For a prospective franchisee, one of the best ways to learn about a franchise is to talk to current franchisees. Franchisors are required to list current franchisees and franchisees who have recently left the system in the Franchise Disclosure Document. Before purchasing a franchise, a prospective franchisee should contact as many current and former franchisees as possible. The Bundy Law Firm has coached hundreds of prospective franchisees in Washington, Oregon, and California and around the country through validation, and these are our top tips for a successful validation process:
- Ask Specific Questions. There is a direct correlation between the quality of the questions a prospective franchisee asks and the quality of information that they get through franchise validation. If you ask, “are you happy with the franchise,” you are likely to get a brief surface level response. Better questions look for specific and detailed answers. Consider asking the following questions while you do you franchise due diligence.
Contact Franchisees Like You. Franchise units are like people. They may perform differently based on their location, their region, their age and the type of franchisee operating them. If you are a first-time franchisee and small business owner opening a single unit in a new market, you may not get helpful information about the franchise from a multi-unit operator going on their sixth year of operating in an established market. An experienced franchise attorney can help you find franchisees like you to contact for successful franchise validation.
Trust But Verify. During franchise due diligence, a prospective franchisee may hear that the franchise unit is “doing great” or that the franchisee is “very happy” and “profits are good.” Doing a thorough franchise validation means asking to see documents that confirms those statements. Ask for profit and loss statements, balance sheet or other accounting information. The worst that can happen is the franchisee tells you no.
Avoid Franchisor Steering. It’s easy to rely on a franchise salesperson or broker to set up validation calls with franchisees. But a successful franchise validation requires prospective franchisees to independently contact franchisees. Generally, a broker or salesperson will try to direct a prospective franchisee to successful, happy franchisees who are working the system. No one wants to send a prospective franchisee to an unhappy franchisee who will kill the sale. But in your franchise due diligence, you need to hear the good, the bad, and the ugly. A franchise attorney can help you use the FDD to contact franchisees directly.
Ask to Visit. -Most franchisors have you tour a franchise outlet on discovery day but those units are designed to show off the system. It’s bit like touring a furniture show room to determine how durable a couch is. During your franchise validation, you should visit existing units to see how the system really operates. Set up a time to shadow an existing franchisee or “secret shop” franchise units near you. Ask yourself if the customers, employees, and managers look happy? What is the foot traffic like? Even if you are planning on being an absentee franchise owner, you will be spending a lot of time in your business, especially in the beginning. Will you like being there?
Talk to a Variety of Franchisees. Every franchise system performs differently. In some systems, franchisees have strong first and second year sales but struggle in later years. In other systems, franchisees may need to feed the business for several years before they are profitable. For a successful franchise validation, you should talk to the starry-eyed rookies and the grizzled veteran. They both have important information you need for a solid franchise due diligence process.
Track Down Former Franchisees. Most franchisees have a ten-year term; that’s longer than many marriages. And just like marriage, not ever franchise relationship works out. During your franchise validation, it’s incredibly important that you contact former franchisees and ask them why the relationship didn’t work out. You might hear some sour grapes but if you hear the same story from multiple former franchisees, it’s a red flag and could be a sign that the franchise system is struggling.
Pay Attention to Red Flags. At the Bundy law firm, we spend a lot of time advising unhappy franchisees about how to get out of their franchise agreements. Most of the time, the unhappy franchisee tells us, “I should have known it was bad franchise when…” and they tell us about the warning they didn’t listen to during the franchise validation process.
Hire an Experienced Franchise Attorney. An experienced franchise attorney can help you spot possible problems with the franchise system and tell you whether the royalty rate, support, and system growth are better or worse than the industry standard. Caroline Fichter and Howard Bundy have reviewed hundreds of FDDs and advised dozens of prospective franchisees in California, Washington, Oregon and nation-wide. Let them help you determine if a franchise is a good investment for your future.
- Did the franchise training prepare you to operate?
- Was the cost of franchise build out and start up similar to the estimate the Franchisor gave you? What cost more?
- How has the franchisor helped you succeed? What do you wish they did differently?
- Are you making a profit with your franchise? Are you taking a salary? When did you become profitable? How much did you make each month during your first year? Second year? How do you define “profit”?
- Do you feel like you are getting a good value for your royalty fees?
- If you had the chance to do it again, would you purchase this franchise?