When performing due diligence, valuable resources for
prospective franchisees are franchisees and former franchisees. In
the Franchise Disclosure Document (“FDD”), the franchisor must list
all current franchisees and all franchisees who have left the
system in the last fiscal year. These lists are generally in an
exhibit to the FDD. One purpose of these lists is to permit
prospective franchisees to contact those franchisees who are, or
have been, in the system and provide the prospective franchisee
with information on the franchisor and its system.
Communicating with franchisees and former franchisees can be
enlightening. They are one of the best sources of information about
the franchisor, brand performance, culture of the franchise
community, benefits of the system and problems within the
system.
My advice to prospective franchisees is to call as many current
and former franchisees as you can. Call those near you. Call those
in other areas. Call new stores. Call stores with long histories.
Here are just a few questions to ask.
- Would you do it all over again? This is a very telling
question. The answer speaks volumes about the franchisor and its
operations. Explore this question extensively. Accepting “Yes” or
“No” doesn’t tell you much. What are the reasons for their answer?
The answer to “Why” is where the information is.
- Have you considering opening a new location? A
franchisee looking to expand suggests that the franchise is meeting
expectations of the franchisee. However, beware. Under some
systems, franchisees are obligated to expand under an area
development agreement. Exploring why franchisees are expanding, or
conversely, why they do not wish to expand, is an indicator of the
brand’s success or failure.
- How long did it take for the store to break even? How
long did it take the owner to make a profit? Questions about money
are difficult to ask. But, they are important. Explore the average
unit sales, cash flow, accuracy of the Item 7 Initial Investment
ranges and year-end sales. Asking these tough questions will help
to give you a realistic expectation of what your gross revenues and
profit margins might be.
- How does the franchisor handle conflict? During the
sales process, the franchisor puts on its best face. But what
happens when a problem develops? Asking franchisees, and in
particular, former franchisees, how a franchisor handles a
situation when the franchisee is in trouble is very telling of the
franchisor’s mentality toward its franchisees. What happens if a
problem exists between the franchisor and franchisee? Is there a
mediation process? Is it “my way or the highway?” Preparing for the
worse when buying a franchise is difficult. But it is wise to
explore what happens when something goes wrong.
- Does the franchisor’s marketing program work for the
franchisee? How receptive is the franchisor to local marketing
efforts of the franchisee? Exploring the marketing of the brand is
important on both a national and local level. Franchisees are a
great resource to understand if the franchisor’s marketing effort
make an impact locally.
- Why did you leave the system? Asking former franchisees
why they left may reveal a serious problem with the franchisor. If
former franchisees are giving you consistent answers to a
particular problem; then further research into that problem needs
to be pursued.
Some franchisor guide prospective franchisee to certain
franchisees on their list. “Here’s a list of franchisees to call.”
There are reasons for this. First, the franchisor may not have made
a Financial Performance Representation in the Franchise Disclosure
Document, and, the franchisor knows that these particular
franchisees will give a glowing report of the franchisor and the
store sales. Second, the franchisor wants to steer prospective
franchisees away from problem stores or disgruntled franchisees.
Third, simply, they know these franchisees will give good review.
Whatever the reason, if the franchisor gives you a list of
franchisees to call, make sure to call a good number of franchisees
that the franchisor did not list.
Franchisees and former franchisees are an excellent source of
information on the franchisor and the chain. Calling them should be
a high priority for any prospective franchisee.
Debra Hill is a partner at FisherBroyles, LLP practicing
in the areas of franchise and intellectual property. She can be
reached at 904-612-3780 or debra.hill@fisherbroyles.com.