Due diligence is vital before signing up the franchise contract to manage your expectations and avoid wasting money, time, and effort. Considering the significant financial and multi-year time commitments you’ll make with a new business, you want to go into the opportunity with as much information as possible.
Asking smart questions about the franchise opportunity is one of the most important steps of this due diligence process. While going through the companies marketing materials and franchise information is important, the information provided will inherently have a positive slant. For example, one common mistake of franchisees is assuming that a franchise system has several units, a solid product, and attractive stores, the opportunity must be profitable. In reality, this isn’t always the case.
Here are the four categories of questions, I recommend to uncover the truth about the franchise you’re investing. Use these questions to help determine the franchise the best fits your goals and skillset.
Many people do not ask questions about franchises before signing on the dotted line and deeply regret it after a few months. Don’t let this happen to you. These are the essential franchise questions you must be asking.
Personal Questions to Ask
Before deliberating with the questions to ask other people, it’s helpful to build questions for yourself first. It’s crucial to know thyself before moving forward with an opportunity. These reflective questions should explore you ability to manage calculated risks, desires, passions, or even the why behind your desire to open a franchise business.
There could be a lot of questions that you could ask within yourself. Here are some of the most important ones you need to address. Use your answers to help guide you.
Will you enjoy doing this work?
Figuring out whether or not you’ll actually enjoy operating this business is really important. For example, I think the handyman services business is a terrific opportunity for someone that wants to start a low-risk business. I think building a customer list would be straightforward and that it could be a lucrative opportunity that could be quickly built-up to $250,000+ in revenue per year.
But I don’t like fixing things. I never have and working in this environment wouldn’t be enjoyable to me. As a result, I know to pass on all of these franchise opportunities even if I see the business potential. It’s not that the franchise is a bad opportunity, it’s not a good fit for me.
If the only reason you want to start a business is to earn more that’s a red flag. Your vocation should be more than just a source of livelihood. If you don’t enjoy what you do, you could face burn out quickly. And if you’re going to be starting a business anyway, why not pick something you actually like?
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Be honest with yourself if you are ready to continue despite all the challenges you’ll face as a business owner. People who are enthusiastic about their field of business are more likely to be optimistic, motivated, learn more quickly, make less mistakes, and execute better business judgments than those who are not.
Do you have relevant work or school experience in this field?
A lack of basic understanding of the industry can be dangerous. Sometimes the dream of owning a certain business doesn’t match the reality.
For example, there are a lot of people that dream of opening a small coffee shop. They imagine welcoming smiling customers and working in a relaxing environment. The reality is starting a coffee shop requires a ton of marketing to compete with the big boys like Starbucks. Just getting enough customers through the door to pay the rent is a challenge for many first-time business owners. The reality does not match the vision most coffee shop owners have when they start out.
Don’t enter a business you’re clueless about. Understanding the operations of a business always improves the odds of success. You don’t need to know everything, but a certain degree of industry knowledge is helpful for good management and long-term business success. Many experts cite business failures stemming from a lack of experience or knowledge on the part of the entrepreneur.
If you want to pursue a particular venture, but you don’t have any experience enroll in a coaching class, get an entry level job in the industry so you know what it’s like, listen to podcasts, take an internship, or have a coffee with a business owner. This are terrific ways to up-level knowledge in an industry.
Here are some additional personal assessment questions to help you gauge your interests and skills:
- Do I have the drive to become a successful entrepreneur?
- Am I willing to whatever work hours that it would take to take my business to a load of success?
- Will I be a reliable boss?
- Will I enjoy solving the problems that arise in this franchise business?
- Is this the type of business that I will have fun operating?
- Am I willing to take calculated risk knowing it could possibly fail?
- Do I have the mental ability to meet the everyday needs of operating my own business?
- Can I maintain a good relationship with the people who work for me? How about my customers?
- Can I afford to start my own business?
- Do I have the ability to communicate well?
- Can I handle the crisis situations and deadlines?
- How does my significant other feel about this decision?
Franchise Questions to Ask
What questions should I ask?
Asking a franchisor the right questions is another important part of the due diligence process. These questions will determine if your goals are aligned wants and if you can both reap benefits a the partnership. Some franchise opportunities it seems are designed only to profit from the work of franchise operators. That’s not a healthy situation to be in.
Here are the questions I would ask any franchise before signing an agreement.
Can I get a list of current franchisees to speak with about their experience?
Learning from other franchisee’s experiences is worth its weight in gold. They are in the exact same position you could be in within 6 – 12 months. They can also give you the good and the bad about working inside a specific opportunity. Does the corporate entity increase their supply fees? Can corporate management be trusted? Are you happy you joined this business? These are all hard-hitting questions you can get answered from a fellow franchise owner.
This is also a chance to establish a relationship with co-franchisees and find a mentor or friend. They will offer valuable help with the improvements or even share effective answers for problems they might have experienced before.
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You will want to inquire about the franchisor’s assistance, the profitability of the business, the franchisor’s advertising activities, their approximate start-up costs, and their overall contentment with their investment decision when meeting with franchisees.
What are the biggest challenges of this business model?
There is no existing business that didn’t encounter any challenges when they are starting up or even if it’s running for a long time. It is impossible to know if there is no business that hasn’t encountered challenges when they were just starting up. Before we get a full load of success, there could be a ton of trials or obstacles that we could face in the road of business.
As a franchisee, it is your responsibility to know the difficulties that a franchise faces before joining. It is beneficial to know how to handle possible situations similar to how the franchisor or co-franchisees dealt with it in the past. It will also give you ample time to think of practical ways to manage the business better and develop it.
Do not just focus on the strengths. Take time to discover the weaknesses of your franchisee. Here are the franchise questions I would want answers to.
- What is the success rate of your other existing franchises?
- Do you finance some of the costs for those who are willing to startup?
- Are you going to help your franchisees pick the best location?
- Can you tell me the competitors of this business, especially those operating near my location?
- How much can I expect to earn from this franchise?
- What training and support will I receive from this franchise?
- Does the franchisor provide hands-on assistance during the pre-opening, up until the initial period? What type will it be, what is its duration and cost?
- What are your possible plans with regards to possible competitive threats from other businesses?
- Are there any management changes planned?
- What are the strengths and weaknesses of this franchise?
Financial Questions to Ask
It’s all about that money, honey.
Raising financial questions is necessary because, after all, revenue is the thing you’ll need for a business to thrive longterm. But you’ll also want to understand the costs, including royalties before joining any company. After all, it’s not just how much you make. It’s how much you keep after expenses.
What are the royalty fees?
The royalty fee is a payment that a franchisee will pay as an ongoing percentage to the franchisor. Even if you already paid a one-time franchise fee, royalty fees are recurring monthly payments that cover the ongoing support.
The royalty charge is what keeps the franchisors afloat and pays for the costs of providing you with continuing education and support. It’s also a payment that lets you leverage an existing brand. Royalty payments are often based on a proportion of the gross or net revenues generated by a business. However, they can be negotiated on a case-by-case basis following the interests of both parties in the transaction.
Asking the royalty fees will help you evaluate if the franchise will generate a net profit income after all the expenses associated with running a business.
Do you offer discounts to certain groups of people? (Minorities, Women, Veterans, etc.)
If you are a military retiree, a veteran who served at any time in any branch of service, current or former guard or reserve, or if you are the immediate family member of someone who has served, some business considers giving a discount. People who are part of a minority group or women get discounts. If you’re not, it’s still justifiable to ask about any and all discounts offered. A discount program shows how the franchisor recognizes the debt owed to current and past service members of the military to other social groups. A discount can also make the business more appealing financially.
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Here’s a list of financial questions to get answers to before starting out:
- What is the total investment for this franchise?
- How much sales do I need to have to cover the cost?
- How much working capital do I need?
- How can I finance my investment?
- Can you provide financial support?
- Can I ask for a loan?
- Are there any fees aside from franchising fees that I should consider?
- When will I see a profit?
- Is this franchisor financially strong?
- What sort of return can I expect from this franchise?
Questions to Ask Current Franchisees
Group meeting with existing franchisees.
Aside from all the questions, you have asked, and information you have gathered from your franchisors, talking with other franchise buyers is a good way to learn from them based on their experiences. It will not just help you to gain connections, but it will also help you to take into consideration on how to smoothly manage your business and handle operational or marketing hurdles. Knowing
Some of these questions could be a great start. Try including it in your very first conversation.
Are you making money?
You may need to ask this question a bit more delicately. But this is a question you’ll want to have answered. You could politely pose this question by asking, “Can I make good money doing this?” This approach lets you get the information you want without seeming intrusive and directly asking about someone else’s finances.
Again, get clear on the sort of return on investment will make you happy. Will generating a profit of $50,000, $100,000, or $200,000 per year make the franchise worthwhile to you? Until you define your number, you won’t have a tangible way to define success.
Are you happy with your decision to join the franchise?
Satisfaction is evaluated in this question. It also provides an owner the opportunity to share the pros and cons of a business. There’s no one better to help you determine whether or not to move ahead with a business than speaking with a current franchisee operator.
Profit is only one of the many bases of overall satisfaction in owning a franchise. There are underlying factors that others might answer like operations support, material support, training support, or marketing assistance. At the end of the day, you want to know if you’ll be supported.
The most crucial reason you should seek a franchise that you enjoy doing is that you deserve to be happy and earn a strong return on investment. Life is too short to be stuck operating a business you hate.
What would you change about this franchise opportunity if you could?
It is very wise for franchisees to ask this type of open-ended question in order to grasp where the franchisor might be coming up short. Co-franchisees laying down the factors they want to change or develop is will give you a big point of view on the disadvantages of the franchise. No business is perfect. You just have to make sure that the benefits outweigh the disadvantages. You want to know you can live with the challenges.
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To further assess the prospective franchise business, here are the questions I would ask.
- What made you choose this franchise? Who introduced you to this franchise?
- If you would rate your experience with this franchise, how would you rate them?
- Does the franchisor listen to their franchise buyer’s suggestions and feedback?
- What’s a typical day like for your franchise? Is there a high possible income daily?
- What has been the most rewarding part of being a franchisee?
- Would you suggest this franchise to your family and friends?
- Have you got good business experience during your first few weeks under this franchise?
- Did the opening of your business go according to plan?
- Are there any hidden fees in this franchise?
- How would you describe your relationship with the franchisor?
Many entrepreneurs choose franchising as their vehicle to more confidently launch a business. Franchises have a lower failure rate than a startup businesses because the concept has already been proven in the market and the operations / marketing plan has been tested. What are you hoping to get out of a franchise? I’d love to know your goals in the comment section below.