Q:
Your advice regarding the wisdom of investigating the average
return per unit over a three-year period seems solid (see
"Franchise
Investment vs. Return"). However, I have a question: How
does one obtain these figures? Is it your opinion that most
franchise operators will disclose this information? Can you
recommend any other methods?
A:
This is a great question that a number of people wanted more
information about. If you're dealing with a franchisor that
doesn't provide an earnings claim in the UFOC (which sounds
like the case with you), then you're going to have to do a bit
more digging. Knowing the best techniques for this research will
make the process much more effective for you.
The best sources of information about actual financial results
of operating units in a franchise system are the existing
franchisees. You'll want to use these sources to confirm the
accuracy and clarify the scope of information in a franchise, even
if an earnings claim is published in the UFOC. The bottom line is,
you can get this information from existing franchisees in most
cases, but you've got to be smart about how you ask.
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If the first question out of your mouth is, "How much money
do you make?" you can expect an answer that is some variation
of "none of your business." This is highly personal
information, and they don't know you from a can of paint. For
all they know, you could be a competitor.
Always start by asking questions about other subjects that you
want to know about and spend some time building a rapport with the
existing franchisee. Examples of these types of questions would
include:
- Training programs: How well does the franchisor set up
and train a new franchisee to have initial and ongoing success in
operations?
- Opening support: How easy did the franchisor make the
process of getting a new business ready to open?
- Marketing programs: How effective were the
franchisor's marketing programs in terms of creating initial
and ongoing customer demand for the new business?
- Purchasing power: How well does the franchisor take
advantage of the buying power of the chain to save franchisees
money in relation to ongoing supply purchases for the
business?
- Relationships: How well do the franchisees and the
franchisor get along?
- Total typical investment: What did it actually cost to
get a unit up and going through to the point where it began to
break even in terms of current operations? How did that number
compare to the estimates in the UFOC?
Once these areas are covered, you will have built a relationship
with the franchisee, and that will make it much easier when you
approach questions about income. The secret here is to work into it
somewhat gradually.
Start by asking franchisees for information about system-wide
averages. For instance, what is their understanding concerning
typical gross sales and the various categories and amounts of the
expense items? Then work into a discussion about net results in
relation to profit and, even more importantly, cash flow. Remember,
you're asking about system-wide numbers.
Finally, ask how these numbers compare to their specific
operation. Again, first sales, then expenses, then nets. You will
find that, most of the time, they've actually given you their
own numbers when you asked about system-wide results and
they'll confirm this by stating that their numbers are just
like the system-wide numbers that they already discussed with you.
In any case, they'll usually give you at least a percentage
variance factor that will let you easily extrapolate their numbers
from the information you've already been discussing.
I think you'll find that this approach works most of the
time. After making a number of calls in this manner, you should
have a pretty clear idea of what's happening in relation to
actual operating results in that franchise.
Jeff Elgin has almost 20 years of experience in franchising,
both as a franchisee and senior franchise company executive. He is
currently the CEO of FranChoice
Inc., a company that provides free consulting to consumers
looking for a franchise that best matches their needs. He can be
reached at jelgin@FranChoice.com.
The opinions expressed in this column are those
of the author, not of Entrepreneur.com. All answers are intended to
be general in nature, without regard to specific geographical areas
or circumstances, and should only be relied upon after consulting
an appropriate expert, such as an attorney or
accountant.