Franchisees: A Valuable Resource For Prospective Franchisees

When performing due diligence, valuable resources for prospective franchisees are franchisees and former franchisees. In the Franchise Disclosure Document (“FDD”), the franchisor must list all current franchisees and all franchisees who have left the system in the last fiscal year. These lists are generally in an exhibit to the FDD. One purpose of these lists is to permit prospective franchisees to contact those franchisees who are, or have been, in the system and provide the prospective franchisee with information on the franchisor and its system.

Communicating with franchisees and former franchisees can be enlightening. They are one of the best sources of information about the franchisor, brand performance, culture of the franchise community, benefits of the system and problems within the system.

My advice to prospective franchisees is to call as many current and former franchisees as you can. Call those near you. Call those in other areas. Call new stores. Call stores with long histories. Here are just a few questions to ask.

• Would you do it all over again? This is a very telling question. The answer speaks volumes about the franchisor and its operations. Explore this question extensively. Accepting “Yes” or “No” doesn’t tell you much. What are the reasons for their answer? The answer to “Why” is where the information is.

• Have you considering opening a new location? A franchisee looking to expand suggests that the franchise is meeting expectations of the franchisee. However, beware. Under some systems, franchisees are obligated to expand under an area development agreement. Exploring why franchisees are expanding, or conversely, why they do not wish to expand, is an indicator of the brand’s success or failure.

• How long did it take for the store to break even? How long did it take the owner to make a profit? Questions about money are difficult to ask. But, they are important. Explore the average unit sales, cash flow, accuracy of the Item 7 Initial Investment ranges and year-end sales. Asking these tough questions will help to give you a realistic expectation of what your gross revenues and profit margins might be.

• How does the franchisor handle conflict? During the sales process, the franchisor puts on its best face. But what happens when a problem develops? Asking franchisees, and in particular, former franchisees, how a franchisor handles a situation when the franchisee is in trouble is very telling of the franchisor’s mentality toward its franchisees. What happens if a problem exists between the franchisor and franchisee? Is there a mediation process? Is it “my way or the highway?” Preparing for the worse when buying a franchise is difficult. But it is wise to explore what happens when something goes wrong.

• Does the franchisor’s marketing program work for the franchisee? How receptive is the franchisor to local marketing efforts of the franchisee? Exploring the marketing of the brand is important on both a national and local level. Franchisees are a great resource to understand if the franchisor’s marketing effort make an impact locally.

• Why did you leave the system? Asking former franchisees why they left may reveal a serious problem with the franchisor. If former franchisees are giving you consistent answers to a particular problem; then further research into that problem needs to be pursued.

Some franchisor guide prospective franchisee to certain franchisees on their list. “Here’s a list of franchisees to call.” There are reasons for this. First, the franchisor may not have made a Financial Performance Representation in the Franchise Disclosure Document, and, the franchisor knows that these particular franchisees will give a glowing report of the franchisor and the store sales. Second, the franchisor wants to steer prospective franchisees away from problem stores or disgruntled franchisees. Third, simply, they know these franchisees will give good review. Whatever the reason, if the franchisor gives you a list of franchisees to call, make sure to call a good number of franchisees that the franchisor did not list.

Franchisees and former franchisees are an excellent source of information on the franchisor and the chain. Calling them should be a high priority for any prospective franchisee.

Debra Hill is a partner at FisherBroyles, LLP practicing in the areas of franchise and intellectual property. She can be reached at 904-612-3780 or debra.hill@fisherbroyles.com.