The franchisor-franchisee relationship is crucial, and these key considerations can help foster franchise success
When you apply for a franchise, you should expect that the franchisor will put that application under a microscope. That’s because good franchisors complete significant due diligence on their candidates to make sure that awarding a franchise would be in the best interest of everyone involved. This helps to ensure prospective franchisees are a good fit and they have the right disposition and the finances available to take the leap.
While the franchisor carefully analyzes its prospective franchisees, you should also be performing the same level of due diligence about the franchisor you’re considering. You need to ensure you’re entering a franchise system that meets your specific business goals, aptitudes, and interests. Here are some things you should be on the lookout for as you investigate the franchise opportunity.
1. A reliable franchise concept
Franchising is all about consistency. The ability of franchise systems to replicate the success of the concept throughout dozens, hundreds, and even thousands of locations (potentially globally) is one of the biggest strengths of the business model. Here are some key questions franchisees should ask about a franchise’s replicability:
- How many locations are there?
- If it’s a start-up franchise system with a few locations, can the concept be replicated in new markets?
- What kind of market would the franchise be successful in?
- How many locations have failed? Why?
- How similar are the existing franchised businesses in the system? Is the brand consistent across locations?
2. A strong franchise brand
There are dozens of quick service franchise systems serving hamburgers across Canada, but a solid brand concept and established reputation can help a quick service burger franchise system stand out from the pack. Here are some key questions to ask about the franchise brand and concept to determine what makes it stand out from the competition:
- Does the franchise have protected trademarks (name, logos)?
- Does it have name recognition?
- What’s the reputation/public opinion of the franchise? Is there negative feedback on social media?
- How many corporate stores are there? Can customers tell the difference between a corporate store and a franchised store?
- Is the franchise financially healthy?
- If it’s a newer concept, what is the franchisor doing to differentiate the brand from the competition? Is it enough to stand out?
3. Consistent franchise operations
Franchisors create consistency across all the franchises in a system through the operating standards and procedures documented in the operations manuals. The system, suppliers, and training are all designed to create a consistent experience for customers while setting expectations for franchisees. As a prospective franchisee you should thoroughly review the franchisor’s operations manuals before signing a franchise agreement. If the franchise doesn’t have an operations manual, or won’t let you to review its contents before signing, this might be a red flag.
4. A supportive management team
Franchises are often backed by a strong corporate management team that provides support to help the business thrive. The franchisor’s management team of professionals should be dedicated to the success of the system—
which means supporting franchisee success. Some key questions to ask about the support for franchisees include:
- How involved is the franchisor in the day-to-day operations of the franchise?
- What support does the franchisee receive? If the franchisee has questions, how do they get answers (phone call, email, web portal, etc.)?
- How dependent is the system on its founder?
- What are the founder’s long-term plans for the franchise?
- Is there a private equity investor? If so, what is its role in management? And what are its short-term/long-term interests in the systems?
5. Comprehensive franchisee training
Typically, franchisee training occurs at the franchisor’s corporate office or at an existing franchised location. Again, training ensures the franchise’s consistency across all its units. It helps to make sure all franchisees are on the same page and includes key training areas such as site selection, operating standards, recruitment, and marketing. Before signing on the dotted line, franchisees should review the disclosure document for more information about training, and should go over questions such as:
- What type of training do franchisees receive (online, in-person, on-site, etc.)?
- What’s covered in the training program and how long is it?
- Who must attend training?
- Is there an additional cost for initial training?
- Who conducts the training?
- What happens if the prospect doesn’t successfully complete the program? How often does that occur?
6. A smooth site selection process
When it comes to brick-and-mortar franchise concepts, location is critical; the location of a franchise can make or break its success. Each franchisor handles site selection differently. Some franchisors leave it to their franchisees, while others take complete control over the process. Prospective franchisees should ask the franchisor how involved they’ll be in the site selection process. They should also ask key questions regarding territory, and development of the location.
You should also find out what kind of lease the franchisor will hold. Is it a head lease? If not, you’ll have to find out how and whether it will exert any other form of land control to ensure it maintains an interest in the location if the franchisee fails.
7. A healthy supply chain
A franchise system’s supply chain is what keeps it running. It’s what fills the shelves of a retail store or keeps fresh ingredients in stock to feed hungry customers ordering off a menu. Like site selection, supply chain management within a franchise system varies from franchisor to franchisor. Prospective franchisees should find out what their role will be when it comes to the supply chain. You should ask questions such as:
- Is the franchisee required to purchase all equipment, products, and related accessories and supplies from the franchisor?
- How are the products distributed?
- How long does it take for orders to be filled?
- Does the franchise offer discounts for bulk orders?
8. Marketing programs and support
Without basic marketing, consumers won’t learn about a franchise’s products or services. In franchising, the marketing program is often laid out in the franchise brand standards manual and other operational and legal documents. Prospective franchisees will want to understand:
- Has the franchisor established a national or regional marketing program?
- Is there a requirement for the franchisor to report on the use of advertising funds generated from the franchisees?
- To what extent do franchisees benefit from the fund compared to one another?
- Is the franchisee required to do local advertising? How does that work?
9. What are the terms of the franchise agreement?
The franchise agreement should lay out, in clear terms, the rights and responsibilities of both the franchisor and franchisee. You can’t expect everything to balance in favour of the franchisee, but some agreements are more one-sided than others.
Some key issues franchisees should note:
- Are parts of the agreement negotiable?
- What is the initial franchise fee?
- What is the initial term?
- Are there any conditions of renewal (i.e. will the franchisee have to spend a lot to renovate to renew)?
- Does the franchisor retain the right to change the agreement at any point?
- What rights has the franchisor reserved for itself while granting this franchise? Is there an exclusive territory?
- Are there minimum performance standards?
- How much will the franchisor receive in ad fund fees, technology fees, additional training fees, and other royalties?
- Does the agreement have a reasonable process for addressing disputes?
- What happens in the event of a default/termination? What are the rights to transfer the business?
10. Is it a good lifestyle fit?
Ultimately, the decision to invest in a franchise is driven by a desire to be one’s own boss while running a business that has a proven track record or serious prospects of success. Not every franchise works with everyone’s preferred lifestyle, so here are some questions to help you decide if the franchise works for you:
- What does the day-to-day life of owning this franchise look like?
- What type of work will the business require? Is it physical? Is it customer-facing?
- What are the expected working hours?
- Can you do the job from home, or do you need to go to the location every day?
When franchisees invest in a franchise, they’re not just investing money and taking on financial risk; they’re also investing time, passion, and hard work. With the amount of resources that franchisees devote to a franchised business, they should get a full picture of the franchise opportunity before they sign. Documents like the Franchise Disclosure Document will hopefully answer some of the questions above, but speaking to existing and former franchisees, reading online reviews, seeking the advice of experienced legal and financial advisors, and even just visiting franchised locations in person will provide a clear picture of the franchise system.
After reviewing all the documents and going through these questions, you should have a pretty good idea of what you’re getting yourself into and the quality of the franchise systems you’re considering. Remember, there are plenty of systems to choose from, so don’t settle for anything less than a great franchise fit.