After you've received all the documents from the franchisor, you'll enter a preliminary negotiation stage before you sign. This is the most critical period in your dealings with the franchisor. At this point in time, you'll meet a representative of the franchisor and conduct interviews with as many franchisees as possible in order to evaluate the franchise package. This provides an opportunity for both you and the franchisor to form first impressions and determine whether negotiations will proceed any further.
The representative of the franchisor may be one of three people: the franchise owner/company president, an in-house salesperson or a franchise broker. No matter which one of these people you meet, he or she will want to know more specific information about you.
The franchisor is going to want to know more about your financial status, experience and general background. If the franchisor doesn't ask these questions or show any interest in your previous background, that should be a danger signal to you. When they do ask you questions regarding these topics, however, don't feel they are prying into your personal life. They aren't. They're just protecting their interests.
Prepare questions of your own about the company. You might even want to have your attorney present or have an attorney highlight areas of the franchise agreement and FDD that should be questioned. Don't leave until you've been supplied with all the information that you need. This could take anywhere from a few hours to a whole day. Your primary goal should be to satisfy all your doubts so that you feel comfortable with the data supplied by the franchisor.
What to Ask the Franchisor
During your interview, you really want to concentrate on some key areas that will help you determine the strength of the franchise:
- Ask what the pretax net profits of existing operations are and compare them against the earnings statement or pro forma that the franchisor has already supplied you.
- Find out what is included in the training program, field assistance, store design, facility construction, site selection, and feasibility studies.
- Will there be any additional working capital required after the initial fee and investment, and if so, how much?
- How will the franchisor arrange for the supply of product to the business? Ask to see a current price sheet.
- Ask the franchisor to detail exactly what the territorial restrictions and protections are.
- Find out how many franchises have been sold to investors in the state you will be operating in during the last 12 months, and how many have opened a franchised business in that time.
- Ask if the company has any plans for further expansion in the state. Has it identified any locations it plans to develop?
- If purchasing a current franchise, ask to see the operating books and records of the business for the past two years.
- What type of support will the franchisor provide once your franchise has opened its doors?
- Find out if any franchisees have been terminated. If some have, have the franchisor detail the reasons. Have any franchisees failed or gone bankrupt?
- What kind of financing is available from the franchisor, if any?
- Find out if there are any current lawsuits pending against the franchisor. Have them elaborate on any past judgments.
- Find out how disputes between the franchisor and franchisees are settled.
- Will the franchisor assist in site selection? It will be of enormous help if it does.Whether it does or not, do your own demographic study so you are familiar with the profile of the audience within the market area.
Don't be afraid to ask questions. And don't be afraid that you'll appear foolish because, frankly, very few people understand the franchise agreement or the FDD in full. Primarily, you're trying to pinpoint any problems that may exist in a franchise. Don't just settle on any franchise.
If you run across a franchisor that is reluctant to pass along a list of current franchisees, makes promises that you'll earn a fortune on a limited investment, insists on deposits for holding a franchise unit, tries to convince you to sign before someone else does, or is full of empty rhetoric when answering your questions, head for the door. These are franchisors that are probably trying to pull a fast one to get your money.
Questions to Ask Current Franchisees
You owe it to yourself to talk to as many current franchise owners as you can. Just get in the car and head out to see them. You'll find names, telephone numbers and addresses right in the FDD (Item 20).
Franchisees' view of the franchisor and the value of the franchise system will be enlightening. Make sure you interview a large sampling of franchisees. Some will have good experiences to report; others may preach doom and gloom. Remember, no one can predict how you will fare or whether you'll enjoy the business, but you need to know the mood of the existing owners before you join their club.
Make sure you visit franchisees at a good time of day. If you show up at a fast-food restaurant at noon, don't expect to get anyone's full attention. By all means, arrive at noon, watch the operation during the lunch hour, and arrange to see the owner later that afternoon, when things quiet down.
Use the visit to follow up on the information you read in the FDD. As lengthy as that document is, it still doesn't tell the whole story. You have to piece that together for yourself. Bring a list of questions when you visit franchise owners. Some questions you may want to ask include:
- Was the training the franchisor offered helpful in getting the business off the ground?
- Is the franchisor responsive to your needs?
- Tell me about a typical day for you.
- Have there been problems you didn't anticipate?
- Has your experience proved that the investment and cost information in the FDD was realistic?
- Have you incurred any hidden expenses?
- Are the advertising fees reflected in the marketing support (for example, local advertising or in-store signage) that you receive?
- What are your sales patterns like? Are they seasonal? If so, what do you do to make ends meet in the off-season?
- Have your sales and profits met your expectations? Tell me about the numbers in the business.
- Are there expansion opportunities for additional franchise ownership in this system?
- Knowing what you know now, would you make this investment again?
Since running a franchise involves an ongoing relationship with the franchisor, be sure to get details on the purchasing process-everything that happened from the day the franchisee signed the agreement to the end of the first year in business. Did the parent company follow through on its promises?
Don't hesitate to ask about sensitive topics. One of the most important questions a prospective franchisee should ask, but rarely does, is "What conflicts do you have with the franchisor?" Even established, successful companies have conflicts. What you need to find out is how widespread and common those conflicts are.
Get a Feel for the Franchise
Talking to franchisees can also give you something you won't get anywhere else: a feeling for what it's like to run this business day to day. Thinking solely in economic terms is a mistake if you end up with a franchise that doesn't suit your lifestyle or self-image. When you envision running a restaurant franchise, for instance, you may be thinking of all the money you're going to make. Talking to franchisees can bring you back to reality--which is a lot more likely to involve manning a fry station, disciplining teenage employees and working late hours than cruising around in your Ferrari.
Many franchisees and franchising experts say there's no better way to cap off your research than by spending time in a franchise location to see what your life will be like if you buy. Buyers should spend at least one week working in a unit. This is the best way for the franchisor and franchisee to evaluate each other. Offer to work for free. If the franchisor doesn't want you to, you should be skeptical about the investment.
When all your research is completed, the choice between two equally sound franchises often comes down to your gut instinct. That's why talking to franchisees and visiting locations is so important in the selection process.
Source: The Small Business Encyclopedia, Start Your Own Business, Entrepreneur magazine and Entrepreneur's StartUps magazine.
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