What To Look For in Franchise Documents (Part 2 of 2)

Cliff Ennico
Mon, 20 Feb 2023 21:00:00 -0800
Lifestyle

Here are five more questions to ask when reviewing a franchise's Franchise Disclosure Document:

No. 6: Is the Management Team Seasoned and Well Experienced?

Don't gloss over the management biographies in the back of the FDD; take out a magnifying glass and pay close attention to them. How long have these individuals been with the franchise? If the entire management team has been with the franchise less than five years, watch out — high turnover could indicate a fundamental problem with the franchise model. Also, look for relevant industry experience. A former marketing director for a consumer products company may not be the best fit for a fast-food restaurant franchise.
Updated: Tue Feb 21, 2023

Here are five more questions to ask when reviewing a franchise's Franchise Disclosure Document:

No. 6: Is the Management Team Seasoned and Well Experienced?

Don't gloss over the management biographies in the back of the FDD; take out a magnifying glass and pay close attention to them. How long have these individuals been with the franchise? If the entire management team has been with the franchise less than five years, watch out — high turnover could indicate a fundamental problem with the franchise model. Also, look for relevant industry experience. A former marketing director for a consumer products company may not be the best fit for a fast-food restaurant franchise.

No. 7: How Good Is the Franchise's Real Estate Team?

Successful retail franchises are all about location, location, location. Meet with the franchise executives who will help you find a location for your franchised business. If you don't like these folks, don't buy the franchise. Period.

Ask tough, hard questions. Will these people fly to your area and help you scout locations? Will these people roll up their sleeves and help you negotiate with a difficult landlord? Beware of real estate professionals who have spent their entire careers in only one part of the country.

No. 8: Are the Franchise's Startup Cost Projections Realistic?

Many franchises start up in areas of the country where real estate and labor costs are relatively cheap. These franchises often get into trouble when they branch out to the East and West coasts and urban areas, where everything's more expensive. Always talk to local real estate brokers, insurance brokers, construction contractors and, especially, the franchise's other franchisees in the area to "reality check" the startup cost projections in the FDD, which are often based on national or regional average costs.

No. 9: Are There Any New Technologies or Business Models That Are Threatening the Franchise's Business Model?

Many traditional retail and service businesses are facing serious challenges from new technologies, business models and changes in consumer attitudes. Ask anyone who was in the publishing business 10 or 15 years ago what the internet has done to their industry (and their career) and you will get an earful.

Some franchise models are a bit like those characters in bad horror movies who've have their heads cut off but don't quite realize they are dead yet. You will have to ask the tough questions and deal with the fact that often the franchise's executives haven't given serious thought to these challenges themselves.

Some examples:

— If you are looking at a tutoring franchise, ask the executives how e-learning and online webinars are impacting their business model.

— If you are looking at a check cashing or payments processing franchise, how will the evolution of a cashless society based on online payment systems such as Venmo and Zelle impact that business?

— If you are looking at a consignment shop franchise (where people bring things to you and you sell them online), will the manufacturers or the major online platforms (such as Amazon and Shopify) allow you to resell brand-name merchandise online in competition with their own online showrooms?

No. 10: What if the Franchise Owners Sell Out?

When starting any business, the founders give serious thought to their exit strategy — how will they cash out of the business and recoup their investment once it's become successful? Franchises are no different. For most large franchise operations, the most common exit strategy is to sell out to someone else — sometimes another franchise, sometimes a large corporation in the same industry.

When buying any franchise, you have to consider that at some point the franchise will buy, or be bought by, someone else, and you will be required to make changes, sometimes radical ones, to the way you do business. Ask any UPS Store owner who formerly ran a Mail Boxes Etc. franchise how easy it was to make that transition and you will get an earful.

Here are some tough questions:

— Looking at other franchises in the industry, who would be the most likely merger partner for this franchise?

— Are there any large, nonfranchised businesses in the industry who would possibly buy this franchise and require franchisees to sell only its products?

— If this franchise were to merge with another franchise, would this franchise be the acquirer (and therefore more likely to impose its model on the acquired franchise) or the acquiree (and therefore more likely to adopt the other company's model)?

— What rights will you have if the franchise merges with another franchise and the other franchise has a competing franchisee in your territory? Will you be forced out of business if your franchise agreement expires before the other guy's does?

Most franchises will tell you they have "no immediate plans" to merge with another company, but if they tell you they've never thought about it or would never consider selling out, don't believe it. It's on their minds, and it should be on yours as well.