It can be easy to get caught up in the hype when learning about ownership in a franchise opportunity or listening to a sales pitch from an enthusiastic seller, but in order to really get to the bottom of what is being offered it’s up to you to seek out your own avenues of information to get a clear picture of what’s going on behind the scenes.
One of your best pieces of information out there will be the Franchise Disclosure Document, which all franchisors must legally offer to potential investors. Within the FDD, you can find an itemized list detailing the franchise offer, up to three years of the franchisor’s audited financial statements, and the franchise agreement that you would have to sign with the franchisor.
Don’t be intimidated by these papers, as they are legally required to be written in plain English so that franchise buyers can understand what they are getting into. Also, show them to an experienced franchise lawyer and accountant who will be able to guide you through them, and point out any potential hazards.
With these documents you should be able to gather some background on the franchisor, including any past history of bankruptcies or litigations, as well as the franchise fee structure you will be required to follow as a franchisee, the total estimated cost of starting a franchise, and any restrictions that would be placed on you as a franchisee.
Another great source of information are other franchisees, either past or present, who can give you some details about what it’s like being part of their particular franchise structure.
To get a real feel for the business, see if you can arrange to stay the whole day with a franchisee to see how the daily operation of the business works, how the employees interact, and what kind of customer base is served in an average day.
Cover how well they felt they were prepared before going into their own business, and what kind of support they were able to enjoy as part of an established franchise. If they tell you that they ran into problems or unexpected issues arose, that may be a warning sign that the support system is weak.
Don’t be afraid to ask about the finances involved in the franchise, and what kind of expectations you should come into the franchise with. How much does it actually cost from start to finish to open a unit, when did they first turn a real profit, and what kind of financial situation are they currently working under. If an established franchisee is still only pulling in a small amount of money or still working very long hours, you will need to investigate further to see if it’s a failure in the overall franchise business plan or a result of their own mismanagement.
Finally, find out what kind of marketing programs are in effect and if they actually help to draw in new customers and boost sales. You need to know whether sales can be sluggish, or if people are crowding through the doors as soon as they are opened. What kind of power does this franchise brand actually have, and how much does the franchisor invest in maintaining its reputation and appeal?