Looking to Buy a Franchise? 5 Must-Ask Questions for the Franchisor.
You can see it now: you're successful, you're thriving, and you're living your dream. You purchased a franchise and you have a booming business and great relationship with your franchisor.
But before this can happen, you need to make sure you thoroughly interview the franchisor--after all, a standard franchise agreement lasts longer than the average American marriage! Over the 10 years that I was a franchisor, I spoke with hundreds of potential franchisees. These five questions stood out to me as being some of the best:
1. How do you approve your franchisees? What percentage of candidates are accepted?
If the franchisor doesn't have a thoughtful answer to this first question, then it's a good indication that they are willing to accept just about anyone--which isn't a good sign. You want to work with a franchisor who has a thorough vetting process for its franchisees because, after all, the franchisees are the ultimate face and sales force of the franchise. If the franchisor lets anyone represent its brand, then it might be that it values the franchise fee more than then franchise itself.
A newer franchise will naturally have a higher candidate acceptance rate than a nationally-recognized brand. That being said, if the percentage of candidates accepted is greater than 50%, then you may want to dig deeper as to the franchisor's approval process.
2. How many people do you employ? What are their roles?
Every franchisor needs to start somewhere, which might mean the franchisor has only a handful of employees (or none at all). The number of employees isn't as important as the different roles: is there someone dedicated to technology? training? franchisee support? Or is the franchisor employing outsourced personnel to handle its sales and training? If there is a large team that you will be working with, see if you can schedule a time to talk with as many of the team members as possible. This will give you a better picture of your new franchise family and all of the personalities.
3. Do you provide a way for franchisees to connect with each other?
This is a tough one. As a franchisor, I did not provide a way for the franchisees to connect with one another considering all of the avenues of social media. The franchise owners created a Facebook group and were able to communicate with each other that way. But, be on the lookout if the franchisor specifically does not encourage the franchisees to communicate with one another. It could be that the franchisor doesn't want the franchise owners to talk too much and compare notes (which could lead to grumbling or more work for the franchisor) or it could be that the franchisor prefers to be the main point of contact. Either way, knowing if the franchisor encourages communication between the different franchise owners is a good way to judge the overall health and camaraderie of the franchise entity.
4. What percentage of FDD disclosures turn into sales?
The industry standard for FDD to sale conversions is about 10%. This means, that on average, it takes the franchisor sending out 10 FDDs to get one sale. If the number is much lower, then perhaps the terms of the Franchise Agreement are too heavy-handed and the franchisor is unwilling to negotiate. If the number is much higher, it could be that the franchisor is strategically courting the buyer from one step of the process to the next.
5. How much can we negotiate on the Franchise Agreement?
This is perhaps the most important question you can ask your franchisor. Many small or mid-size franchisors are very willing to negotiate through the terms of the Franchise Agreement if that means a sale. If you don't ask, then you don't know what terms you can get in your favor. I was always surprised by how few franchisees asked for concessions in the Agreement; and those that did ask, we almost always came to an agreement.
Before signing on to be the newest franchisee of XYZ Franchise, be sure to do your homework and thoroughly interview the franchisor. If you have questions about what to ask the franchisor, or want an attorney to ask the tough questions for you, get in touch!