7 Tips for Franchise Validation Calls Before You Sign an Agreement

Perhaps one of the most overlooked and most important parts of the franchise discovery process is validation. It’s time-consuming, detail-oriented, un-sexy work, but it’s one of the most valuable parts in ensuring that you’ve chosen the brand that offers the best mutual fit. 

As a franchise consultant who has worked with over 1,000 franchise candidates, I’ve noticed that there is often a certain resistance some feel towards starting validation. Despite my encouragement, I still have many candidates who avoid or dislike validation calls. And I get it – it can be time-consuming, sometimes frustrating and feel intrusive. But, at the end of the day, I always emphasize that it is the most important part of any prospective candidate’s due diligence. 

So, what is validation? 

In the broad scope of the franchise discovery process, “validation” comes after you have been introduced to the brand, after you’ve been through initial screening, and have also been sent and reviewed the FDD (Franchise Disclosure Document), but before you’ve attended Discovery Day or signed a Franchise Agreement. This is the middle of the process where theoretical conversations slide into clear focus before decisions start being made.

They’re called “validation” calls for a reason. These are calls you make with franchise owners in the brand you’re considering, validating and confirming information the franchisor should have already shared with you.  

Financial scope before validation calls

It’s worth noting here that franchise brands have wide latitude for what they can disclose to franchise candidates. However, the law requires that whatever they share with one candidate must be the same information they share with every other candidate. For this reason, it can sometimes feel like the franchisor is being evasive or not answering your questions, but that is why validation with existing franchisees is so important – there are no restrictions on what or how they share information. 

This is most evident in financial disclosures, where certain information must be available. For example, in the Franchise Disclosure Document, Item 5: Initial Fees, Item 6: Recurring Fees and Item 7: Estimated Initial Investment will all be detailed, specific information available for you to see. 

However, Item 19: Financial Performance Representations, which provides information about a franchise’s historical financial performance (like average unit volumes, sales projections and profit margins), may have super detailed information, or no information at all. It is up to the franchisor whether to share this information with candidates, and what is shared can vary. Some will only show revenue (no expenses), some will show every line item for every location they’ve ever had, and some will fall somewhere in between. Most franchisors do share detailed information, but not all. And there may be valid reasons for this. 

For example, new franchises without a long track record won’t have enough data to make accurate representations. Alternatively, consider a franchisor that performs many different services under its umbrella – comparing one brand’s financials against others represents skewed data (imagine a painting brand and a flooring brand under the same parent franchisor company – it’s like comparing apples and oranges). 

So, how do you prepare for these validation calls? 

7 tips for validation calls:

1. Remember, no franchise is perfect. What you are trying to find out is what the key factors of success and challenges are for each system and how that fits with your skills, experience and capital position.

2. Take franchisor suggestions seriously. The franchisor may likely provide a short list of franchisees they suggest you call. Don’t be surprised if these are the top-performing locations in the system. This is a good thing and you should speak with franchisees that are the best representation of the brand.

3. Group calls are an opportunity. For efficiency, many brands (particularly younger brands) may hold group validation calls on a weekly basis. If they only have 20-30 franchisees, then the same people are getting bombarded with validation calls weekly. So, don’t feel the group calls are a bad thing. Know that it’s always acceptable to ask if there are individual franchisees willing to talk more separately.

4. Ask open-ended questions. Ask open-ended questions to get the franchisees to expand. For example, instead of “Are you happy with the system?” you might ask “how do you feel about where you are now compared to where you thought you would be?”

5. Understand how to fail. This is a unique one, but I encourage you to ask: “How do I fail at this business?”  That will crystallize the critical skill, financial strategy or experience you need to have as an owner to succeed in that system.

6. Discover break-even and working capital trends among franchisors. Franchises typically don’t fail because of the system, but due to a lack of working capital. Asking them how long to break even for them and how much working capital they recommend to start is a great risk reduction strategy.  

7. Determine mutual fit. The franchisor will award you a franchise if they feel you are a good fit with skills/experience/culture. Like a job interview, it can be somewhat subjective. As you talk with other franchisees, you may start to get a feel for the culture of the people in that system.  Trust your instincts.

Beyond the calls

Finally, in addition to these validation calls, it’s also important that you are performing additional due diligence based on your location and market. Perform competitive analysis and market investigations that highlight customer demographics, local trends, etc. While the franchisor may be able to provide you with reports that highlight national data and heatmaps, they aren’t going to know your exact market. Take the time to research your territory.   

I can’t stress enough the value of taking validation seriously. One way to assist with this process is to work with a consultant who can help walk you through the process and ensure that you are getting the most out of these validation exercises.