Don’t Skip This Step: 10 Critical Questions to Ask Franchisees Before Signing a Franchise Agreement
When you decide to become a franchisee, thorough research is essential for making an informed purchase and increasing your chances of selecting the right franchise.
One of the most effective ways to gather valuable insights is by speaking directly with other franchisees. Questions like, "Are you making a profit?" or "How much can you pay yourself?" are critical details that franchisors won't (or can’t) provide. Fellow franchisees can offer real-world answers that are crucial for your decision-making process.
The FDD is a Disclosure Statement…and a Sales Pitch
The information provided by the franchisor is often limited and tailored to promote sales. The representatives you speak with are essentially salespeople, similar to those in any other situation - their aim is to get you to buy. While it’s helpful to get details from them, they may not be fully transparent, as their goal is to close the deal. Just as you’d seek advice from someone who used a realtor when buying a home, speaking with other franchisees can provide valuable insight into what it's really like to work with the franchisor. Without this crucial research, what seems like a profitable venture could become a challenging and unprofitable commitment. Many entrepreneurs have faced financial losses or difficult relationships simply because they didn’t thoroughly investigate before signing a long-term franchise agreement.
Interview as many franchisees as you can from a variety of geographical locations and markets. Interviewing outside of your geographical location means you are not a competitor, and the franchisee may be more likely to provide candid and valuable information.
Where to Find Other Franchisee’s Contact Information
Within the Franchise Disclosure Document (FDD) will be a list of current and former franchisees. It’s that simple.
10 Questions to Ask Franchisees to cover the basics and get the conversation started.
How Much Does Your Franchise Earn?
To fully understand a franchise's profitability, ask targeted questions about their experience. Consider factors like how long they’ve owned the franchise, its location, and the level of competition, both from the same franchisor and other businesses in the area. Also, ask if the required percentage of gross sales is reasonable and sustainable.
How Quickly Did You Recover Your Initial Investment?
You are not making a profit until you have paid off your initial investment and your income exceeds your ongoing costs. It’s crucial to know how long it took to recover the initial investment.
Were You Able to Negotiate Any of Your Franchise Agreement Terms?
Knowing what a franchisor is willing to negotiate ahead of time gives you an advantage when the time comes to discuss becoming a franchisee.
How Effective Was The Training and Support Provided By The Franchisor?
Getting the details of every aspect of a franchise's training and support is vital to the success of your business. This is especially true if you are getting started in an industry you are not incredibly familiar with.
How Effective And Impactful Is The Franchisor’s Marketing?
The Franchising Marketing Code does require that franchisors show audited financial statements that disclose their marketing money spent which can be a valuable tool. However, a franchisee can give more transparency into the franchisor’s marketing and its direct impact on sales at their particular franchise.
Are There Any Hidden Costs That Were Not Clear When Becoming A Franchisee?
By federal law, franchisors must disclose all the costs of their franchise fees upfront. However, what’s required and what’s done are sometimes two different things. Some examples of unexpected costs could include equipment updates, major store refurbishments, training events, travel costs, material sourcing costs, and legal fees.
How Many Hours Per Week Do You Work In Your Business?
Finances are important, but so is your time. You want to know the time commitment required to make your franchise successful. Additionally, some franchises allow more passive involvement than others.
[Former Franchisees]—What Caused You To Leave?
Inquiries with past franchisees may allow you to see some of the more critical aspects of a franchise that only hindsight and time away will shed light on. If the Franchisee was terminated, you can learn from these situations to avoid any actions that may lead to termination.
Would you Buy this Franchise Again?
This question gets to the heart of the franchisee’s satisfaction with the business and the franchisor. It also helps you prepare for any renewal conditions that may arise.
As A Franchisee, Is There Anything That You Wish You Did Differently?
Asking franchisees if there’s anything they would do differently can help you to avoid common pitfalls and learn from their firsthand experiences. Their insights may reveal crucial details about the workload, information they wish they had known upfront, or strategies for running a more successful franchise. By learning from their mistakes, you can better position yourself for success.
“Lessons in life will be repeated until they are learned.”
Get the Help You Need - Consult a Franchise Lawyer Before Signing
After you have thoroughly conducted your research with both the franchisor and franchisees, you are close to making a decision. Before you make a final decision, reach out to a Franchise lawyer to help you best understand all this information and anything else you may not have considered yet. An experienced franchise lawyer will be able to digest this information and inform you of the risks and benefits of entering into a particular Franchise Agreement. If you decide to move forward with buying the franchise, a franchise attorney will help you navigate the entire process and set you up for your best chance of success as a franchisee.
Nebo Law’s experienced franchise attorneys are ready to help when you need it. Reach out today to learn how we can assist you.
Related content:
Starting a franchise is an exciting journey, but having the right support is essential for success. There are other professional services to help franchisees, including insurance specialists, lenders, franchise search consultants, and business mentors. Each provides crucial guidance, from managing risks and securing financing to choosing the best franchise and addressing skill gaps. Building a strong support team enables you to navigate the complexities of franchising with confidence and establish a solid foundation for long-term success.