Director of Franchise Development
United Franchise Group
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.
Vice President, Franchise Development
Jersey Mike's Subs
Ensuring the brand is the right fit for the prospect is essential. Prospects need to fully understand what they are getting into. They should investigate and figure out the business model, the franchisor/franchisee relationship, the franchisor's role and responsibilities, and the unit economics.
From the franchise development professional's perspective, it is important to understand the prospect's plans and manage their expectations beginning with their capital plan. Do they understand the capital requirements and the cost of entry? Where is their capital coming from? This is an area they do not want to underestimate.
The most important piece of any business is its people. Prospects need to be able to attract the best crew possible to represent themselves and the brand. Up front, prospects should consider: What are their expectations for their involvement in the business? What do they see as a realistic work schedule?
What is their people plan? Who will be involved in daily operations? Will management be incentivized? What is a good crew? How are you going to recruit them? There must be a major focus on the people plan.
The best and most valuable information typically comes from existing franchisees. Before approaching them, the prospect should truly understand their own strengths and weaknesses to see how they line up with those of the franchisees. Are they similar?
The prospect should speak with as many franchisees as possible--single-unit, multi-unit, successful, and challenged--to begin understanding the common denominators. What do they like about being a franchisee? What do they not like? Are they satisfied with the franchisor? How are franchisor/franchisee relations? Remember to speak with franchisees who are new to the system as well as those who have been onboard a while.
The best discussions happen when the prospect asks second- and third-level questions. When a franchisee answers a question, it is the prospect's duty to drill down to why the question was answered that way. For example: Are you happy with the franchisor? Find out why, or what makes them happy/unhappy. Then ask for real-life examples and situations.
Unit economics/ROI is critical. Find out if the franchisees are satisfied financially. Then, using second- and third-level questions, ask if they are above or below the system's average unit volume.
My favorite question to ask a franchisee at the end of the visit: Would you do it again?
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