Here’s what you should consider and expect during the franchise discovery process
Before investing in a franchise, getting to know the franchisor and asking the right questions is a must. The franchisee-franchisor relationship is unique and each brand has its own process in educating you, the candidate, about their concept. Here, we give you a general idea of what to expect during the franchise discovery process plus essential questions to ask a franchisor.
As you go through this process, you will evaluate the franchise to see if it is a good “fit” for you based upon your criteria. At the same time, the franchise development representative (rep) is evaluating if you will be a “fit” for the franchise. The franchisor wants to know if you will produce the revenue expected from your territory, if you will follow their system, and if you fit into the franchise culture. One of the ways franchisors determine a candidate’s willingness to follow their system is by observing them through the franchise development process. The rep will take note of your actions and compliance during the process (completing forms, watching videos, visiting websites, keeping appointments, preparing for calls, etc.).
The franchisee-franchisor relationship
A good franchisee-franchisor relationship is key to the success for both parties. Franchises do not typically “sell” franchises. If they did, their only concern would be financial. When a franchise is “awarded,” it means the person fits the franchise model, culture, has the business acumen, and other factors that are important to the brand. When interacting with the rep and any other franchise personnel, remember they are looking for someone who will be successful. They have a financial interest in your success. The more you make as a franchisee, the more the franchise makes through the royalties. If you find a franchise you like and the franchisor decides to “award” you the franchise, you are going to have a relationship with that franchisor for the length of the agreement, usually 10 years. That means that at some point in the evaluation process you should have developed some sense of trust with the franchise. If not, 10 years could prove to be a very long time.
The franchise discovery process
The franchise discovery process starts with an introduction to the franchisor. The first call will be around 30-60 minutes. You will likely be given some “homework” to do before the call that will start the process of education (remember to follow the process). During this call, the rep will educate you further on the concept. Be sure to take notes. You may or may not have the opportunity to ask questions on the first call but have your questions ready either way. The next step is a second call and some more homework. You can expect additional calls every 3 – 7 days. During the calls, the rep will ask questions about you as well. The rep wants to learn about your experience, motivation, work ethic, people skills, etc., to determine if you are a good fit. It is a two-way educational process.
The Franchise Disclosure Document
The rep will send you their Franchise Disclosure Document (FDD) early on. This document is required by the Federal Trade Commission (FTC). It has 23 items. Item 23 is the receipt which you will be asked to sign, date, and return. You are not committing to anything by signing Item 23. It merely shows that you have received the FDD. The franchisor is required to have this receipt by the FTC.
After reviewing the FDD and going through the validation process, the next step is a Discovery Day (D’day). It may take place in person at the franchisor’s offices or through video conferencing. This is an opportunity for you and the corporate team to meet. You will very likely see the operation of an actual franchise, be able to ask questions, etc.
Questions to ask a franchisor
When it comes time to get face-to-face with the franchisor, be ready with questions. Here are 25 essential questions to ask a franchisor, but you will likely have a set of your own that are specific to the brand.
- What should I know about joining your franchise system?
- What are the strengths of your franchise?
- Where do you see this franchise system in 5 years and what steps are being taken to reach that goal?
- What competition is there in this field?
- How are you viewed in the consumer marketplace?
- Can you give me a breakdown of all of the expenses associated with getting started?
Startup: Operations: Marketing:
- Please explain the contractual responsibilities of joining your franchise system. (i.e. length of the agreement, renewals, etc.)
- What can I expect to earn if I join your franchise system and does your franchise disclose this amount in your written materials?
- What does your training program look like and what ongoing training do you offer?
- How much additional capital will I need after I launch my franchise?
- What goods or services do I have to purchase directly from you and can I competitively shop for a better deal?
- Is there an advertising fund that I must contribute to? What rights do the franchisees have regarding auditing that fund?
- What is my protected territory and how is it defined?
- How many franchises have been awarded in my state and have they all opened? If they haven’t opened, why not?
- What are your plans to develop my state and how will that impact my franchise?
- How many franchised units have failed and why?
- Do you have sources to assist with financing, real estate, and construction?
- Have you been sued or are being sued and why?
- How have previous franchisee-franchisor disputes been settled?
- How have most franchisees found their franchise locations? Did they use the franchisor’s resources?
- What will you do to ensure that I am properly set up to run my own business?
- What happens when I want to retire or sell my business?
- What is the biggest complaint from your franchisees?
- Do I need permission if I want to market my business through any trade groups?
- If I sell my business and leave the franchise system, what am I forbidden to do?
If all goes well and you like the answers, it’s time to sign the franchise agreement. But before you make your final decision to invest, talk to a franchise attorney and have the attorney review the FDD and franchise agreement. It is money well spent. It’s also a good idea to hire a CPA to review the financials and any financial projections.
Of course, the most important step of all is that first one. As Martin Luther King, Jr. once said, “You don’t have to see the whole staircase, just take the first step.”