So many individuals are exploring franchising today because they are getting tired of exchanging time for dollars in a traditional career. In order to turn curiosity into cash, these possible–entrepreneurs must thoroughly investigate franchise companies and have the guidance and support necessary to do so in an educated fashion. In my experience coaching potential franchisees, the process can take as long as 3–6 months or more. During that time, the question usually comes up: What are the most important questions to ask the franchisor and the franchisees.
While franchising is regulated by the FTC and every franchise must disclose info to you through the Franchise Disclosure Document, not all systems will have all the numbers you might expect.
Here are some questions for you to get answered one way or another during the due diligence process:
1) What are the minimum financial requirements?
The number 1 reason business fail today is undercapitalization. Studying the range of financial requirements closely will help determine if the business could work and create your projections. This is an item required in the FDD and is easy to discuss with franchisor in great detail.
2) How long will it take to break even?
Probably one of the hardest questions to get clarity on — due to inconsistency in performance across the system. During the process, you have the opportunity to talk with current and previous franchise owners. Get several answers to this until you are comfortable with an average.
3) What kind of ongoing training and support can I expect?
The FDD may only show you an agenda of the Initial Franchise Training Program. It may give you more insights about available support, it may not. It’s best to ask this directly to the franchisor and even talk with the VP of Operations and/or Training. Also ask existing franchisees about their level of satisfaction with ongoing support as this is a key reason you will be paying royalties to the franchisor.
4) How much money will I make?
This is the bottom line, isn’t it? The FTC does not require franchise systems to disclose earning claims, however, franchisors can do this if they chose. Approximately 40% of all systems complete and “Item 19” Financial Disclosure. This can be a compilation of the entire system, but it does not have to be. It can be gross sales, P & L’s or any number of ways the franchisor chooses to illustrate earnings. Although not consistent in format, what is consistent is that any claims made in the FDD must be authentic. When reading the FDD, pay particular attention to how the earning claims are calculated so you know what you are reading. Here is another place your conversations with franchisees are significant. You can ask franchisees anything and everything about fiscal performance and it is wise to do so. Handling this part of your due diligence skillfully is key to getting the information you desire for a good final decision.