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When San Francisco software salesman Andrew Lee decided to go into business for himself, he started digging. Interested in a personnel franchise, he called close to 40 franchisees at eight different concepts before choosing Express Personnel in November 2005.
The franchisees were a fountain of information, Lee says. Through them, he learned that a professional recruiting agency might be more difficult to resell than a temporary-employment firm.
By calling competing temp agencies in his city, he learned there was plenty of work to go around. He also heard complaints about unfair competition from chains with company-owned units.
"I tried to call until I found an unhappy franchisee at each company," says Lee, 41. "I couldn't find one at Express."
Unfortunately, franchise experts say stories like Lee's are rare. Too few prospective franchisees conduct even basic due diligence, much less beat the bushes like Lee did.
If you want to know more than the splashy brochures and franchise salespeople will tell you, then roll up your sleeves. You can use a variety of methods to dig deeper and get the real lowdown on a franchisor. The good news: Most of these techniques are cheap or free.
1. Mine franchisees. It seems like an obvious place to start, but few franchise prospects talk to franchisees, even though they're given names in the Uniform Franchise Offering Circular, says Michael Katz, president and CEO of Franchisee Consulting Group in Aurora, Colorado.
"It's a vital [step] that shockingly few people do," says Katz, who is also a franchise lawyer. "They're afraid to ask people questions. Or maybe they talked to one guy down the block."
When you do contact franchisees, choose carefully. Call some franchisees who weren't on the franchisor's recommended list, and if possible, get in touch with some former franchisees. You'll also want to call franchisees who operate in a market and format similar to yours.
When Laura Tanner, 50, was looking into opening a Tutoring Club franchise in Petaluma, California, she called many Bay Area franchisees because she knew they would also have high real estate costs and higher costs of living. Though few shared their financials with her, Tanner was encouraged to learn many were opening additional units.
One of the biggest problems prospects have when contacting franchisees is that they tend to shoot the breeze rather than firing off tough questions, says Mark Siebert, CEO of The iFranchise Group in Homewood, Illinois. Prospects should be extracting nitty-gritty details on revenue, customer counts, ramp-up times, franchisor support, and line-item costs such as labor, rent and supplies. With this data, you can create your own P&L projection.
Franchise attorney Bret Lowell of DLA Piper highly recommends visiting franchisees at their stores, a step many prospects skip. "You can get more information in person," he says. "And it's an opportunity to see the franchise in operation."
2. Dig in to the UFOC. The UFOC furnishes tons of franchisor details, but most prospective franchisees barely give this federally required disclosure document a glance. You should use the UFOC as a starting point for further investigation.
For instance, if the UFOC lists lawsuits against the company, a franchise attorney can usually obtain the actual lawsuit filings. Be aware that the UFOC's summaries of the suits were written by the franchisor, not an unbiased third party. Read the actual court documents to get a better sense of exactly who's suing and what they allege.
Be sure to ask management probing questions about any revenue or earnings figures found in the UFOC. The FTC's guide to evaluating franchise offers notes that such figures may be averages, which aren't necessarily representative of a typical store, or may have been calculated on a small store base rather than across the entire chain.
One thing few prospective franchisees do is obtain the UFOCs of several competitors in their category of interest. Comparing these side by side can reveal crucial differences in cost, royalty rates, marketing or corporate support.