What to ask a franchisor

You have picked a franchise that interests you and spoken to its existing franchise owners. Now you should put the franchisor in the ‘hot seat’. Fraser McKay offers some questions to get the most out of this stage in your research

Getting the most out of your meetings with a franchisor is vital if you want to obtain the key information that will be the deciding factors on whether you choose a brand.

There are a number of areas where you need to get the franchisor to explain in detail what they will provide what will be expected of you and what will be provided to help you achieve it.

The basics

Before quizzing the franchisor about the nitty gritty of the opportunity, you need to know the basics. Most franchise brochures will provide a brief background, but make sure you fill in any gaps when you question them further.

Among the information you will need to unearth is how long the franchisor has been posting profits, when did the company start franchising, how many franchise owners it has, and the speed at which the franchise network is growing.

Getting started

Once you have established how long the franchise has been running successfully, you will want to know what you will receive for your investment.

Your initial training is likely to be included, but will it include staff training? If you are starting out solo, you may employ staff as your business expands. If so, will the franchisor require all staff to be trained by head office and, if this is the case, how much of this cost will fall on your business?

Alternatively, the franchisor may require you to train your own staff. If so, is this covered in the initial franchise owner training and manuals?

Setting boundaries

Another important consideration when investing in a franchise is the exclusivity of your franchise – is it a single unit or is it a territory within set boundaries.

Many franchisors use postcodes to define a territory, but check out how many potential customers are in your territory. Your franchisor may request you conduct your own market research, which you should already be doing to verify the franchisor’s figures before any agreement is made.

Also, check the exclusivity of your territory. Some franchisors offer a territory exclusive of other franchise owners, but leave open the possibility of opening a company-owned operation. It is best to go into the agreement aware of whether the franchisor is able to open a competing store in the same city at a future date.

Value for money

In addition to your initial investment you will be expected to pay management service fees to the franchisor to provide you with support. You need to find out whether you are getting value for money.

For instance, some franchisors operate a sales department dedicated to generating initial business for their franchise owners from launch day. Alternatively, the franchisor may take total control of the sales process, providing you with a constant flow of business and leaving you to concentrate on providing the service.

You will also need to discover whether the franchisor operates field support managers and who will make on-site visits – and how regularly – to your business to help you solve any challenges you may face.

Some franchisors provide their personal mobile number to every franchise owner, in the event of an emergency, while others operate helplines.

Your peers in the franchise owner network can also provide support. How does the franchisor encourage this? Such initiatives as a franchise owner intranet, or regional and national franchise owner conferences, are excellent methods of forging closer links within a franchise network.

Any business requires marketing and, as a franchise grows, it can initiate national campaigns. This is one of the responsibilities of the franchisor and when it begins to conduct such campaigns, the cost will need to be absorbed by the franchise owner network, which benefits. If the franchisor is not already charging a national marketing fee, when does it plan to?

Alternatively, the franchisor may charge an administration fee on every national lead passed to you. Again you will need to take this into consideration in your own forward financial planning.

Counting the cost

Now you have discovered what you can expect from the franchisor, you will need to find out what the other financial implications of becoming a franchise owner are.

This will involve quizzing the franchisor about how much working capital you will need, how long it will take for your business to break even and the growth level current franchise owners are achieving.

Ideally you should request that your accountant or bank manager check these figures out, but receiving a green light from these people is no assurance of success. They are merely confirming the figures look fine on paper, not their precise knowledge of all the risk factors involved with your selected franchise opportunity.

You should also ask to see the franchisor’s finances or obtain a bank reference in order to find out the company’s main sources of income.

If it appears to be the initial franchise investment fee, be very wary. The franchisor’s incentive should be to earn from the ongoing success of its franchise owners, not the initial sale of licences.

Franchisors’ profits are earned through the management service fee – typically a percentage of your turnover or profits. However, closely examine how this affects the profits in the franchisor’s financial forecasts. This charge funds ongoing franchisor support, so compare it with the level of support you will receive and decide whether it represents a good deal.

If the franchisor is the sole supplier of the products, services or tools used by the franchise owner, enquire how profitable this is and whether it is taken into account in the ongoing management service fee. Are the supplies priced above or below the market rate? The answer you receive will significantly affect your competitiveness.

Looking ahead

After a few meetings with the franchisor you will have a good idea of your role in operating the franchise – whether you will be required to be hands-on in delivering the service or taking a more managerial role.

You must ask yourself whether what you hear corresponds with your own goals, and then query whether you will be able to move into the latter category if you see yourself expanding the business at a later date. Many franchisors applaud this desire and offer the opportunity to extend the franchise licence once you are operating your first successfully.

Before making your final decision, make sure you clearly understand about the franchise you have chosen and about all the elements that make it a success. This is why it is important to make your questions really matter to make your foray into franchising a success.