107 Questions For Franchisors and Franchisee

Purchasing a franchise is a major investment decision and not every franchise will be right for every individual. The following list of questions that FranNet and the CFA recommend you should ask, if you are considering purchasing a franchise.

I . THE FRANCHISOR – IDENTITY & EXPERIENCE

  1. Who are the shareholders of the franchisor?
  2. Who are the officers and directors of the franchisor?
  3. What is the business experience of the franchisor’s directors and officers?
  4. Is the franchisor a subsidiary of another company?
    • If so, who is the parent company?
    • Has that company ever franchised other services?
    • If so, which concept(s)?
    • How successful are the other concepts?
  1. What is the franchisor’s financial condition?
    • Have you received its most recent audited financial statements?
  1. Have any of the franchisor’s directors, officers or shareholders gone bankrupt or convicted of any criminal offences in the last 7 years?
  2. How many years has the franchisor been operating?
  3. How many years has it been offering franchises?
    • In Canada?
    • In USA?
  1. How many franchises does the franchisor have?
    • How many units are corporately owned?
  1. Is the franchisor a member of the Canadian Franchise Association?
  2. What is the franchisor’s reputation with the Better Business Bureau?
    • With the Chamber of Commerce?
    • With Dun & Bradstreet?
    • With their banker?

I I . FRANCHISOR RELATIONS WITH ITS FRANCHISEES

  1. On a scale of 1 – 10, how good is the franchisor’s reputation for relations with its franchisees?
  •  with its customers?
  1. How does the franchisor choose its franchisees?
  • Have your qualifications been reviewed?
  • Why do they feel you’re a good match?
  1. What are the franchisor’s plans for future development?
  • For expansion/diversification?
  1. How will these plans affect your dealings with the franchisor?
  2. How does the franchisor monitor franchisee operations?
  • Does the franchisor periodically inspect all of the franchises?
  1. Does the franchisor keep a separate advertising budget?
  • Will the franchisor provide franchisees with a statement of the disposition advertising funds?
  1. On a scale of 1 – 10, how well does the franchisor solicit franchisee input into marketing strategies new product development, etc.?
  2. On a scale of 1 – 10, how well does the franchisor account for the unique needs of different marketing areas when it designs its marketing strategies?
  3. Will the franchisor provide a list of all the franchisees in the area?
  4. Have franchises been terminated in the last 10 years?
  • How many?
  • For what reason?
  1. Has the franchisor litigated with franchisees previously?
  • What was the outcome of such litigation?

 

  1. Is there any pending litigation against the franchisor?
  • What is the nature of such litigation?
  • The status?
  • The likely outcome of the litigation?
  1. How does the franchisor describe its corporate culture? On a scale of 1 – 10, how comfortable are you with this culture?
  2. Does the franchisor have a recognition program for exceptional performance? What does it involve?
  3. Is there a franchisee association or council? Who belongs?
  4. How important is innovation to the franchisor’s industry?
  5. How innovative is the franchisor?
  • What successful innovations has franchisor introduced since starting?
  1. Does the franchisor have plans for expansion or diversification? What affect will these plans have on your dealings with the franchisor?
  2. Has the franchisor introduced any innovations since it began its business?

III. REQUIRED INVESTMENT

  1. How much is the initial franchise fee?
  • Is there a deposit?
  • How much is refundable?
      • Under what circumstances?
    • Is there a site development fee?
  1. What is the anticipated cost of leasehold improvements, equipment, signage and start-up inventory?
  2. What is the anticipated occupancy cost of the premise? i.e.
    • rental payments or purchase cost of real property?
    • anticipated construction costs for the premises?
  1. What other costs may be incurred?
  2. Does the franchisor assist in the financing of the franchise?
  3. What is the anticipated period of time between start-up and break-even /profitability?
    • As identified through discussions with at least 6 existing franchisees?
  1. What is the anticipated “business” working capital required through the launch period (from signing of contracts through to the franchise achieving break-even/profitability)?
    • As identified through discussions with at least 6 existing franchisees?
  1. What is your anticipated “personal” working capital required through the launch period (the amount you need monthly to cover living expenses, multiplied by the number of months before you can draw income form your franchise)?
  2. On a scale of 1 – 10, how well does the total investment, including business and personal working capital, fit within your financial investment range comfort zone?
  3. What are the anticipated franchise earnings?
    • As stated in an Earnings Claim?
    • As identified through discussions with at least 6 existing franchisees?
  1. On a scale of 1 – 10, how well do the anticipated earnings satisfy your income goal/requirements?

IV. FRANCHISED PRODUCT OR SERVICE

  1. What makes the franchisor’s product or service unique?
    • Does it satisfy a need?
    • Is it marketable in your territory?
    • What are the franchisor’s strategic differentiators over the competition?
  1. What are the current sales of the franchisor’s product or service?
  • Have sales been increasing or decreasing?
  1. How long has the product/service been on the market?
  2. Would you buy the product/service on its own merits?
  3. What is the competition for the franchisor’s products or services in your market?
  4. On a scale of 1 – 10, how competitive is the price of franchisor’s product or service?
  5. Is the sale of the product or service subject to legal standards and regulations and if so, what are the applicable federal and provincial standards and regulations and does it comply?
  6. Is the product protected by patent, trademark, or copyright?
  • Are the trademarks, copyright or patents registered in Canada?
  • Who owns the trademarks, copyrights and patents?
  1. Are there product warranties? Are they the responsibility of franchisor, the franchisee (YOU) or franchisee or a third party supplier?
  2. What products must be purchased from the franchisor or designated suppliers?
    • On a scale of 1 – 10, how competitive is the cost from third party suppliers?
    • If supplies are interrupted, can purchases be made through alternate suppliers?

V . SALES TERRITORY AND LOCATION

  1. Is your franchise territory exclusive?
  • If not exclusive, is there any territorial protection?
  • Will there be other outlets opening in or near your territory?
      • Company owned?
      • Owned by other franchisees?
      • Can you get first right of refusal?
  • Does the franchisor sell its products through other channels?
      • If so, what are these channels?
      • How will they impact on the profitability of the franchise?
  1. Can you decrease or expand your sales territory?
    • Under what conditions?
    • At what additional investment level?
  1. Has the franchisor provided you with population statistics, including age, occupations and income levels, and information about projected growth potential over the next few years? If not, how will you obtain this information?

VI. QUESTIONS TO ASK CURRENT FRANCHISEES

  1. What was your total investment of the franchise?
  2. Were there any unexpected costs? If so:
    1. what were they for?
    2. How much were they?
    3. How unique were they to that individual, or is it something several franchisees experienced?
  3. On a scale of 1 – 10, how good is the quality of the products supplied by the franchisor or its designated suppliers?
  4. On a scale of 1 – 10, how satisfied are you with the price-quality relationship?
  5. On a scale of 1 – 10, how well reliable are deliveries from the franchisor or its designated suppliers?
  6. On a scale of 1 – 10, how effective was the franchisor’s initial training? How long was the training?
  7. What is the franchisor’s ongoing training program?
  • On a scale of 1 – 10, how effective is the:
      • Ongoing training?
      • Group training calls?
      • Mentoring by franchisor?
      • Mentoring by other, successful franchisees?
  1. On a scale of 1 – 10, how effective is the franchisor in responding promptly and helpfully to questions you have or advice you seek?
  2. What type of ongoing support and advice, including advertising, marketing and promotional assistance, do you receive from your franchisor?
  • On a scale of 1 – 10, how satisfied are you with this support?
  1. On a scale of 1 – 10, how profitable is your franchise as compared to initial expectations?
  2. How long did it take revenue to cover operating costs?
  3. How long did it take for you to receive a reasonable salary?
  4. What have you done to make your franchise successful and would you recommend this franchise?
  5. Does the franchisor have a dispute settlement board with both franchisee and franchisor representatives? On a scale of 1 – 10, how effective is it?
  6. Have you ever had a serious disagreement with your franchisor? What was the disagreement about? How was it settled?

VII. THE CONTRACT

  1. Are the franchise, the location and the territory clearly described in the contract?
  2. Is the contract specific as to the type and size of operation you’re expected to manage?
  3. Does the contract clearly describe the duration, type and cost of the training to be provided by the franchisor?
  4. Does the contract include, in detail, all of the franchisor’s verbal promised made to you throughout your discussions?
  5. Does the contract clearly specify the type, amount and timing of all payments to the franchisor including the following?
    • the franchise fee;
    • any deposit;
    • any fixed yearly (or other frequency) payments that the franchisor receives;
    • royalty payments based on a percentage of gross sales;
    • monthly percentage of gross sales which must be spent on local advertising;
    • advertising payments to franchisor operated advertising fund;
    • fees of continuing services provided by the franchisor; and
    • other payments?
  1. Are you required to purchase supplies from the franchisor or other designated suppliers? If so,
    • what and how much?
    • Are there any annual (or other frequency) minimum purchase quotas?
  1. Can you use alternate suppliers if franchisor’s quality standards are maintained or franchisor’s supply deliveries are interrupted?
  2. Do you have the right to use any innovations developed by the franchisor?
  3. Is there a sales quota? On a scale of 1 – 10, how attainable is it?
  4. What is the contract term?
    • Is the term renewable?
    • For how long?
    • What are the renewal conditions?
  1. What types of records and reports are you required to provide to the franchisor?
  2. Are you leasing your location or will you have a sublease?
    • Is the lease for the same period as the franchise contract?
    • Can the lease be renewed?
      • On what term?
      • When you renew your franchise?
    • Can you change locations?
      • If so, on what conditions?
  1. Are you required to build or may you renovate existing franchise premises?
    • Will the franchisor provide design and construction specifications?
      • Can these specifications be changed?
  1. Do you choose the location or sales area of the franchise, or does the franchisor?
  2. Can you operate more than one franchise in your sales area?
  3. Can you sell your interest in the franchise?
    • Does this require the franchisor’s consent?
    • What are the conditions of such consent?
    • How is the sale price determined? Is there a pre-determined valuation formula?
  1. Can you terminate the contract?
    • If so, what are the conditions for terminating?
    • What are the costs and/or penalties?
  1. When and how can the franchisor terminate the contract?
  2. If the contract is terminated, will you be compensated for the goodwill that you have built up in the business?
  3. Is there a post-term non-competition covenant?
  4. If you violate a term of the agreement, do you have time to correct the situation?
    • How much time?
  1. Does the contract contain an arbitration clause?
  2. What happens if you suffer a prolonged illness or death?
    • Have transfer/succession questions been satisfied?
  1. Can you engage in any other business enterprise for the term of the contract?

VIII. FRANCHISOR’S ASSISTANCE TO YOU

  1. Does the franchisor offer financing assistance?
  • For fixed assets/leasehold improvements?
  • For initial inventory
  • For vehicles, if required?
      • Directly?
      • Through a 3rd party?
        • At what cost to you?
        • What about ongoing inventory financing
      • Does the franchisor help establish trade lines, or will you buy COD?
  1. What inventory control programs/assistance does the franchisor provide?
  2. Will the franchisor choose or assist you in the selection of an appropriate site?
    • If only assisting, to what degree do they provide assistance?
    • Are professional realtors/brokers/ space specialists utilized?
      • At what cost?
      • Who pays – franchisor or franchisee?
  1. Does the franchisor build the premises? If not, does the franchisor specify the design of premises layout and displays?
  2. Does the franchisor assist in lease negotiations, or do they sign the lease and then sub-lease to you?
  3. Does the franchisor provide initial training in, or assist in selecting your initial employees?
    • For how long?
    • At what cost?
  1. Does the franchisor provide initial training and ongoing training for future employees? If so,
    • how often,
    • for how long and at what costs?
    • Will you be required to attend on-going training sessions?
    • On a scale of 1 – 10, how good is the training, if available?
  1. Does the franchisor provide on-site opening assistance?
    • For how long?
    • At what cost?
    • How available are the franchisor’s own qualified staff in case of an emergency?
  1. What continuing management assistance will you receive? On a scale of 1 – 10, how good is it?
  2. On a scale of 1 – 10, how good is the franchisor’s system/ability to detect franchisees in need of assistance?
  • How does it respond to such situations?
  1. What advertising and sales promotion assistance does the franchisor provide?
  • Do they provide designs/specifications for ad layouts/displays?
  1. To what degree do you control the cost and format of local advertising?
  • If not, how does the franchisor control this? Can you live with this?
  1. Does the franchisor have simple and well-run book-keeping and other administrative procedures?
  2. Does the franchisor provide operational manuals and guidelines?

Jun 24, 2014

Canadian Franchises, Editorials