Questions to Ask Before Investing in a Franchise
Top 20 Questions to Ask Before Investing in a Franchise
So you want to invest in a franchise. You've done your research and looked into what type of franchise you're interested in running, and perhaps you've even connected with a franchisor in your area.
Before your initial meeting, it's important to ensure you're prepared by knowing what questions to ask. Investing in a franchise has many benefits; you gain independence; you’re likely to be successful because of the support from the franchisor; and you get to be your own boss. However, each company is different. Just how much autonomy you have and support you receive will vary greatly depending on the franchisor—and that's just the tip of the iceberg.
There are a number of questions you need to ask your franchisor before knowing if you've found the right franchise. Continue reading to discover what these key questions are.
1. How Did the Franchise Get Started?
Before you invest in a franchise, it's important that you choose a company that's a good fit for you. You will become part of a conglomerate, so it's important you have a good relationship with the franchisor. While you likely have already done your own research about the franchise, it's still important to learn as much as you can about the company's background—particularly about the founder's motivation for starting their franchise business. That way, you can establish if your passions and values align.
2. What is the Background of Your Executives?
It's important to know who you're going into business with. Ask about the history and work experience of the founders. Are they from a similar industry as your own? By learning as much as you can about the founders, you'll also fill in any knowledge gaps you have about the franchise's inception.
3. What is Your Criteria for Choosing a Franchisee?
Usually, franchisors have a list of personality traits and qualifications they are looking for in a franchisee. The purpose of this vetting system is to establish whether or not you are a good fit for the company. It's important to investigate what criteria they're looking for—because it's also an opportunity for you to determine if you feel your personality, skill set and values align with the franchisor's.
4. How Much Do I Have to Invest Before I Can Open My Doors?
Depending on the size of the company, the initial investment for starting a franchise can range from thousands of dollars to upwards of a million. Be sure to comb through your Franchise Disclosure Document (FDD) and talk with the franchise's rep to ensure you're on the same page about cost expectations. Before signing a franchise agreement, you should know:
- The initial franchise fee.
- Additional start-up costs, such as real estate, equipment, licenses etc.
Knowing these costs will give you a clear idea of how much your initial investment actually costs, and what you will need financially to get started.
5. How Much Liquid Capital Will I Need to Cover the Franchise Until it Breaks Even?
Like any business, it will take a few months before your successful franchise breaks even. However, aside from initial start-up costs, you also need enough operating capital to cover you for the first few months until that happens. This length of time will also vary depending on how long the franchise location has been open—say you're taking it over from someone else—and the kind of brand recognition the location has.
To be financially prepared, you should ask about the average amount of time it takes most franchisees to start turning a profit. That way, you can feel confident about pursuing your new role as a franchise business owner without the added stress of not having enough capital to cover your first few months in operation.
6. What are the Ongoing Royalty Costs and/or Franchise Fees? How Do Your Royalties and Marketing Fees Work?
While there are many benefits to being part of a franchise, it often also means you have ongoing financial obligations to the franchisor. Ask if you will be obligated to pay royalties or other fees, like advertising fees and marketing costs, to the corporation. It's important to have a clear idea of your ongoing costs so you can budget accordingly.
7. How Financially Strong is Your Franchise Company?
The franchisor's financial statements should be included in your copy of the FDD. However, you should still discuss it with the franchisor representative so you have a clear idea of the company's financial health. Ask the representative to explain how they have garnered steady growth, and what their projected financial growth is.
It's also worthwhile to check where the bulk of the income comes from, whether royalties or the sale of franchises. Remember, asking these questions is important so you can establish your own financial security.
8. How Much Money Can I Make, Roughly?
It's impossible to know exactly how much money you'll earn as much of that is up to you and whether you run a successful business. But, they should still have a good idea about what a typical franchise owner earns. This will give you an idea of your income potential.
9. How Many Other Locations Are There? What is Your Success Rate?
The success rate for a franchise is not just dictated by how many locations they have. Rather, the amount of support and resources offered to franchisees is a far better indication of whom you'll be getting into business with. Sometimes, a large franchisor may seem more impressive—but be spread too thin when it comes to offering support—whereas a smaller operation might be more invested in the success of its franchise locations.
10. What Sets You Apart from Your Competitors?
Some franchise markets are highly competitive, such as food franchises. Others are more unique or focused on a specific target market. Ask about the level of competition for the franchise in question. Who are their top competitors? What are their unique selling points? What advantages do they offer compared to the competition?
11. What Support Do You Offer Beyond the Initial Training?
It's important that you feel supported by your franchisor. After all, starting a business—on your own or as part of a chain—is a big commitment. This is especially the case if you're transitioning out of your current industry or have little business experience. While most franchisors offer initial training to get your business started, you should check to see if there is ongoing support available. This could take the form of:
- Support staff available to you daily
- Opportunities for additional training
- Professional development opportunities
- On-site assistance
12. How Do You Resolve Disagreements or Disputes?
While you naturally will hope a dispute will never happen, there is still always a chance that it might. Information regarding legal action involving the franchisor will be included in the FDD, but it's still wise to discuss the implications. For instance, numerous claims against the parent company could indicate they have a history of going back on the franchise agreement.
You should also protect yourself. Ask how disputes are usually handled, and for details about how your agreement could be terminated if you fail to uphold the franchise contract.
13. What Are Your Expectations for a Franchise Owner?
Discuss with the franchisor representative what is specifically required of you pertaining to day-to-day operations, payments and any other obligations you should know about. The clearer understanding you have, the better success your franchise unit will have. It helps prospective franchisees to know what they are getting into, and what your business relationship with the parent company might be like.
14. What Will My Territory Be?
It's important to determine if you will have an exclusive or protected territory; if the franchisor reserves the right to approve your service area; and how they manage territories according to your agreement. Your territory is your opportunity to gain new customers and make a name for yourself in the area—in essence, it's your bread and butter. You should know what limitations are put on your territory, and what support is offered to protect your territory as well.
15. How Will My Territory Be Protected?
Understanding how your territory will be protected gives you an idea of how competing locations could have an impact on your success. It also gives you a sense of the company culture. Is this a company that forces neighboring locations to fight for customers, or supports each business as part of a franchise family?
16. What Input Will I Have in Marketing and Advertising?
Contributing to advertising funds are typically included as part of your agreement. But you should ask about how that will be broken down. Is the marketing fund for local, regional or national advertising campaigns? Will you have the opportunity to seek out your own agency to handle local marketing efforts?
17. What is a Typical Day Like for a Franchisee?
If you've never owned a franchise before, it can be hard to envision what the day-to-day will be like. Asking this question helps you get a clear picture of what your work life, daily tasks and overarching goals will be. It will also help you decide if the franchise is a good fit for you.
18. Do You Have Preferred Vendors?
Many franchisees are surprised to find that the franchisor will have already established relationships with certain vendors that they can't deviate from. They may not always be the most cost-effective options, but it could be that the franchisor believes these vendors to be the best quality, or a long-standing relationship is at play. Thus, you may be required to use them.
19. Will I Have a Dedicated Account Representative?
Supportive parent companies have dedicated account representatives for their location owners. This is important to ask because you don't want to wind up on-hold for an extended period of time to get one question answered. Rather, establish you'll have one person you can reach out to and build a lasting working relationship with.
20. Can I Speak with Current Franchisees About Their Experience?
Did you know that franchisors are required to disclose the contact information for both current and past franchisees? Not only does this mean that if they refuse to give you said contact information, that is a big red flag, but also speaking with current franchise owners is a great way to gain insight into their personal experiences as part of the given franchise conglomerate. Try to get in touch with both current and past franchise owners. This will help you get a well-rounded idea of how the franchise system operates, how it supports its owners and what its pitfalls may be.
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