The questions to ask a franchisor matter more than the answers you get on a sales call. Here’s why. A good answer is easy to give. A good answer you can check in writing is worth something. So as you go through this list, keep asking yourself one thing: where can I verify that?
Most of it you can verify in the Franchise Disclosure Document. Under the FTC Franchise Rule, you get it at least 14 days before you sign or pay anything. Use those 14 days.
Questions to Ask a Franchisor About Money
Start with the full picture, not just the fee.
- What’s the total investment to open, and what pushes buyers to the high end of your Item 7 range?
- What do I pay you every month after I open? Royalty, ad fund, technology, anything else?
- Are royalties based on gross sales? (They usually are, which means you pay them in losing months too.)
- How much working capital do your newest owners actually need?
I walk through these costs in detail in How Much Does It Really Cost to Buy a Franchise?
Questions About Support and Training
Every franchisor says they have great support. Get specific.
- How long is initial training, who teaches it, and what does it cost to train a new manager later?
- How many owners does each field support person cover?
- What happens in my first 90 days after opening?
The FTC suggests asking to review training materials. If the franchisor won’t share them, even under a confidentiality agreement, the FTC says to consider a different opportunity. I agree.
Questions About Your Territory
- Do I get an exclusive or protected territory, and how is it drawn?
- Can you or another franchisee sell into my area online or through another channel?
Read Item 12 for this. A “protected” territory doesn’t always protect you from everything.
Questions About the System’s Health
This is where buyers get soft, and it’s where I push hardest.
- How many units closed, transferred or were bought back in the last few years? (Item 20 shows this.)
- Have you sued franchisees, or been sued by them? (Item 3.)
- Is your income coming more from royalties or from selling new franchises? (An accountant can help you see this in the Item 21 financial statements.)
Questions About Earnings
- Do you make a financial performance representation in Item 19?
- How many units are included, and what share hit the numbers shown?
- Can I see the written substantiation? The FTC says the franchisor has to provide it if you ask.
If a salesperson tells you what you’ll make and it isn’t in Item 19, that’s a red flag.
Questions About the Exit
- What happens at the end of my term? Can I renew, and on what terms?
- What does it take to sell my unit?
- What non-compete applies if I leave?
Item 17 covers renewal, termination and transfer.
The Questions You Ask Franchisees
The franchisor’s answers are only half of it. Item 20 lists current and former owners. Call them and ask the same questions. In my experience, those calls are where the truth comes out. For more on weighing the risk, see Is Buying a Franchise Safer Than Starting My Own Business?
Want a Second Set of Ears?
If you’re getting ready for a call or a discovery day and want help building your list, I’m glad to talk. No pressure, just a straight conversation. Call me, John Henning, at 267-417-4980.
Sources
- FTC, A Consumer’s Guide to Buying a Franchise (Sept. 2020): https://www.ftc.gov/business-guidance/resources/consumers-guide-buying-franchise
- FTC Franchise Rule, 16 CFR Part 436 (eCFR): https://www.ecfr.gov/current/title-16/chapter-I/subchapter-D/part-436