Franchising is a great path to business ownership for the discerning entrepreneur. By investing in a proven business model, the learning curve is shortened and the path to profitability is accelerated. However, this only works if you have chosen a business model that is the right fit. Asking the right questions is an important part of making an informed decision.
The following list of questions will help guide your discussions during the due diligence process and are divided into three main areas of focus: Questions to ask yourself, the franchisor, and current franchisees.
Questions to ask yourself
- Am I prepared to follow a system? Success as a franchisee starts with the ability to follow and execute a brand’s proven system.
- Do I have the support and buy-in from my spouse/partner? While they do not need to take an active role in the business, your spouse/partner does need to be on board with the business. Their support is crucial in the startup period and beyond. Discuss how you each define support. The earlier you can involve them in the discovery process the better.
- What role do I want to take in the business? It is critical to match the business ownership model to your expectations and goals. If you are looking for a job replacement, an owner/operator model could be best suited for your goals. If you want to maintain your current employment and commitments, a semi-absentee business model could be a better fit.
- Are my short-term, mid-term and long-term expectations in line with the required investment? Investment level and time needed to achieve your desired return on investment (ROI) goals are linked. If you explore a restaurant requiring a multimillion-dollar investment versus a $300,000 service business, the time to reach your ROI expectations should be proportionate to the investment levels.
Questions to ask the franchisor
- What are the characteristics of the top performers in your franchise? Do I possess the personality traits and skill set that have shown to be successful with this offering? Is my background a good fit? It is often not about whether you have any experience in the industry you are considering, but whether you have transferrable skills. Many times, some franchisors prefer you don’t have industry experience, as you will likely not have to unlearn bad habits to follow their process.
- What is the brand doing to stay ahead of industry trends? The brand should actively be looking into ways to stay relevant, competitive and to differentiate themselves within their industry and beyond. Ask them how they are constantly improving.
- Why might a franchisee under-perform and/or potentially fail? It is easy to tell the success stories, but it is important to also learn from the struggles.
- What are the opportunities for growth and scaling the business? Ask about the brand’s history. How long has it been in business? What is the experience of the leadership team? Has it grown steadily over time or experienced a large boon? What are the plans for future expansion?
- What level of support can I expect pre- and post-opening? Some franchises operate under a “business-format system” with a high level of support across all phases of the business while others provide much less support. Find out what to expect.
Questions to ask the franchisees
- What does a typical day look like for you? This will look different in each phase of the business, from the startup period to the first six months to the first year to when the business has been established. Ask about how those phases differed.
- Has the level of support you received matched your expectations? It is important to determine if the franchisee’s experiences matched what the franchisor indicated they would provide in terms of support.
- Would you make the same decision again? Why or why not? Success means different things to different people. Find out how the decision has impacted their life.
- How much of the success of the business is dependent upon the franchisee’s execution of the business model? If you verify the franchisor is providing strong support of a well-established brand and proven business model, a business may still struggle without great execution. Find out from the franchisees how important it is to their franchise.
- What is one thing you do now that you wish you did day one? This is a simple question that is great to ask of any tenured franchisee. It’s important to take note of this answer and make every effort to apply this early so you can benefit from the learnings of the franchisees who pioneered the system before you.
For further reading on questions to ask during due diligence, read here about using the FDD to improve your validation process.