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Posted on Jan 19, 2011

Before Buying a Franchise How to Evaluate Your Franchisor

There are a number of important steps to follow before purchasing a franchise. Although the bulk of the evaluation process focuses on the operation and results of the franchise, attention also needs be directed to the franchisor. After all, it’s the franchisor that directs, administers and develops the franchise network.

Buying a new franchise begins a relationship that can run from 5 to 10 years or longer. During the term of your franchise agreement you can expect to face some challenges, which will arise during the normal course of business. Some challenges can arise unexpectedly. The recession of 2009 is an example of an event that came quickly and with devastating results for some businesses. Since challenges can take various forms it’s important to understand how the franchisor administers the franchise on a day-to-day basis. You need to evaluate the franchisor in order to better understand whom you’ll depend upon to help you be successful.

In addition to an in-depth due diligence that should be performed before purchasing a franchise, here are some tips that can provide insight into a franchisor’s profile.

Here are some indicators that can help you develop a franchisor profile:

  • How does the Franchisor Sell Franchises?

The way a franchisor sells new franchises can reveal quite a bit about the operation of the franchise. Using only franchise brokers versus in-house sales staff, for example, may indicate that the franchisor is looking for fast growth and may lack the capital to fund its own sales staff.

  • Was the Franchisor responsive?
  • Was your request for franchise information processed on a timely basis?
  • Did you receive an e-mail acknowledging your interest in the franchise?
  • Do your e-mails or calls to the franchisor sales staff generate a prompt response?

A poor response by the franchisor can mean that they are understaffed, overwhelmed with requests or simply not as responsive as they should be. You’ll need to keep these things in mind during your inquiry into a franchise opportunity.

  • Franchisee Feedback

Your most credible source of information about the franchisor will come from existing franchisees. During your conversations with existing franchisees it’s not unusual to focus most of your time upon the operational aspect of the franchise. However, it’s also important to use this opportunity to learn about the franchisor. Here are some questions that will help you add to your franchisor profile.

  • Has the franchisor delivered as committed?
  • If not, what happened?
  • Has the franchisee sought assistance from the franchisor and if yes, how did they respond?
  • Do the franchisor staff and senior management respond promptly to e-mails and phone calls?

Discovery Day

A key step in the franchising process is meeting with the franchisor during discovery day. Some franchisors try to schedule Discovery Day at an early stage in the process. Usually, this occurs after the franchise application has been submitted and approved. The franchisor can use this opportunity to evaluate a franchise candidate and try to close the sale. Although your focus will be to gain added knowledge regarding the franchise, ask questions, and perhaps negotiate terms of your franchise agreement, this is also an opportunity to gain further insight into the franchisor. Simply put, if you haven’t gathered your preliminary information regarding the franchise you should delay your Discovery Day visit until you’re properly prepared.

Here are some things to look for at a franchise Discovery Day:

  • Did you receive an agenda prior to the meeting?
  • Did the key members of the franchisor’s staff participate?
  • How helpful was the franchisor regarding your travel and lodging requirements?
  • Were you able to meet a key member of senior management?
  • How responsive was the franchisor to your questions or requests?
  • If the franchisor staff is aggressively trying to sell the franchise it can be a “red flag.”  Typically, a solid, well-managed franchise company won’t take this approach.

Overall, your objective during discovery day is to question, observe and make notes regarding the franchisor staff. This is a key component of your franchisor profile.

Purchasing a franchise is an important decision with significant implications. Since the franchisor is the critical part of the franchise relationship it’s important to gain as much knowledge about the franchisor as possible. You’ll be engaging in an imperfect science, however, it’s important for you to “know the franchisor” before signing on the dotted line.

Ed Teixeira has over 35 years of franchise industry experience as a franchise executive and franchisee. He has served as a franchise executive in the c-store, manufacturing and home healthcare industries and has licensed franchises in Asia, Europe and South America. He has spoken on the subject of franchising throughout the world. Ed operates FranchiseKnowHow which provides information and advice to prospective and existing franchisees and franchisors.

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