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You'll Never Know If You Don't Ask
by Kenneth R. Franklin

Many franchisors urge prospective franchisees to get in touch with existing franchisees in order to get a feel for the company. This is good, and it's something everyone thinking about buying a franchise should put on the top of their list of priorities.

Before they even get to that point, however, prospective franchisees should educate themselves about franchising in general. This can be done through reading and visiting different franchises to compare them with each other.

At that point, you're ready for more in-depth information. A person who is doing every day what you will be doing every day if you buy this franchise is the most valuable source of information you can find.

Pick franchises at random. All the franchise company's franchisees are listed in the disclosure documents you'll be given when you express serious interest in buying a franchise. Try to call or visit at least a dozen existing franchisees.

If possible, track down some former franchisees and talk to them about why they left the system. It's also a smart move to retain a competent advisor, such as an accountant or an attorney, to help you understand the disclosure documents.

Good franchise companies want you to succeed. That's one of the reasons they encourage you to contact their franchisees. If the life of a franchisee of their company is not right for you, they prefer to find out early and avoid unmet expectations on both sides.

There is another reason franchisors want you to speak to existing franchisees. The way the laws governing franchising are written, it is very difficult for a franchiser to predict what a prospective franchisee's earnings will be.

By being observant and asking the right questions in their interviews with existing franchisees, prospective franchisees can determine what kind of earnings they can expect in their own business.

That's the point of this column-to help prospective franchisees figure out the right questions to ask of existing franchisees. That's not just to find out about earnings, but to find out if that is what they want to do with their lives.

Following are some sample questions that can help in that area. Combine the answers you receive to these questions with your own observations, and then you can make a truly informed choice about any franchise opportunity.

  • Under the general heading of operational issues, consider the following questions:
  • How comprehensive are the operational controls?
  • Are the forms and procedures effective in helping you understand the business?
  • Do they help you monitor the business? ¥ How about the accounting system and assistance; will it meet your needs?
  • Can you buy used, inexpensive equipment rather than new equipment? If you can, should you?

  • MARKETING AND ADVERTISING

    Ask the following questions to get a feel for the franchisor's approach to marketing and advertising, two activities that are crucial to success in today's competitive business environment:

  • Do the products and services we offer really meet consumer needs?
  • Are there things that consumers ask for that we are not supplying?
  • How do we differ from our competition? What do our competitors do that may be different-and better-than what we do?
  • What kind of advertising and promotional support is the parent company providing?
  • Are the materials being supplied in this area creative and sophisticated?
  • Are they competitive for your marketplace?
  • Does the company give you strong support with your initial promotional efforts in a new marketplace?
  • What happens if the cost of the advertising you need to maintain your business exceeds the amount of money you have available for it? Can you expect any assistance from the franchiser?
  • The bottom line for going into any business, franchised or otherwise, is to make money. In that regard, ask the franchisees you interview these questions related to financial issues, sales and earnings:


    Prospective franchisees should educate themselves thoroughly about franchising.

  • Does the franchisor offer any assistance at all in finding money?
  • How much money will be needed over and above what is indicated in the disclosure documents?
  • How long should I expect to wait before I hit the break-even point?
  • What would normally be break-even volume?
  • What was it in your case?
  • How long was it before the business was able to support you?
  • What has been your return on investment?
  • Over what period of time did you achieve it?
  • Can I expect a two- to three-year pretax return on my investment, after a manager's salary?
  • Do you feel you got value for the franchise fee that you paid?
  • Do you feel you are getting continuing value for the royalties you pay?
  • Does it bother you to write a royalty check every month or week?
  • One of the most sensitive issues in relations between franchisers and prospective franchisees is that of earnings. Few franchisers make hard and fast earnings projections. The documentation required for them to do so is extensive, and many fear it could open them up to legal action later if a franchisee does achieve the projected level of income.


    EARNINGS QUERIES

    That being the case, existing franchisees are one of the best sources for prospective franchisees to tap about the earnings potential of a franchise company. Here are some questions to ask those franchisees:

  • If earnings claims have been made, are they accurate?
  • What were your total sales last year?
  • What was your net profit?
  • What were your royalty payments last year?
  • What was your advertising budget last year?
  • Have your sales increased every year since you've been in business?
  • About what percent could I expect the second year would increase over the first, the third over the second, and so on?
  • Excluding the manager's salary, what percent of sales does payroll represent?
  • While pointed and targeted questions can elicit valuable information, it also makes sense to ask existing franchisees a variety of more general questions. Some examples are:

  • Were you rushed to sign your franchise agreement?
  • From what you know, did the company check out your references and qualifications?
  • Do the top executives seem to be competent?
  • In general, does the parent company have problems with its franchisees? How about with you in particular?
  • From what you know, does the company have sufficient funds for the ongoing development of the franchise program?
  • What do you think the parent company is doing with the money received in royalties?
  • Are the lines of communication between the franchisor and franchisees open?
  • Is there a franchisee association in this company?
  • If so, is it really an independent organization, or is it controlled to a great extent by the franchisor or a ll group of franchisees who appear to do the bidding of the franchisor?

  • Earnings claims are one of the most sensitive areas of negotiations in franchising.

    Of course, there are many other questions you might want to ask existing franchisees during your search for your own franchise business. To some extent, they will be determined by the type of business in which you are interested and the things that are important to you personally.

    If there is one cardinal rule to keep in mind, it is this: There is no such thing as a dumb question. The only stupid question is the one that isn't asked. Remember, when it comes to finding out everything you can about your future franchise business, you'll never know if you don't ask.

    Kenneth R. Franklin is president of Franchise Developments Inc. in Pittsburgh, PA. He can be reached at 412-521-4988.

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