10 Questions to Ask a Franchisor Before Investing
These are the questions you should ask a franchisor before you invest, Michael Johnson, managing director of Card Connection, says
As a franchisor of 20 years, at Card Connection we have helped hundreds of people, from all walks of life, become successful franchisees.
The process usually starts with an interview. But don’t panic, as it’s much less daunting than it sounds. From the franchisee’s point of view, it’s an opportunity for a fact finding mission. From a franchisor’s perspective, we expect lots of questions.
However, sometimes franchisees come for an interview and don’t ask enough or the right kind of questions. By this I mean franchisees should be taking advantage of the face-to-face meeting to explore the topics that will help them evaluate the potential viability of the business that’s for sale.
If you’re about to make a five-year commitment to a new business, you need to know it’s going to work for you or your future and the security of your family could be at stake.
Therefore, we have prepared a possible list of questions potential franchisees could be asking:
How many of your franchisees have failed and why?
What franchisees should be trying to find out with this question is: what’s the likelihood I will be successful? If you can understand why some franchisees have failed, it’s possible to see if you might fall into that category.
Issues concerning ‘too much competition’ or ‘market conditions’ should raise alarm bells. The odd franchisee who perhaps had some genuine personal challenges to deal with or another franchisee who, despite help, ‘didn’t follow the franchise manual’ would be less of a concern.
How long do franchisees stay with you?
Looking at the degree of franchisee turnover is a helpful guide. For example, at Card Connection our franchisees stay with us for an average of eight years and some more than 20 years. This statistic helps illustrate the stability of the franchises. If turnover is high, you need to ask why.
Can I talk to any existing franchisees?
Talking to franchisees who do the job day in, day out will give you a realistic idea of what’s involved, rather than the glossy picture some franchisors tend to paint.
Find out what franchisees spend most of their time doing. What challenges do they face? What are the head office staff like to work with? How many hours do they typically put in? How many customers do they work with? What did they find difficult when they started out? What would they do differently next time?
What does your average - not your best - franchisee earn?
Many people want to shy away from the subject of money. However, a franchise is destined to be your livelihood, so you need to be clear about realistic earnings.
Be aware that forecast earnings are not the same as the sum franchisees actually earned. It would be particularly concerning if a franchisor was unwilling to provide actual average earning figures.
Can I see your accounts?
Being able to evaluate the accounts of two or three ‘average’ franchisees is helpful, as it’s hard evidence of what you might realistically earn, compared with what a franchisor thinks you could earn if the wind was blowing in the right direction.
If you need to hire an independent accountant to help you understand what the figures mean, it will be money well spent. If you join the franchise, you will need an accountant anyway, so it could double up as the perfect opportunity to interview a prospective accountancy firm.
Can you tell me about the financial history and stability of the company?
This is an interesting question and one we rarely hear asked by potential franchisees. Maybe it’s because Card Connection has a solid financial background and franchisees have already done their research.
If I was joining a franchise, I would like to be 100 per cent sure the company supporting me has not had previous financial issues. There are franchisors out there that have been dissolved then re-emerge and continue trading in a slightly different guise. This points to fundamental problems with a business that is not going to provide security for the future.
How profitable is the franchise organisation?
Franchisors should be happy to discuss the company’s level of profitability with you and what influences this. Again, unwillingness to be open from the outset could point to hidden problems within the organisation.
How have other franchisees funded their businesses?
Unless you have a significant sum to invest, all franchisees should be asking how they can best fund the purchase of the franchise.
However, given this is one of the main hurdles that prevents people from buying the franchise of their dreams, this question is seldom asked.
Gaining funding for most reputable franchises is quite straightforward (depending on status), as the franchise departments of the main banks will be aware of the business model and should be happy to support a loan to fund the investment.
Your potential franchisor will be able to explain how other franchisees obtained their funding and provide details of the banks that could help. If you need to provide a business plan, the franchisor may also be able to assist, as it will have much of the information needed.
What are the main challenges faced by the company and your franchisees?
This is a question that will give an insight into ‘how it works’ on a day-today basis. By asking about the problems you’ll face, you’re evaluating if you can deal with them or even if you want to.
What do your staff do to support franchisees?
Here we’re finding out about training and support in the field.
You need to know how committed the team is to looking after its franchisees and how many staff are available to support the various functions of the business. You will need help when starting out and you need to know how hands-on the franchisor will be to provide such support.
Franchising can offer the perfect way to start your own business. However, without the right infrastructure and team behind you, there could be trouble ahead.
By asking the right questions and doing sufficient research, you can be more confident of making the right decision and securing your long-term future.
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