Basic Questions, Basic Answers About Franchising
Two sold-out audiences participated recently in The A to Zs of Buying a Franchise, the most popular symposium offered annually at the International Franchise Expo. Following are several of the questions asked by participants, who learned basic information about franchising. The answers were provided by Dr. John P. Hayes, who has led the symposium for nearly 30 years. He’s the author of two popular eBooks about franchising: Buy Hot Franchises Without Getting Burned and 101 Questions to Ask Before Buying a Franchise.
Why can’t I buy a franchise as soon as I find the one I want to buy?
A: You can’t because the law says so! And that’s a good thing. Federal and state franchise regulations require franchisors to give you at least two weeks to study the franchise and make an informed decision. This is not optional – franchisors cannot sell you a franchise until you have had their disclosure document for at least two weeks. Take advantage of that time to do research about the opportunity.
Q: Why won’t the franchisor give me the disclosure document when I ask for it?
A: Franchisors are required by law to give you a disclosure document at your first “serious” meeting to discuss you buying the franchise. But the franchisor wants to be certain that you are a qualified candidate for buying the franchise, so the franchisor gets to decide when the meeting is “serious.” Franchisors usually will ask several “qualifying” questions before giving out the disclosure document. For example, “Where do you plan to open a franchise? . . . How much money do you plan to invest? . . . How soon do you plan to open a franchise?” Your answers to those questions will help the franchisor decide whether or not you’re a qualified, and therefore “serious”, candidate.
What does the franchisor do with the upfront franchise licensing fee that I’m required to pay? Is this all profit to the franchisor?
A: I suggest you ask those questions of the franchisor. Every franchisor will have a different answer, and every franchisor has the right to use the money as they see fit. However, it’s your money until you pay it, so you have a right to know how it will be used. Hopefully, much of the money is being re-invested in you. For example, if the franchisor provides 15 days of training, that’s valuable education, and your fee pays for it. If the franchisor provides two weeks of field support – that’s also valuable, and your fee pays for it. A good franchisor will have a frank discussion with you about how the money is used. And some of it may go into the franchisor’s personal pocket.
Why would a franchisor decide not to renew a franchisee’s license?
A: For many reasons! Franchise agreements are very specific, especially about how a franchisee is expected to behave and perform. If you violate any of the requirements of the franchise agreement, you may lose your right to be a franchisee. However, the reason can’t be capricious. If you’re not meeting the terms of the agreement, the franchisor will give you advance notice with time to “cure” the default.
Isn’t it enough that I pay a franchise fee and royalties every month? So what if my royalty isn’t the biggest in the franchise network. What if I don’t want to work that hard?
A: A franchisor can sell a limited number of franchises as dictated by demographics and economics. Let’s say it’s 1,000 units in the USA. The purpose of every unit is to maximize profits for the franchisee and the franchisor. If you can’t maximize profits in your unit, the franchisor may be willing to work with you for a period of time to help you improve, but ultimately the franchisor wants a franchisee who will produce maximum results in every unit. If that’s not to your liking, it’s better that you do not buy a franchise.
Got a question for Dr. Hayes? You can contact him at Howtobuyafranchise.com.
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