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Which Questions You Should Ask the Franchisor Before Purchasing

Aug 18, 2021

An essential step in buying a franchise is conducting thorough research and informing yourself of all the details. Asking the right questions will ensure that you make an informed decision about whether or not to sign an agreement. To help you out, we compiled a list of questions to ask prospective franchisors during your research.

What to Ask the Franchisor – Top 16 Questions

1. What criteria do you use to choose a franchisee for your business? A list of personality traits and qualifications that best fits their brand is what franchisors will have. The key is to review these criteria and decide if your personality and skills fit into the system.

2. What amount do I need to invest before I open my doors? Starting a franchise requires an initial investment of anywhere from $2,000 to over a million dollars. The Franchise Disclosure Document (FDD), Item 5, lists the initial fee, and Item 7 details any additional costs like real estate, equipment, licenses, etc. These items should be discussed in detail with the franchisor to understand your investment and what financial resources you will need to get started.

3. What is the background of your executives, and how did you get the franchise started? Who were the founders of the business? Was there a reason they started the business? Are you both skilled and passionate about the industry? It would be best if you felt that the franchisor is competent and you can relate to the fundamentals of the business.

4. What are the ongoing fees? What are your marketing and royalties? It is crucial to fully understand the ongoing financial obligations to the franchisor, including whether you are required to pay royalties or other ongoing fees like advertising. This question is crucial for managing your company’s financial health.

5. What amount of liquid capital do I need to keep the franchise afloat until it breaks even? Franchisees will need sufficient operating capital to cover the start-up costs and the cost of the franchise. It’s also essential to determine the average time it takes for a franchisee to turn a profit.

6. What is the financial strength of the franchise company? The FDD, Item 21, contains the most recent financial statements of a franchisor. These financial statements will give you an idea of the financial health of the franchise system. Ask the franchisor about their growth plans and how they’ve achieved steady growth. It is essential to ask the franchisor whether they receive a large portion of their income from royalties or sales of franchises. Also, it would help if you inquired about whether sufficient funds are allocated to the system.

7. What is my income potential? Although a franchisor cannot predict your success, they can give you an idea of what a typical franchisee makes and the potential income. The gross sales figures provided by the franchisor might not include rent expenses or other operating costs.

8. What are your success rates, and how many locations are available? A franchisor’s number of units determines their success, but not their size. Do franchisees receive

enough support? An established franchisor might have too many resources, while a large franchisor may be too spread thin. Find out what their success rates are among their franchisees and the reasons for failed units.

9. What kind of support are you able to offer after the initial training? While most franchisors provide initial training to help you get your business started, it’s essential to compare what ongoing support you offer with similar franchises. What is support staff available to you day-to-day? Is there any ongoing training? Are there on-site support services? You should feel confident about the support you will receive after you open your door.

10. What makes you different from your competitors? Some brands are highly competitive and well-established, while others are innovative and more unique. Here you can also ask which brand falls where on the spectrum and about the most competitive market and the top contenders. Moreover, ask the franchisor what their unique selling points are and how they compare to the competition.

11. What expectations do you have for your franchise owners? You, as a franchisee, have to meet many obligations regarding operations, payments, and other obligations. It is essential to talk with the franchisor to understand expectations to do as a unit operator thoroughly.

12. How can you resolve disputes or disagreements? Investigating the franchisor’s past litigation is an integral part of due diligence. The FDD’s 3rd section contains information about legal actions involving the franchisor or its officers. If there are many claims, it could signify that the franchisor is not following the franchise agreement. Ask the franchisor how they handle disputes with franchisees and what reasons you could lose your franchise agreement if you don’t uphold your end.

13. How will I be able to protect my territory? According to the agreement, find out how the franchisor manages territory for its franchisees and what rights you have. Is the franchisor allowed to approve the location for your franchise? Do you want to be able to choose a protected or exclusive territory? It can impact your success by determining whether you will be protected against other units.

14. What’s a typical day for a franchisee? Knowing what a typical day looks like for a franchisee will help you better understand your work life. It’s also important to inquire about the most significant challenges franchisees face to help you decide if the franchise opportunity is right for you.

15. What type of marketing and advertising input will I get? As part of your agreement, you will likely be required to contribute to a national, regional, or local advertising fund. Ask the franchisor whether you control how the money is spent or what marketing opportunities are available in your area.

16. Do current franchisees have any stories to share? This question is an essential part of due diligence. Franchisors must disclose the contact information of past and current franchisees. Talking with both parties can help you gain an honest view of the franchise system and its pros and disadvantages. Avoid any franchisor that discourages you from speaking with other operators.

Each franchise is unique, so it is crucial to understand what you are buying. An in-depth investigation should include information from the franchisor and past and current franchisees, and third-party sources. For more information on minimizing your risk when purchasing a franchise, download our free e-book “Minimizing Risk.”

Do you feel more Prepared?

Before investing in any franchise system, it’s crucial to speak to existing franchisees. We recommend these top questions to franchisees before you invest, and we hope that they will give you the answers you’re seeking.

Please share with us your experience and how the research went.

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