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Franchise Candidates Need to Ask the Right Questions

by Ed Teixeira

When franchise candidates evaluate a franchise system they need to ask the right questions and get the right answers.

Candidates that perform due diligence on a franchise opportunity have to review and evaluate a number of areas. The result means obtaining a great deal of information from various sources. However, it's important that the candidate gets the right information and that means knowing which questions to ask. It also means knowing when to keep digging for the right answers. There are some questions that are more important than others.

The following 10 questions represent a guide to obtaining the right information:

1. Ask existing franchisees how long it took them to reach break-even and has the franchise met their financial expectations? This is so important; it may mean contacting enough franchisees in order to get the information you need.

2. From Item 19, the franchisor and franchisees gain as much information as possible pertaining to operating expenses, sales, gross margin, and product and supply costs. Note: If the franchisor doesn't do an Item 19 disclosure, you should seriously consider walking away, unless it's a start-up franchise.

3. Ask existing franchisees how their actual franchise investment compared to Item 7 in the FDD. If not, find out which areas were off. An item like rent or building improvements can represent a substantial amount of money, if it's not accurate in relation to the FDD.

4. Ask franchisees, how many hours they work in the franchise? Are family members involved? Has the amount of time that they have devoted to the franchise been what they expected or was it more or less?

5. Question the franchisor regarding how and why they configure the territories, the way they do. Be sure to dig into this area. Do they feel a franchisee's territory is large enough to allow for current and future growth?

6. Determine, if the franchisor has group purchasing programs. A franchisor may cite group purchasing as a franchising feature, but may fail to implement a program. This is one of the major benefits of a franchise.

7. Be sure to review Item 20 in the FDD to determine how many franchisees were added to the system in the past years and subtract the number of franchisees that were terminated and left the system for other reasons. If the result is a negative number or slightly positive, this could be a red flag. If the number is not positive, ask the franchisor why.

8. Ask for some suggested pricing data to compare what your future competitors are currently charging. Do you feel confident that the demand and prices for the products or services you'll be selling will be competitive in your proposed territory?

9. How does the franchisor configure the franchisee territory? Are the franchisees you speak with satisfied with the way their territory was defined? Has the franchisor had any encroachment issues with its franchisees or among franchisees? If yes, how were they resolved?

10. Does your franchise agreement allow the franchisor to sell to customers in your territory, either directly or via the Internet?

As a franchise candidate there is a good amount of information that needs to be acquired before a final decision is made. These 10 questions combined with the right answers, will go a long way toward leading you in the right direction. Finally, as always be sure to have professionals to aid you in your analysis and decision making.

2015 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow.com and Chief Operating Officer, FranchiseGrade.com. He is a former franchise executive and franchisee. He can be contacted at 631-246-5782 or at  franchiseknowhow@gmail.com

 

 

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