a feel for you to see if you would be a good fit in their franchise. Franchising is all about the relationships, so be yourself and really get the details on whom you could potentially be working with. Here are some questions you should ask:
- How much can I make? Unfortunately, it’s not answerable in a definitive way. The Franchise Disclosure Document (FDD) provides “financial performance representations” in a section called the Item 19, but only about 30 percent of franchisors provide these, and the level of data varies greatly. You will have to speak with franchisees in that organization to gather the numbers required to create your business plan
- What’s in your Item 19? The more information, the better. Remember, it is extremely difficult for a franchisor to predict net profit, since each franchisee is an independent operator and both reporting methods and the types of expenses taken will vary.
- Can I achieve my goals with your concept? Talk about both your business and personal goals. Be prepared to go in-depth with this.
- Do our values and culture align? Companies have a unique culture and you have yours—are they similar? Will you be working with like-minded people?
- Do you help with financing? Is the company on the SBA Registry? Where have their current franchisees found capital to start up and grow?
- Are you offering any financial incentives or deals? Many franchisors offer veterans, minorities, and women discounts on the franchise fee and/or reduced royalties to help the business get off the ground. Franchisors also will offer deals on targeted geographic areas in which they’re interested in expanding.
- How do you resolve disagreements or disputes? Does the brand have a history of franchisee lawsuits? Do they require mediation? Do they require a specific venue for all disputes?
- What territories are open in my area? Where do you want to open? In your neighborhood? Generally, connections to the local community are a plus in building a successful business.
- How long before I can open? Does the lag from signing the franchise agreement until you open your doors fit with your plans? Do your finances support the months it can take? What if you can’t find a suitable site? Can you get your franchise fee back?
- Do you offer a “starter kit”? Some franchisors offer a scaled-down version of their brand, allowing new operators to keep their full-time job for a time; others offer a reduced model that allows new franchisees to try on the brand for before committing to a full-blown version.
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- Who will I deal with on an everyday basis? Field support staff have seen it all before and can offer invaluable expertise to help franchisees at all levels and stages of development to succeed.
- Do you provide grand opening support? Support can include corporate personnel, advance advertising and marketing, a public relations campaign (radio, TV, print, online), on-site promotional materials, opening-day discounts and giveaways, and even some funding.
- Describe your training program. Proper training is essential to your success as a franchisee. This includes how to hire and train employees, financial management, and how to be a leader for your growing team.
- How do your royalties and marketing fees work? While most franchisors collect monthly royalties as a percentage (generally in the range of 4% to 8%) of gross revenues, some have a flat fee structure allowing their more enterprising franchisees to make more money. Many franchisors also have a collective marketing fund (an additional 1% to 3% of gross revenues) that is used to market the brand nationally and regionally.
- Is there an exit strategy? Where do you want to be in 5, 10, or 20 years? Assuming your franchised business is a success, can you pass it on to your children? Sell it to another franchisee? Will the franchisor buy it back? Does the franchisor insist on a right of first refusal? Will they provide any help in selling the business at any stage?
The discussion with the franchisor is an important step in your due diligence process and one that should not be taken lightly. The list of things to think about above only scratches the surface of everything that needs to be taken into account.