Must ask questions for your future franchisor
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I’m Brody Sweeney, the founder of Camile Thai Kitchen, an award-winning home delivery franchise. It’s my third and most fun franchise business, and after 40 years in the franchise industry, I guess you could say I’ve seen a lot – good and bad – about this industry. This blog is not about my business, but rather some advice for if you’re thinking about franchising, or indeed already involved in it – and want to learn more.
Questions to Ask Your Potential Franchisor
Asking the right questions is important to laying the foundation of your future franchise partnership. I’ve set out some important points that will help you form an opinion of your new franchisor before making a financial or legal commitment to them.
As a general point, franchisors should welcome these questions, because they demonstrate you are doing your due diligence. The better quality questions being asked of me, the more excited I get about taking a franchisee on. It shows their seriousness about the venture, which bodes well for both of us.
1. Can you show me the actual operating performance for a unit?
It’s an unstated principle that good Franchisors shouldn’t really make earnings claims for their business, as nobody really knows how a new business will perform in the early days. But you need to know how the financial side of the business works, and so a historic profit and loss statement, for one or more branches, will give you a good idea, how sales translate into profits.
Your franchisor will probably give you figures for their top-performing units (they are after all trying to sell you a franchise), and there’s nothing wrong with that, except to understand that these are probably not average performances.
In any franchise system, there will be poorly performing branches, that may even lose money. There are a wide variety of reasons why that may be – in my experience so much has to do with the manager or franchisees operation of the business – that do not call into question the viability of the system.
A franchisor may also have some form of disclosure document, which outlines a lot more detail about the franchise, including who owns it, and how they make their money. You should ask for it, and expect a yes.
2. Can I speak to existing franchisees?
Speaking to existing franchisees is a great way of finding out about the franchise. Ideally, your franchise company will give you a list of all their franchisees, and invite you to pick 2 or 3 to actually meet.
Firstly, you get to see the type of people that the franchisor has recruited. Do you identify with them? Do they seem like good business people? Can you imagine them as colleagues and peers for the next ten years?
Secondly, how does the franchisee speak about their franchisor? A healthy tension in a franchise is a good thing, but that’s not the same as a franchisee bad-mouthing (maybe with some justification) the support office. You can tell a lot about the state of relations in the franchise, by talking to two or three franchisees.
And finally, you can ask them about how they’re doing financially. They don’t have to be making a fortune (their own business may have only recently opened for example), but they should feel they are on a pathway to profitability, and be able to verify for you, that their key costs are in line with what the franchisor says they are.
3. Are you members of the IFA / BFA, or your region’s franchise association?
Any franchisor worth their salt, will be a member of their local franchise trade association, and if they’re not, you should be asking why.
Franchise trade associations conduct some basic checks on your franchise before admitting them to membership, and while this is not a substitute for separate and specialist independent legal and financial advice for you, it does indicate that your franchise has at least passed some basic tests that indicate that it is a bona-fide business.
You should be conscious though that the trade associations tend to conduct tests before admitting franchise companies to membership, but almost no tests after that. So while the company may have passed a test 20 years ago, there’s no guarantee that standards are still being maintained.
4. Can you introduce me to contacts in the banks?
Most high street banks have specialist franchise teams, who act as a liaison between franchise companies, and the banks local branch management teams. Banks love lending to franchisees as it’s way less risky for them to spread their risk over many franchisees (who are unlikely to go bust all at the same time) as opposed to a company owned chain, where if the company fails, all is lost.
Your franchisor should have a relationship with all the franchise managers in the high street banks, and be able to introduce you to them, before you make an application to your local branch. If they can’t do an introduction, that should be a red flag for you. Why do they not have a relationship with the banks?
5. What are you doing to future proof this business?
While none of us can forecast the future, some trends are obvious, and to the extent they might affect the performance of your chosen business, you want to think that they are on your franchisors radar, and that he or she is thinking about how to deal with them.
For example the coronavirus crisis it seems will lead to many more people working from home than before. Peoples are still increasing their use of screens for phone, email, video calls – all of which can impact business in all sorts of ways. Can your franchisor demonstrate that they’re on it?
6. What are the biggest challenges I will face as a franchisee?
Any franchise you get involved with will have challenges, some of which are common to nearly all business start-ups. If your franchisor cannot articulate what they are, or indeed down-play them, then they may not be being realistic with you. Some common challenges with starting a franchise or any new business might include learning to manage the business, prioritizing, hiring, training and motivating your team – and building sales in a very competitive environment.
7. Have any of your franchisees failed?
Surprisingly maybe, you should expect your franchisor to have had some franchises that did not work out. No franchise company is perfect, and every established franchise will have some closed branches, or franchisees that did not work out, and that shouldn’t be a major concern for you.
What is important is first, that your franchisor acknowledges problems (it’s not realistic to expect that there would be none), and secondly to understand why some of the franchisees’ businesses failed.
So was it because a franchisee turned out to be unsuitable, or the demographics of an area changed? Or was it some other reason, that will help you avoid that situation yourself?
8. How will you support me pre-opening and post-opening?
One of the areas where franchise relationships can break down, is where expectations are not managed, and assumptions are made.
Before embarking on your new venture, you should be crystal clear about who does what in terms of getting the new business off the ground. In our case for both pre and post-opening, we list the franchisors responsibilities and the franchisees separately.
For example, it is the franchisor’s duty to help with the recruitment and training of new staff, but the franchisee’s responsibility to actually legally hire, train and fire them as necessary.
Take the trouble before signing off with your franchisor, to remove any and all “assumptions” about who will do what, and get a name responsible for each task.
9. How and when will I be trained?
Many recruits into a new franchise system will have no specific industry experience, as well as probably little experience of running their own business. The training of these people is therefore vitally important, if we want to reduce the risk of something going wrong.
Most franchise companies run effectively a Start-Your-Own-Business course, focussing on their particular business.
The more thorough the training and preparation before the new business opens, the more chance that it will get established quickly and profitably.
Find out where your franchisor is on training, and how and when you will be trained.
10. Can I meet other members of your management team, and particularly those with whom I will have day to day contact?
The person in the franchisor company who sells you the franchise, is unlikely to be the person who looks after you on a day to day basis. So while you might get on like a house on fire with the franchise salesperson (who by the way tends to be warm and engaging – otherwise they don’t sell franchises), the person you actually deal with from the operations team may be very different.
It pays to get to know the franchisor team before committing, to make sure the person looking after you, is someone you can relate to – as well as you judging the calibre of people running the business. If you are not impressed with the people you meet, why would you want to spend the next 10 years or so of your life with them?
You have an opportunity before commitments are made and money changes hands, to ask hard questions and get satisfactory answers. It has never ceased to surprise me over the years, how many franchisees become blinded by the perceived success of the franchise, and don’t ask hard questions, before parting with significant amounts of cash and a major portion of their life. Don’t be like that.
Brody
