Talking with Franchisees -- How to make the most of your due diligence calls to a franchisor's current franchisees
When researching a franchise opportunity, one of the most important things you will do is to talk to current franchisees in the system. No one knows the business like those out in the field, and, providing you build the proper rapport, they are likely to give you candid answers to your questions, which will, in turn, help you decide if this opportunity is right for you.
You will want to speak with many franchisees, preferably some of whom are very successful and some who are struggling. By reviewing the responses and comparing your own management style to those currently operating stores, you will have a better idea of where you might end up if you purchase this franchise.
One thing to keep in mind is that there will be a number of people at any given time who will be researching franchise opportunities, and a franchisor's more successful franchisees, in particular, have to field a number of these calls. Therefore, having a precise itinerary of subjects to discuss will help you organize your call and the busy franchisee by keeping your call on subject.
You will find that the following list covers the most critical areas you will want to cover during your calls with the existing franchisees:
Franchisor/Franchisee Relations. How do the franchisees feel about their relationship with the franchise company? Are they getting the support they want and need? Do they think the franchisor cares about their success and is willing to help them as needed? A good franchise company will work continuously to keep their current franchisees happy and open communication is paramount. If the majority of franchisees feel good about the franchisor, it is a sign that the company is supportive, caring, and focused on the success of their franchisees.
Training. Ideally, the training a new franchisee receives should prepare them to open and run the business. If you hear from the franchisees that they were unprepared for some of these issues, you could assume the training program needs more work. Be sure you understand the critical elements necessary for success and how the franchisor will help provide these elements before you become involved.
General Support. You should expect to get a glowing report on the overall support provided by a franchisor from the franchisees who have been in business for a while. This support should include helping the franchisees resolve any problems that arise and providing ongoing training as needed. A franchisor should also be responsive to changes in the marketplace, so you will want to gauge franchisees' comments about how innovations/changes to the system are integrated.
Opening Support. A franchise company can truly shine when it provides superior support to the new franchisee during the opening of the business. Ask the existing franchisees if they received assistance in site selection, lease negotiations, build-out, permit processes, or any other areas unique to the business's opening.
Marketing Programs. You won't make a profit if you don't have customers, and for that reason, most franchisors collect marketing dollars from each of their franchisees and spend the combined amount on promoting brand awareness on a large scale. Being part of a well-known brand is a significant advantage of a franchise system and usually worth the money spent. Find out how the existing franchisees feel about the way their money is spent but beware – this is the one area you are most likely to find complaints as every franchisee considers himself a marketing expert. Balancing all feedback is essential in this area.
Initial Investment. Before calling any franchisee, you should have read the franchisor's FDD, giving you a wide range for the total initial investment required for opening this business. You can get a better feel for the investment needed by talking to the franchisees and learning what they spent, and even more importantly, learning what they'd do differently if they could do it over again. This is an excellent question for franchisees who operate in markets similar to yours as you can get a better idea of the costs you will face opening your franchise.
Purchasing Power. This is another massive advantage of being part of a franchise system, so be sure to determine if the franchisor uses the total system's collective buying power to get discounted pricing on equipment and inventory.
Earnings. Everyone's favorite subject, the discussion of earnings between a franchisor and a potential franchisee, is strictly regulated. While you can often find earnings information in Item 19 of the FDD, your best source of information is from the current franchisees. Hopefully, by the time you get to this question on your list, you will have developed a relationship with the franchisee, and it will be comfortable for you to ask questions such as, "How long were you open before you showed a profit?" and "What is your typical net profit per month?" You can also glean valuable earnings information by talking about an average number of customers, average ticket or invoice amount, or even the average number of calls or visits per sale! If you don't get a clear idea of what a typical unit earns, do not proceed with the purchase. You are not interested in franchising because you want to be surprised; you are buying a franchise because of the proven and probable value of the franchisor's system.
Besides talking to current franchisees, you may want to talk to some former franchisees of the franchisor you are investigating. You will find any franchisee's contact information that has left the system in the past year in the FDD. You will want to find out why they left the system and what kind of experience they had. In some cases, they will have left for personal reasons or perhaps because they found the opportunity wasn't right for them. Suppose you compare the responses of these people to those of the successful franchisees. In that case, you may be able to see a trend that will help you determine if 1) you identify with one group more than the other and 2) if the success or failure of a franchisee is due more to the personality/experience of the franchisee or the support/system of the franchisor.
Your satisfaction and happiness as a franchisee can depend not only on your success but also on the franchise system's overall culture. By talking to current franchisees, you will learn the answers to many questions you may have, but you will also find out if you'd fit in with the franchisees. These people will be your peers and valuable resources to you as you build your business. By talking to a number of franchisees, you should get a clear picture of how you would fit in the organization.
