franchise due diligence: using an attorney for franchisee interviews
So you’ve found a franchise opportunity that looks to be a great fit and now you’re ready to interview the current and former franchise owners.
Most franchisors will give the green light for interviewing after you’ve gone through a fairly extensive vetting process: application, financial credibility, preliminary territory consideration, your own interview, receipt of the FDD, and perhaps even a deposit. Franchisors have an interest in keeping those who haven’t completed these steps, or “tire-kickers,” from contacting their franchise owners for a number of reasons, including:
1. Too many tire-kickers and not enough serious applicants leave a poor impression on the franchisees. If franchise owners receive 10 times more calls from people who don’t eventually purchase the franchise than those who do, they might begin to wonder why those people didn’t buy in and their confidence in the system might begin to decline.
2. Franchisees are busy running their businesses and don’t necessarily have the time or desire to talk with prospectives. Sure, they understand that it’s part of the process, but frankly, it’s not their job to be part of the franchisor’s sales force. Both the franchisor and franchisee want the business to do its primary purpose: make money!
3. Without a proper vetting process by the franchisor, it’s entirely possible that the prospective is a competitor or other deviant trying to gather inside information. If franchisees receive the green light from the franchisor that a prospective has been cleared, it lets the franchisees know they can be confident in sharing information that would otherwise by off-limits to a competitor.
4. The interview process can usually make or break a sale for a franchisor, so keeping track of what goes on is in the franchisor’s best interest. If the franchisor recently suffered for a technology breakdown, for example, the morale of the franchise owners might be at a low point. Even though the franchisees might generally be pleased with the system, the recent tech problems might cause them to share a more negative experience than normal. Franchisors want to time the interviews on an upswing, if possible.
All this being said, there is perhaps nothing more important in the due diligence process than interviewing current and former franchisees, but how is it done effectively? I would argue an independent interviewer will make the most of this important step and ultimately get you better, and more thorough, answers. Here are three reasons why it might be helpful to work with an attorney to help you in the due diligence process:
Emotions Can Get in the Way
As a former franchisor, I saw many franchisees jump in head first without doing proper due diligence. As flattering as it was to see them bursting and ready to open our franchise, I knew that they must make sure our opportunity was right for them. If the franchise isn’t a good fit for either party, then eventually the relationship will deteriorate, which is good for no one. It’s hard to remain completely neutral when interviewing just because emotions and excitement can often distort the bigger picture.
Unhappy Doesn’t Necessarily Mean unhappy
Perhaps one franchisee that you interview has nothing nice to say about the franchise. She doesn’t like the franchisor (too bossy), doesn’t make enough money (still hasn’t broken even), and the job isn’t as fun as she thought it would be (employees, what a pain!). But is her experience truly indicative of what it’s like to be a franchisee? With some further digging, she might admit that the franchisor really does do a good job of keeping uniformity in the system (hence the bossiness), her revenues are strong considering she’s only working part time (so maybe it will take twice as long to break even), and she’s never managed employees before (maybe a skill to work on).
Blame the Attorney for the Awkwardness
An interview should ask difficult questions (you’re the first one to mention slow sales, what do you think you’re doing differently than the other franchise owners?) and asking those tough questions yourself can make for an unfavorable first impression. Attorneys tend to have a reputation for being intimidating, so why not let an attorney ask those tough questions?
Purchasing a franchise is substantial commitment—many times for 10 years or more. As a former franchisor, I can attest that there are intricacies in the operation of a franchise that often go undetected by the purchaser during a typical interview process. If you're looking on advice on how to interview current franchise owners, please reach out. We're happy to help.