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. It’s like dating. You might find exactly the franchise you’re looking for on the first try, but that is highly unlikely unless you are using a consultant like us to narrow the search for you.
You also understand that it is unlikely that anyone contacting the franchisor will turn out to be an excellent match for them. Therefore you are both trying to determine if the fit seems right from the beginning of the investigation.
Each step in the investigation will require more time and effort on both your parts. Going forward requires both parties to provide greater detail until you reach the point where you each have sufficient information to make an informed business decision. A match that is ideal for both parties is the only one that will work.
If either party realizes that this is not the right match, they inform the other party and move on.
hear pete and nat discuss the investigation process and their experiences as franchisees
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 info (by filling out a questionnaire) to determine if you have the general characteristics that they are looking for. Assuming that each party is still interested based on this information exchange, you will proceed to the next steps.
The Franchise Disclosure Document
This document, commonly referred to as the FDD, is the F. T. C. 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 primary 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.
- All obligations of either party to the other during the term of the agreement and after that.
- 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 previous three years for the franchise company.
- A list of the current franchisees.
- A complete copy of the actual franchise agreement document is usually attached to the FDD, but may be provided under separate cover at the option of the franchisor.
A few franchisors also include a financial performance representation (commonly referred to as an earnings claim) in the FDD 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 FDD, it is still imperative to discuss this subject with franchisees during fact-finding calls and visits.
Franchise Calls and Visits
The most valuable source of information on any franchise system is the existing franchisees. It would be best if you planned on calling and, when possible, visiting a number of the existing franchisees during your investigation.
Whatever you find the prevailing attitude of the existing franchisees on any issue, it would undoubtedly 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 group's prevailing attitudes.
Though you want to find the overwhelming majority of franchisees to be happy and supportive of the franchisor, it is essential to try to find an unhappy franchisee during your investigation. When you do, listen to the complaints and 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 like you, you should be fine. If you find that you are more like the unhappy person, this is probably not the right franchise for you.
It is always good 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. You will find the franchisees 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 a serious prospective franchisee who will need the information to proceed. They were all in your position at some point in the past.
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 franchisees' reference. Make sure that such documentation exists.
The franchisor will probably not give you a copy of their actual manuals. Still, 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 the scope of coverage of all significant business factors.
Meet the Franchisor
At some point in the investigation process, you will want to have personal meetings with the franchise company's key personnel. 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 within the building of 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.
Make a Decision
The entire process outlined above should have taken about two to four weeks to complete if you have been diligent. 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. Remember, a franchise is an investment like any other and involves risks; you need to feel confident in your selection.
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.