You Found a Franchise to Investigate – Now What?

You’ve chosen the franchises that you want to investigate – congratulations – the easy part is over… now what?

There are three phases to detailed franchise research, “Franchisor Discussions”, “Validation” (speaking with existing franchisees), and “Discovery/Confirmation”. It is important to progress through these phases in chronological order

Phase 1 – Franchisor Discussions: (duration – 2 to 4 weeks)

In this first phase, you will want to learn as much as you can about the business model, the market opportunity, what critical roles are required to drive success, etc. please remember that you are gaining all this information from the franchisors perspective, so feeling some level of doubt and scepticism is normal; as you go deeper into research, the doubt and scepticism should be relieved.

Essentially, there are three critical things that you should have a clear understanding of by the end of this phase:

  1. What the critical roles are that the franchisee has to perform in order to drive success in the business (i.e. sales, staffing, inventory and facility management, etc.). The more you understand what the roles are, the better you will be able to address to what degree you will be able to perform these roles. As you gain understanding of this information, you will always be running things are two filters
    1. “can I do it” – the degree to which you are physically able to perform the required tasks (based on a combination of your previous skills plus the franchisor’s training and support)
    2. “will I do it” – the degree to which you can see yourself excited and motivated to perform the required tasks, both short-term and long-term
  1. what the value proposition is – this should always be assessed on two levels:
    1. By the franchisor to you as the franchisee – when you compare buying the franchisor’s business model against starting the same business on your own from scratch, a good franchise system should always be able to demonstrate “compression of time”. This comes from being able to leverage the franchisor’s proven systems and processes, superior marketing strategies and resources, and most importantly, the compressed learning curve resulting from the combined knowledge and experience of the franchisor and all of the franchisees that have gone before you. Time compression is typically evidenced in these three cycles:
      1. time from signing your franchise agreement to opening the doors to your customers
      2. time from opening to achieving consistent breakeven (where revenues cover all expenses)
  • Time from breakeven to achieving “full stride” (where full stride is achieving the financial objectives you originally set out to realize)
  1. You will also want to understand what the value proposition is that you will be providing, as the franchisee to the marketplace – there can be numerous factors involved here, i.e. superior product, greater product mix, superior service, etc. in some franchise systems there are significant aspects of differentiation, while in some (more competitive) business categories, often the primary differentiator will be the degree of service that you as the franchisee will provide to your customers

3. What the strategic differentiators are (if any) that the franchisor is able to demonstrate as compared to their competitors. Some people would consider this part of the value proposition, but I believe it is important enough to isolate and define as best you can.

Phase 2 – Validation with Existing Franchisees: (duration – 4 to 8 weeks)

Most experts will agree that this is the most important stage of franchise research so give yourself plenty of time! This phase often takes much longer than people originally estimate… While typical discussions with existing franchisees each last between 20 and 40 minutes and that in itself consumes a lot of time, the greater delay is caused by the amount of effort it takes to reach out and coordinate calls with these very busy people.

Remember, the purpose of this phase is not to learn what the business model is and what the franchisor believes is required to drive success – you should have accomplished that in phase 1. Instead, the purpose of this phase is to get the existing franchisees opinions on how well the system is working, and more importantly, what their perspectives are regarding what critical roles are required to drive success… don’t be surprised when answers do not always match the franchisor’s answers – this is exactly what you’re trying to figure out! Essentially, you want to understand how well the rubber is hitting the road!

We maintain that you should talk to at least 2 to 3 existing franchisees of each concept before eliminating them from your list, or deciding if you want to do further research. For the companies that you do find highly interesting and that you want to do more thorough research on, then for these companies we recommend that you talk to at least 8 to 10 existing franchisees – we call this “going deep”.

Many franchisors are quite happy to share who their top performers are, but if you only talk to this group than you are not getting the full picture. Ideally, one third of the existing franchisees that you talk with will be top performers, one third will be middle performers, and one third will be the unhappy or underperforming franchisees (not always the same thing). It is a requirement of most jurisdictions’ franchise legislation that the franchisor include a list of all existing franchisees in their disclosure document, so as you start making random calls to this list, you should be able to find happy as well as unhappy franchisees.

It will also be important to ask “quantitative” questions instead of “qualitative” questions… For example, if you ask somebody “how good is the ongoing coaching and support?” The answers will likely sound something like “it’s really good!”. Essentially, this answer might give you a feel good feeling, but it doesn’t really tell you anything. Instead, ask something like “on a scale of 1 to 10, how good is the ongoing coaching?” You will likely hear a numerical answer, something like 7 ½/10 or 8/10… That on its own is not enough – you will also want to get a better understanding of what the gap is, and why it’s happening. Ask questions like “what do you like about the ongoing coaching and support that you gave it that score? What else? What else?” Once you get some positive answers, then you will also want to ask for some negative feedback, perhaps “what’s missing from the coaching and support that if it was in place, you would have given it a higher score? What else? What else?” For a complete list of questions to ask franchisors and existing franchisees, visit my June 2014 blog: 107 questions

A natural part of phase 2 is eliminating options (assuming that you have started with more than one franchise to investigate). As you progress through phase 2, one or even two concepts should start looking a lot better than the others; these are the ones that you will want to “go deep” on. By the end of phase 2, you should’ve been able to get enough information to build a thorough business plan and financial model, where you have a high degree of confidence in being able to realize that plan. You should be at the stage where you’re “almost ready to buy” – in other words, the business satisfies all of your logical criteria (financial, lifestyle, skills match, etc.), as well, your primary emotional criteria (passion for type of work, image, comfort with risk, etc.) are also satisfied. If you are at this stage, then you are ready for the final phase of franchise research.

Phase 3: discovery/confirmation: (duration – 2 to 3 weeks)

Up until now, you will have likely been dealing with the franchise sales person. As soon as you buy the business, their job is to go on to the next prospective franchisee so, as you’re final step in research, it will be important for you to meet with the franchisor’s senior leadership team so that you can check for final culture fit and make sure you’re comfortable with the people who will be responsible for supporting you in business for the many years to come. This is usually done through scheduling a Discovery Day, where you (and ideally your spouse/partner) will fly to the franchisor’s head office and spend a day with them. Here are the three actions you will want to take at this point:

  1. Get the next discovery day dates from the franchise sales person, then book your flights and hotels accordingly
  2. Book a meeting with a franchise lawyer (not a regular business lawyer) to get your Disclosure Document and franchise agreement reviewed prior to your departure. This will enable you to have your questions and concerns addressed either prior to or at the Discovery Day; it will also help keep any negotiating potency slightly in your favour.
  3. Book a meeting with your banker prior to your departure to get the financing application underway

You will not be expected to make a decision while you are there, but most people usually know by the time they get back home whether or not they want to proceed with the purchase of the franchise.

If you do want to buy the franchise, then the purchase (signing a franchise agreement and writing a very big cheque) is usually done within 3 to 5 days upon returning from the Discovery Day.

Following the steps outlined herein is one of the most effective ways and significantly mitigating your risk and finding the right franchise. There is a tremendous amount of ongoing coaching that simply cannot be sufficiently covered in this kind of medium, but hopefully this gives you some important insight into the type of research I coach my clients through!

About Gary:

Gary Prenevost is one of Canada’s leading franchise experts and has been an entrepreneur for more than a quarter century. He has been involved in a variety of successful non-franchised and franchised self-employed businesses. By exploring the ideal solutions that fit an individual’s desires and strengths, Gary helps senior and mid-level executives take a step back and objectively look at whether franchise ownership would be a viable and positive career choice. By playing to the individual’s transferable skills and passions, the franchise owner can enjoy less stress, greater success, more fun, and improved quality of life.  In addition to being one of Canada’s top franchise matchmaking experts, also co-owns a master franchise and unit franchise for Alair homes, a custom home building and renovation company, so he is intimately familiar with the home improvement marketplace.

May 15, 2015