The first thing you need to keep in mind in your investigation is that it is
a process of mutual elimination for both you and the franchisor. Therefore both
of you are trying to determine if the fit seems right from the beginning of
the investigation. If either party comes to the realization that this is not
the right match, they simply inform the other party and move on.
Step 1 - General Information
The franchisor will begin by providing you with overview information on the
company (typically a brochure and video package). They will then ask you to
provide them with additional information on you (by filling out a questionnaire)
to determine if you have the general characteristics that they are looking for,
and the financial qualifications necessary for their franchise. Assuming that
each party is still interested, based on this information exchange, you will
proceed to the next step.
Step 2 - The Uniform Franchise Offering Circular
This document, commonly referred to as the UFOC, is the Federal Trade Commission
mandated disclosure document that gives you a wealth of information about the
franchisor. The form and composition of the document is standard with any franchisor
and must include information on a variety of topics of interest to you. The
major subject areas include:
The history of the franchise and its officers and directors.
A complete description of the business to be franchised.
All costs and fees that you will be subject to under the agreement.
The obligations of either party to the other during the term of the agreement and thereafter.
Any relevant litigation history of the company or its officers.
Any business failures, ownership transfers, franchise agreement terminations
or other potentially adverse information relating to the success rate of the
existing units in the system.
Audited financial statements for the franchise company for the previous three years.
A list of the existing franchisees.
A few franchisors also include an earnings claim in the UFOC document. Though
they are not required to do so, this can be a real time saver for you if it
is included. Even if it is included in the UFOC, it is still imperative that
you discuss this subject with franchisees during your fact-finding calls and
visits.
You will carefully review the UFOC document and note any questions or issues
that the material raises for further discussion with the franchisor. You may
also choose to involve outside advisors to review material you do not understand.
Step 3 - Franchisee Calls and Visits
The most valuable source of information on any franchise system is the existing
franchisees. You need to plan on calling or visiting a number of the existing
franchisees during your investigation. It sounds almost trite, but whatever
you find the prevailing attitude of the existing franchisees on any issue to
be, it will almost certainly be your attitude on the issue as well if you decide
to become a franchisee. Visit with a sufficient number of the existing franchisees
to ensure you have a sense of the prevailing attitudes of the group.
Though you want to find the overwhelming majority of franchisees to be happy
and supportive of the franchisor, it is important to try to find an unhappy
franchisee during your investigation. When you do, not only listen to the complaints
but also try to determine what makes this franchisee different from the rest.
If you find you identify with the positive ones and feel the negative franchisee
is not at all like you, then you should be fine. If you find that you are more
like the person who is unhappy, this is probably not the right franchise for
you.
The following list covers the principle areas you want to investigate during
these calls:
1. Training Programs - You need to determine how well the initial training
programs and support prepared the franchisees for opening and running their
business.
2. Opening Support - How easy did the franchisor make the process of getting
the first unit open and operating? Was there assistance in site selection, lease
negotiation, construction and design, securing financing, permits or any other
factors unique to getting this business up and operating?
3. Ongoing Support - You want to know how effective the ongoing support services
of the franchisor are in terms of helping franchisees deal with the problems
that come up in the running of their business.
4. Franchise Marketing Programs - Most franchisors collect marketing dollars
from every franchisee into a pool that is spent to promote the brand. You need
to know whether the franchisees are happy and supportive of the way this process
is handled. Note: this is typically the area where you will find the most complaining
in any franchise you examine.
5. Purchasing Power - Does the franchisor use the collective buying power of
the total system to get discounts on supplies and inventory beyond what an independent
operator could achieve? This factor is one of the biggest advantages of joining
a well-run franchise system and should offset much of the upfront fees associated
with being a franchisee.
6. Franchisor/Franchisee Relations - Determine how the franchisees feel about
the franchisor in general. Is the franchisor supportive, caring, focused on
their success, responsive, effective, organized, and trustworthy? Make sure
you have a good feeling about the values of the organization and that they are
consistent with your values.
7. Franchise Investment - The UFOC will give you a wide dollar range for the
investment required in the business. Use the franchisee discussions to narrow
that down to a reasonable and conservative estimate of how much capital you
will need to be successful in this franchise for your market or region.
8. Earnings - It is critical that you have a strong sense of just where the
average unit is in terms of earnings. You should know the answers to the following:
How much money does the typical unit make given a specified length of time
in business?
How soon does a typical unit start making money after opening?
What is the range of answers for these questions?
If you are simply not able to determine these answers to your satisfaction
in your research, do not settle! Tell the franchisor of the problem and that
you cannot proceed unless you have these answers.
It is always a good idea to bring up the subject of earnings as the last point
in your franchisee visits. Most people are reluctant to discuss their income
with strangers and you will find the franchisees are more willing to cover this
subject after you have spent some time visiting with them. At that point they
know you're not a competitor trying to get information but rather a serious
prospective franchisee who will need the information to proceed. They were all
in your position at some point in the past, so if they develop a comfort level
with you it may enhance the financial information you can gather.
Step 4 - Review the System Documentation
A strong franchise company will have documented their systems, operations and
marketing programs in a concise and easy to use format for the reference of
franchisees. Make sure that such documentation exists. The franchisor will probably
not give you a copy of their actual manuals, but they can certainly provide
you with the table of contents or index of every support manual they have. This
will enable you to confirm that the documentation exists and will show the scope
of the coverage of all their major business factors.
Step 5 - Meet the Franchisor
At some point in the process of investigation, you will want to have personal
meetings with key personnel of the franchise company. This might be possible
in your local market or you may need to travel to the headquarters of the franchisor.
Many franchisors facilitate this need by holding what are referred to as "Discovery
Days". These are structured events where you can go to a specified location
and know that all of the key people from the franchisor will be available.
Be sure to get to know those people you will be working most closely with as
you build your business. We would expect the President of the company to be
an impressive person, but that's not who will be answering your call when you
have a problem. Find out who will be providing the operational support and training
directly to you and form an opinion about their competence. Make sure that any
remaining questions or issues you may have are addressed at this meeting.
Step 6 - Make a Decision
If you have been diligent, the entire process outlined above should have taken
about two to four weeks to complete. You have now finished your investigation
and have all the information you need to determine if this franchise is right
for you. It either is or it isn't, and you'll know which it is. In either case,
it is time to make a decision and move on. Use the model you developed for yourself
to evaluate what you wanted in a business. Don't settle. If this company has
everything you wanted, do it. If it doesn't, eliminate it and go to the next
one.
