Five basic franchise questions and their answers
Staff Writer | Posted Monday, September 19, 2016 |
The following article is authored by Guest Blogger, John Hayes.
From my franchise seminars, and from mail sent to me via my website, here are five of the most frequently asked basic franchise questions, and their answers.
Q: Why can’t I buy a franchise as soon as I find the one I want to buy? I recently found a franchise at an expo. I liked it and wanted to buy the rights for my area before someone else did. But the franchisor said the government would not allow them to sell me the franchise that day. Is that true?
A: Franchise disclosure laws in the United States, and some other countries, dictate the timing of a franchise sale. In the USA, you must possess the franchisor’s disclosure document for at least two weeks before you can legally buy a franchise. Franchisors do not violate this law because the consequences are severe.
The disclosure laws are intended to provide people with critical information that’s designed to inform and protect them before buying a franchise. So it’s a good idea to delay the sale to give the prospective buyer time to study the opportunity.
Unfortunately, many prospective franchisees do not read the information provided in the disclosure document! But that doesn’t mean it’s not useful or important.
Q: Why won’t the franchisor give me the disclosure document when I ask for it?
A: U.S. franchisors are required by federal law to give you a disclosure document at your first “serious” meeting to discuss you buying the franchise.
What defines a “serious” meeting?
How “serious” are you?
Basically, a franchisor wants to be certain that you are a qualified franchisee candidate, so the franchisor gets to decide when the meeting is “serious.”
Franchisors usually will ask several “qualifying” questions before handing over the disclosure document.
For example, “Where do you plan to open a franchise? . . . How much money do you plan to invest? . . . How soon do you plan to open a franchise?”
Your answers to those questions will help the franchisor decide whether or not you’re a qualified, and therefore a “serious” candidate.
Get disclosures online
Disclosure documents include sensitive information, but not secretive information. For example, you’re not going to get a franchisor’s recipes, or inside information that you could utilize in a business of your own.
However, the disclosure document includes information about lawsuits filed by or against the franchisor, as well as financial information. Perhaps the most sensitive section is in the back of the document where the franchisor must include a list of franchisees, including contact information.
Of course, all this protection may be over doing it because anyone can get almost any disclosure document online, sometimes for free, and other times by paying for it. Do a search for “franchise disclosure documents” and go from there.
Q: What does the franchisor do with the upfront franchise licensing fee that I’m required to pay? Is this all profit to the franchisor?
A: Every franchisor will answer that question differently, but you should make certain to ask that question when you meet with a franchisor.
Hopefully, much of the money will be re-invested in you. For example, the franchisor probably provides training before you can open a franchise, and the franchisor also provides some initial support. Both are valuable.
You’re paying for training and support
If the franchisor provides 20 days of training, followed by two weeks of in-field support, what’s that worth to you?
Good franchisors strive to be transparent. They want you to know how they’re spending your money, including your royalty payments.
Keep in mind that franchisors intend to earn a reasonable profit. Or possibly even an unreasonable profit! Don’t begrudge them for making a reasonable profit. Without profit, how will the franchisor remain in business to support franchisees?
Q: Why would a franchisor decide not to renew a franchisee’s license? I wouldn’t want to invest 10 years of my life operating a franchise only to be told that I can’t continue operating it.
A: There are many legitimate reasons for a franchisor to refuse to renew a franchisee’s license. All franchisees are not created equally. Some are better than others. Some should never have been granted a franchise in the first place.
Put yourself in the shoes of the franchisor. What do you want from your franchisees? Let’s get right to it: Big Royalties!
Yes, of course, you want franchisees to be happy, and you want them to be productive. You want them to be good representatives of your brand and product or service. But ultimately, you want the franchisees to produce big royalties.
Losing opportunity dollars
Keep in mind that franchisors can only sell so many franchises. If a market can only support one franchise, the franchisor wants that franchisee to be wildly productive so as to produce big royalties. Otherwise, the franchisor loses opportunity dollars. If the market should produce $200,000 in royalties per year, but the franchisee is only producing $100,000, because the franchisee isn’t wildly successful, what’s the franchisor to do?
Well, yes, the franchisor should work with the franchisee to help the franchisee produce big royalties. Maybe the franchisee needs additional training or support. Franchisors are generally aware of these needs and are also willing to help franchisees improve. After all, when franchisees produce more royalty dollars they should also produce more money for themselves.
But what if the franchisee can’t be helped? And some can’t.
What if the franchisor has spent a disproportionate amount of money on a franchisee that continues to lag behind other franchisees? Should the franchisor be forced to renew the franchisee’s license?
Franchising isn’t for everyone
There are also franchisees that refuse to follow the franchisor’s operating procedures and that’s why they lose their licenses. Other franchisees commit criminal acts and lose their licenses.
By the way, if you want to know how to avoid losing your franchise license, read the franchise disclosure document. The rules and regulations are set out in advance of you buying the franchise!
Q: Franchisors seem to have all the control over franchisees. So if I become a franchisee, it’s like I’m a puppet of the franchisor. I just do what the franchisor says. I don’t want to be a puppet, but I do want to own my own business. Is franchising the way to go?
A: First, I don’t know any franchisors that think of their franchisees as puppets. But I do know franchisors that believe that if franchisees do what their told, they’ll make money. Is it a guarantee? Of course not.
Are franchisees puppets?
I don’t blame you for not wanting to be a puppet, and I think you can control that outcome, but only to an extent. Franchising succeeds (and franchisees make money) because specific systems tell a franchisee what to do, how to do it, and when to do it. If you don’t like following specific systems, I suggest you avoid franchising.
The alternative to franchising is to figure it out on your own, but be sure to carefully research that alternative. You won’t be impressed, or enthused, by the results. You may prefer some puppet-like behavior to losing your total investment.
Submit your franchise questions to Dr. John P. Hayes via HowToBuyAFranchise.com.