When franchisee prospects begin their research into franchise brands, they often don't have a clue about what questions to ask their franchisor, or what to ask franchisees during the validation phase of their investigation. We asked Erin Crawford, director of franchise development at United Franchise Group, what questions she considers essential to completing a deal that works for both the franchisor and prospective franchisee. Here's what she had to say.
The following are five areas I believe are important for prospects to inquire about.
1) Costs and what's included (franchisor). It is important to ask a franchisor about the various costs associated with the franchise. A franchise fee usually covers the training, implementation, and setup. The total investment includes the franchise fee, working capital, inventory, and equipment costs. The initial investment is the amount of liquid capital required up front after all financing options have been applied. Ongoing costs include royalties, usually calculated as a percentage based on gross revenues, that will cover ongoing support programs from the franchisor. In some cases, the markup on products required to be purchased directly from the franchisor will constitute royalties. Very seldom, a franchisor will set a cap or maximum amount on royalties. Other continuing costs include national marketing or advertising fees and are calculated as either a percentage or flat fee.
2) Training and support (franchisor). Training should be well-planned, and prospects should receive detailed training and operations manuals. It is also good for a prospect to be prepared for additional expenditures if the franchisor does not cover travel and lodging costs during training. Further, they should ask what costs, if any, are associated with additional training for spouses, partners, or staff.
Prospects should ask about ongoing marketing and support provided by the franchisor. Often, an established field staff and/or mentor program can be crucial for a franchisee's initial success. The training will serve as a foundation. However, local ongoing support will definitely help a new business owner implement their new knowledge in the best practical setting: their own business!
3) Expectations and financial questions (franchisee). We have a saying in our office for our prospects: "The best way to learn about this business is to sit down and talk to someone who does it for a living." Legally, franchisors can talk about earnings with prospects only when disclosed in their FDD. After a prospect has had a chance to speak with the representative from the franchisor, they should meet with existing franchisees to seek information relating to financial expectations.
4) How long until up and running? (franchisee). It is important to know how long it will take before your doors are open, and even more important to know how long until your business is fully up and running. Asking a few existing franchisees how long it took to get off the ground will help prospects understand what factors influenced the time it took to begin operations.
5) Industry and territory (franchisee). Prospects should ask multiple existing franchisees what kind of growth or decline they have experienced. They should also ask what potential new products and services are on the horizon. Franchisees will be able to communicate the programs in place to encourage cohesiveness among other franchisees, as well as the marketing efforts that help the brand stand out in the marketplace.
Erin Crawford is director of franchise development at United Franchise Group (UFG), based in West Palm Beach, Fla. UFG has six brands (Signarama, EmbroidMe, IZON/Billboard Connection, Transworld Business Advisors, Plan Ahead Events, SuperGreen Solutions), more than 1,400 franchise locations in more than 50 countries, $500 million in system-wide revenue, and has been franchising for more than 30 years. For more information, call 561-640-5570, email, or visit their website.
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