Tips to Investigate and Validate a Franchise Business
There are many critical stages to researching a franchise and determining if it’s truly the right opportunity for you, but few are as valuable as talking to actual franchisees and hearing about their own experience. This article will go over this important validation step, explaining what questions to ask, how to really read between the lines, filter your responses and truly determine if a particular franchise is a model you can not only be successful with, but happy as well.
How can speaking to franchisees be helpful during the validation process?
In the process of speaking with current (and even past) franchisees in a particular system, you will be able to determine overall franchisee satisfaction and financial performance of a franchise. You will be able to check up on a franchise to determine if they are delivering on their promises, supporting their franchisees properly and are offering a truly viable and successful opportunity. In all franchisors’ disclosure documents are the contact information for all other franchisees in their system, both current as well as franchisees who have gotten out of the business within the last 3 years. Most franchisors require that you spend a good bit of time speaking with other franchisees but even if they don’t require it – DO IT! These franchisees have nothing to gain or lose by your decision to purchase that franchise therefore have no reason to give you anything but honest answers about their experience owning that franchise. Many franchisors will give you a “suggested validation list” of franchisees to contact but keep in mind this is commonly a cherry picked list of satisfied, top producing franchisees. Use the contact list in the disclosure document and make it a point to speak with a range of franchisees including top producers, struggling franchisees, those that have owned their business for many years and those that are fairly new to the system. You want to get feedback from those in all phases of owning their business as you too will experience these different phases as well.
All franchisees have gone through the validation process themselves so they will understand why you are calling and for the most part be happy to speak with you and share their experience. That being said, understand they are most likely busy running their business so be respectful of their time. Be willing to speak with them at their convenience outside of business hours or at least during slower times of their day. If there are franchisees within driving distance of you, it’s also a good idea to offer to make the trip and take the franchisee to lunch or dinner for a face to face meeting. I would advise you to make a point to speak with 10 – 20 franchisees during your validation when possible.
General Questions to Ask Franchisees
When speaking with other franchisees you of course want to get feedback about their experience owning the business but remember, your ultimate goal is to determine if this is the right opportunity FOR YOU, not for them. No business is right for everyone so never forget that one man’s trash is another man’s treasure. Below are some good questions to ask other franchisees during your validation process:
- What did you do before you invested in this franchise?
- What other franchises did you explore before making your decision to go with this one?
- What were your key reasons for choosing this franchise over the others you were exploring?
- How long have you been in business?
- Do you feel your initial training adequately prepared you to launch your business?
- Did the franchisor provide adequate support during your grand opening and launch phases?
- How often are you in contact with the franchisor?
- Are you pleased with their efforts to continue to support you as a franchisee?
- How often are you in contact with other franchisees?
- Do you find the other franchisees in the system to be of value to you in achieving success with your business?
- Do you feel the franchisor is doing a good job of recruiting top quality franchisees?
- What more could the franchisor be doing to help you be more successful with your business?
- What have been your biggest headaches and challenges to running this business?
- What do you feel it takes to be a top producer with this franchise?
- What advice would you give me as a new franchisee just starting out?
Financial Questions to Ask
Remember, if you are validating properly you will be speaking with franchisees in all phases of their business ranging from those who are wildly successful to those that are new and still grinding it out to break even. Also keep in mind when talking numbers that people structure their businesses in different ways. Some pay themselves salaries, drive company owned cars, take frequent business trips and work out of posh office space, while others take only dividends or distribution and operate the business on as lean of a budget as possible. Be prepared for a wide range of methods and responses when discussing the financial picture of a particular franchise. These questions will also vary depending on which phase of the business a particular franchisee is in.
- What can a typical franchisee expect to produce in gross revenues in year one, year two and year three of this business?
- What are the top producers doing in gross sales?
- What are the lower producing franchisees doing in gross sales?
- Currently what is your gross revenue and how much of that is going into your pocket?
- How long did it take to break even for you?
- How accurate were the franchisors operating capital projections? Did you spend it all? Did you need to go into pocket for more?
- What are the typical cost percentages of sales? Labor? Occupancy and other overhead?
- Assuming a franchisee is running a fairly streamlined operation what should I expect typical margins to be before taxes, debt service, etc?
And Of Course the Big Question…
- If you had it to do all over again, would you?
Filtering Your Responses
When you validate, keep in mind you will not receive 100% satisfaction from every franchisee you speak with. No franchisor has a 100% satisfaction rate and all business owners have bad days at the office. You will too! While it is easy to do, resist getting too hung up on negative or less than satisfactory responses. Negative feedback will resonate more with you than positive, that’s just human nature. Focus on the overall percentages of your feedback from everyone you speak with and rate the franchisor accordingly. Look for trends more than specific experiences to get a sense of overall franchisee satisfaction.
Reading Between The Lines
Probably the most over-looked concept in validating is striving to identify with the different people with whom you speak. As you speak with franchisees, constantly ask yourself, “am I like this person”, “do we share similar values”, “do we have similar strengths or weaknesses”. The bottom line is this… if you are cut from the same fabric that the majority of the super satisfied, top producing franchisees, there may be a great chance this is the right opportunity for you. On the other hand, if you find you are more like the less than satisfied franchisees who are the under achievers of the group, then there’s a chance that particular franchise may not be the right opportunity for you. We all have strengths and weaknesses and finding the franchise that best leverages your strengths while compensating for your weaknesses is critical.
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