Ten questions to ask a potential franchisor
Careful due diligence is an absolute must before becoming a franchisee – after all, you will be in business together if you decide to become part of the system. Here are our top ten questions to ask a potential franchisor to ensure you know what you are buying into.
1. Are your franchises demonstrating long-term growth in sales and profits?
“If you can't satisfy yourself that the answer is yes then you are taking a big punt on the long-term sustainability of the business,” says Giro Maurici CFO and founder of Spanish ‘chocolateria’ chain San Churro.
2. What’s the scope of the territory and is the agreement is exclusive?
“It's vital to understand the provisions of the agreement – including how restrictive the restraint clause is, should the new franchisee have to leave for issues outside their control. Understand your monetary obligations – is there a minimum fee? And, how are royalties charged?” says Darren Wallis, CEO of international franchisor GJ Gardner Homes.
3. What’s in the start-up pack and what marketing support will I receive?
“This will give potential franchisees an understanding of how well supported they will be in the beginning stages of setting up their business. Good franchisors will provide their new franchisees with the tools to create a successful and profitable business,” Wallis adds.
4. How often will you visit me?
Another question that is often forgotten, says Wallis, is how often the franchisor visits his or her franchisees. “Good franchisors will keep their ear to the ground and make an exerted effort to visit franchisees regularly. They should want to talk to their franchisees about challenges as well as triumphs and the issues of each individual franchise,” he explains.
5. Will you listen to feedback?
Willis suggests asking about how ideas are fostered from within the network, how IT systems and other processes offer a competitive advantage and whether franchisees are able to provide input into marketing plans. “This will provide you with an insight into the culture of the organisation and how much the franchisor invests in the success of the business,” he says.
6. Who are the most profitable franchisees and what is their business model?
"Remember profit is the key to the business, not turnover and how a franchisee structures their business in some franchises can dramatically alter the potential profitability of the business,” says Kate Osborne, whose business Leisure Seekers consults to franchises.
7. What are your expectations from this partnership and what is the outcome you hope to achieve?
“Many franchisees enter into the franchise agreement and are unaware of what the franchisor expects from them. By gaining an idea of the goals the franchisor wants you to achieve you can aim to achieve these goals or use them as a measure of your performance,” advises Raffael Fernandes, sales manager at FranchiseBusiness.com.au.
8. What does the business cost and how much money will I make?
Getting the answer to this question is the only way you can assess if you can afford it and live on the income. “The disclosure document will provide details of costs, certain expenses and sometimes information about sales. If you’re buying an existing business, hopefully you’ll get information from the vendor. You must also do your own research, and don’t forget to take account of your own wages and loan payments,” says Kate Groom, from Smart Franchise, which provides financial education to franchisees.
9. How do I end the agreement?
“Know how you are going to get out. Like a Hollywood wedding, the exit clause is one of the most important parts of the agreement because when the romance is gone, all you have is the paperwork. Make sure you read the franchise documents yourself and ask professionals about the things you don’t understand – don’t simply rely on lawyers to do everything for you because you’re the one making the agreement – not the lawyer,” says Dennis Price from business transition specialists Ganador.
10. Can I talk to other franchisees?
“Talk to existing franchisees and ask how satisfied they are with their business, how much assistance and training is provided by the franchisor and whether the return on investment has met their expectations. Talk to many franchisees from within the one system to ensure you’re hearing a consistent message,” says bed franchise Bedshed’s chief operating officer, Gavin Culmsee.
Although this list is not exhaustive – getting the responses to these questions will certainly give you a better understanding of the business into which you are potentially buying and the risks and opportunities that come with it.