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Understand The Franchisor

Whether you buying a new franchise or a franchise resale you need to make sure that you fully assess each franchise business to gain a better insight into the business and the franchisor.

Below is a list of questions you could ask the franchisor or a representative.  This is not an exhaustive list, and a lot of it will be covered in the FDD. It will encourage you to think of additional questions of your own to ask, allowing you to build a better understanding of the business.

  • When was the first location opened? — only a successful business can be franchised. So before a business can even be considered for franchising it needs to have a good track record of being run as a business on its own merit. In no circumstances should the franchise have been operating the same length of time as the business.
  • How long has the business been franchising? — all franchises have to start somewhere and so there is nothing wrong in principle with buying a new franchise. You do need to be aware though that the risk will be greater as the business will not have an established track record, but the franchise cost should be less than other similar, but more established businesses. You therefore need to weigh up the pros and cons of this if considering buying a new franchise. If a franchise is fairly new it will probably have a pilot franchise and maybe one or two other franchisees. If however the business has only been running for a short period of time but has an established network, then this is not good as the network is growing too fast for the franchisor to support it. This franchisor may be looking for quick cash rather than establishing a solid business with future potential.
  • What assistance did they have when setting up the franchise? - You want to be reassured that the company was set up properly using the right expertise. E.g. did they use a franchise consultant, franchise attorney, accountant. It is imperative that the experts used are actual franchise experts with a history of working with franchises.
  • Did they run a pilot franchise? — all franchises should initially test their systems and operations by running a pilot franchise for around 9 - 12 months. Even if the franchisor has run a very successful business for a number of years, they still need to run a pilot to test that their manuals, training and infrastructure can be successfully replicated in a different location. Any issues unearthed will need to be dealt with and tested again. If the franchisor has not run a pilot then no one has tested the business as a franchise and so it could fail.
  • What is the financial history of the business? — you need to find out if the company has ever been declared bankrupt. Also look at their company history to identify how many companies they have run, if any have failed, then why and is the business profitable?
  • What is the company director’s background? — what is the past working experience of the directors i.e .what were they doing before they got into franchising? Have they got previous experience in franchising? And why did they get into franchising?
  • What is involved in the day-to-day running of the franchise? — to make a success out of a business you need to enjoy the work. There is no point getting into something just because you think it may make you money because no matter how good the franchise is, if you don’t like the type of work involved, you will not make a success out of it. Find out what is involved in the day to day running of the business. Ask for an example of a typical day/week in the life of a franchisee in order to identify if it would be something you enjoyed doing.
  • What is the total cost of the franchise? —franchisors tend to not fully disclose full financial information on advertisements. Sometimes the franchisee fee is just given but this can be misleading as it does not give a true reflection of the cost of the franchise. You need to make sure that you identify any hidden costs. Ask for a full breakdown of the cost of the franchise i.e. what would it cost you if you wanted to open their franchise tomorrow. Also find out what ongoing fees there are. You need to be comfortable with these outgoings, knowing them all upfront will help you to understand what you will be paying and why, which makes for a better relationship with the franchisor.
  • How long is the term of the franchise? — you need to identify if you can renew the franchise at the end of the franchise term.
  • What is included in the operations manual? — a good franchisor should provide you with a comprehensive operations manual that covers all aspects of running their business. It should support and reinforce the training being offered.
  • What is their recruitment process? — find out what stages you need to go through before you are granted a franchise. Also ask at what stage you would be able to get a copy of their Franchise Disclosure Document (FDD).
  • What training are you given? — what training are you given prior to opening the franchise, as well as at the launch and ongoing? Is training provided to staff? How does the company react to new products or systems, is training for these given? What ongoing support should you expect to receive? Do you have a dedicated support person/team?
  • What national marketing do they undertake? — what marketing and promotions do they undertake? How successful has past marketing been? What marketing do they have planned for the future? How is it funded i.e. is a marketing fee included in ongoing fees? Do you receive any help with local marketing?
  • How are territories assigned? — what is the size of the territory? What exclusivity are you offered?
  • What happens if you want to sell the business? — what are their terms for selling the business? Do they help you sell it?
  • Do they have an example of a franchisee in a similar demographic area to where you are looking? — it is all well and good telling you about someone who is running a very successful franchise in Florida when you are in Texas as it could be down to geographical location. Remember what may work well in one city or town may not necessarily be successful elsewhere. You want to know about someone operating in a demographic area similar to the one you may be operating in. Do they have any examples?
  • How successful is the franchise? - How many franchisees do they currently have? How successful are they? Do they have international presence? If so, where and how successful are these franchisees? Have any franchisees failed in the past 12 months? If so, why? How many franchises have they opened in the past year? How many applicants do they reject and what are the main reasons for this? What are their plans for the business for the next 5 years?
  • What are the current and future market trends for their product/service? — who are the main competitors of the business? What are their USPs? How do they compare like for like? How has the market been in the past 12 months? Are threats or equally any opportunities? Is there any new legislation coming in that could affect the business? If so, how do they plan to deal with this?
  • What is the structure of the company? - How big is their Head Office? What functions does head office cover? What support do they have there for franchisees?
  • Are they a member of the International Franchise Association? — If not, why not?

This is not a complete list; however, it is a good starting point.  Remember that you are not just buying a franchise resale, you are also joining a franchise system.  You success will be effected by the quality of the system you join.

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