Q & A: Jessica Melendez on vetting franchisors
What are some important questions for a candidate to ask a franchisor?
Working as a broker, I put together a template of questions for my candidates to use when talking to franchisors. During the discovery process, most of those questions are answered, and my clients can check them off their lists. However, I insist that they get clear, in-depth answers on the following questions.
- What does your training program look like? What ongoing training do you offer?
- Do you provide a mentor? For how long?
- Do you assist in training my team?
- What is my protected territory and how is it defined?
- How many franchises have been awarded in my state? Have they all opened? If they haven’t, why not?
- What are your plans to develop my state and how will that impact my franchise?
- Can you give me a break down of all of the expenses associated with getting started?
- How much additional capital will I need after I launch my franchise?
- What goods or services do I have to purchase directly from you, the franchisor, and can I competitively shop for a better deal?
- Is there a national advertising/marketing fund that I must contribute to?
Regarding Potential Earnings
- What can I expect to earn if I join your franchise system, and does your franchise disclose this amount in your written materials?
- Do you provide a pro-forma?
- What is your average profit margin?
- What is your average sales per month?
Regarding Franchisee History
- How many franchisees have you added in the past year? How many have you lost?
- How many franchised units have failed and why?
- How have previous franchisee/franchisor disputes been settled?
What are some red flags to look out for?
- Corporate takeovers: Pay close attention to item 20 of the FDD, which will give you information on the number of franchises transferred, canceled, or terminated; as well as the number of franchises that have not been renewed by the franchisor or have been reacquired by the franchisor. Corporate takeovers or terminations are red flags - possibly indicating there are failures due to training and support or infrastructure.
- Resales: Are resales being sold at their prime for big profit? Or, are they selling to unload their business due to losses or no growth?
- Unhappy franchisees: Another red flag would be several unhappy franchisees during validation calls. If you’re making validation calls and discover several unhappy validators, talk to the franchisor and see how he responds. Are they weak owners, or is the franchisor failing them?
How should you prepare for a Discovery Day?
Going through the buying process in its entirety is the best way to prepare for Discovery Day. By the time it arrives, you should have made your validation calls, reviewed the FDD to completion, had calls with the franchisor, and reviewed all materials/webinars provided. Discovery Day should be the day you meet the executive staff and see how they operate firsthand. At this point, you want to see if the brand and culture are a fit for you.
Discovery Day is also a good time to ask final questions regarding the FDD or validations, discuss attorney review and offerings, finalize territory maps, and ask about next steps. Take care of the following before you arrive to make your trip more efficient:
- Confirm travel arrangements.
- Arrive a day early, as most Discovery Days start first thing in the morning.
- Ask about dress code - some franchisors prefer business casual.
- Ask for an agenda.
- Ask if you need to bring anything with you, such as financial information.
- Prepare a list of final questions.