Prior to opening their dream restaurant, the Ways each came from very different backgrounds. Marilyn enjoyed a 25-year career as a bus driver for the local school district, and plans on returning once schools are back in session. Jim worked for 26 years in various finance and operational roles for a major office-supply company. By Cindy Charette
Before you Buy
Follow this checklist for due diligence
by Jason Power
You probably research cars before buying one and read a restaurant’s reviews before making a reservation. So it makes sense to do the same research—your due diligence—before investing in a franchise.
The process should include a study of the local market that exists for the franchise’s products and services, conversations with other franchisees, a review of the Franchise Agreement by a lawyer, and participation in the franchisor’s Discovery Day. Follow this checklist to ensure you’re thorough with your due diligence.
1. Research your market.
Does your market need the product or service? Have you called your future competitors to learn about their prices and customer service? Have you tested their products? These actions are crucial. There are dozens, if not hundreds, of stories about a franchisee introducing a product or service that was rejected by people in the territory and the cost to educate them about it was prohibitive.
2. Talk to other franchisees.
Just as you read reviews for a vehicle or look at the menu of a new restaurant, you should learn from those who came before you. When you speak with current franchisees and those who were recently terminated, ask them: Are you profitable? Does the franchisor help with your problems and questions? How do you deal with competitors? If you could go back, would you buy this franchise again? By asking these questions early in the process, you avoid the potential for catastrophe.
3. Have an attorney review the Franchise Agreement.
Having an attorney who is well-versed in franchise law is a must. But you also have to read the Franchise Disclosure Document, Franchise Agreement, and all exhibits, too. If you do not read the documents and then prepare a list of related questions and concerns for the attorney, he or she can’t fully help you understand your rights, roles, and obligations.
4. Attend Discovery Day.
Discovery Day, or “Meet the Team Day” as some franchisors call it, is when a franchisor invites franchisees who are close to signing to visit a corporate location and learn more about the franchise and typical day-to-day operations. This is one of the greatest opportunities to obtain an in-depth understanding of the business and in many cases it is one of the last opportunities to ask the franchisor questions before signing the Franchise Agreement. At Discovery Day, ask questions such as: What is the franchisor’s growth plan for the next one, three, five, and 10 years? What is the franchisor’s marketing strategy for helping franchisees? How are the company’s franchisees performing, especially those in your general area?
Each prospective franchisee’s due diligence checklist will differ slightly, but if you follow the four steps above, you’ll be well on your way to having all the information you need to make an educated decision.
Jason Power exclusively practices franchise law as a partner at Barber Power Law Group in Charlotte, North Carolina. He has assisted hundreds of franchisees with their FDDs and buying into franchises all over the country. Power also represents emerging and established franchisors. To learn more, contact Power at firstname.lastname@example.org or call 980-202-5679. Visit www.barberpowerlaw.com.
Q & A
Jessica Melendez on vetting franchisors
What are some important questions for a candidate to ask a franchisor?
Working as a broker, I put together a template of questions for my candidates to use when talking to franchisors. During the discovery process, most of those questions are answered, and my clients can check them off their lists. However, I insist that they get clear, in-depth answers on the following questions.
- What does your training program look like? What ongoing training do you offer?
- Do you provide a mentor? For how long?
- Do you assist in training my team?
- What is my protected territory and how is it defined?
- How many franchises have been awarded in my state? Have they all opened? If they haven’t, why not?
- What are your plans to develop my state and how will that impact my franchise?
- Can you give me a break down of all of the expenses associated with getting started?
- How much additional capital will I need after I launch my franchise?
- What goods or services do I have to purchase directly from you, the franchisor, and can I competitively shop for a better deal?
- Is there a national advertising/marketing fund that I must contribute to?
Regarding Potential Earnings
- What can I expect to earn if I join your franchise system, and does your franchise disclose this amount in your written materials?
- Do you provide a pro-forma?
- What is your average profit margin?
- What is your average sales per month?
Regarding Franchisee History
- How many franchisees have you added in the past year? How many have you lost?
- How many franchised units have failed and why?
- How have previous franchisee/franchisor disputes been settled?
What are some red flags to look out for?
- Corporate takeovers: Pay close attention to item 20 of the FDD, which will give you information on the number of franchises transferred, canceled, or terminated; as well as the number of franchises that have not been renewed by the franchisor or have been reacquired by the franchisor. Corporate takeovers or terminations are red flags—possibly indicating there are failures due to training and support or infrastructure.
- Resales: Are resales being sold at their prime for big profit? Or, are they selling to unload their business due to losses or no growth?
- Unhappy franchisees: Another red flag would be several unhappy franchisees during validation calls. If you’re making validation calls and discover several unhappy validators, talk to the franchisor and see how he responds. Are they weak owners, or is the franchisor failing them?
How should you prepare for a Discovery Day?
Going through the buying process in its entirety is the best way to prepare for Discovery Day. By the time it arrives, you should have made your validation calls, reviewed the FDD to completion, had calls with the franchisor, and reviewed all materials/webinars provided. Discovery Day should be the day you meet the executive staff and see how they operate firsthand. At this point, you want to see if the brand and culture are a fit for you.
Discovery Day is also a good time to ask final questions regarding the FDD or validations, discuss attorney review and offerings, finalize territory maps, and ask about next steps. Take care of the following before you arrive to make your trip more efficient:
- Confirm travel arrangements.
- Arrive a day early, as most Discovery Days start first thing in the morning.
- Ask about dress code—some franchisors prefer business casual.
- Ask for an agenda.
- Ask if you need to bring anything with you, such as financial information.
- Prepare a list of final questions.
A trainer and mentor for FranServe, Inc., the world’s largest franchise consulting firm, and the CEO of WestStar Franchise Group, Jessica Melendez coaches and educates prospective franchise owners and helps them find businesses that align with their personal and professional ambitions. As a franchisor and president of Dryer Vent Squad, Melendez has first-hand experience in all aspects of franchising, which makes her an excellent resource for prospective franchisees. Contact Melendez at 915-202-8272, email Jessica@weststarfranchisegroup.com, or visit https://www.weststarfranchisegroup.com.