Five basic franchise questions and their answers

From my franchise seminars, and from mail sent to me via this website, here are five of the most frequently asked basic franchise questions, and their answers.

1.  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 I wanted to buy the rights for my area before someone else did. But the franchisor said government would not allow them to sell me the franchise that day. I think that’s crazy. This is another example of the government interfering with our rights as citizens.

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.

As for our rights as citizens, there’s something bigger at stake here. The disclosure laws are intended to provide people with critical information that’s designed to inform and protect them. Through the ages, franchisors and prospective franchisees have proven that some protection is necessary.

Answer franchise questions via Internet

You could argue that in the age of the Internet people should be able to get the information they need to protect themselves when buying a business, but that’s not the case.

It’s very easy for a slick sales person to misrepresent a franchise opportunity. This was not uncommon before 1979, when the U.S. Congress promulgated the Franchise Law.

Since 1979, franchising has become a more legitimate enterprise. Nowadays, though it still happens, there are very few legitimate stories about franchisors misleading franchisees.

And in many of the cases where people claim they were misled by the franchisor, the complainant could have prevented the problem by reading the franchise disclosure document!

Fact is, many prospective franchisees do not read the information. But that doesn’t mean it’s not useful.

Two weeks is a reasonable waiting period

Two weeks is not a very long period of time. Yes, it may mean that you’ll lose the rights to a franchise brand to someone else, but in fairness, that person got there first, and also had to wait two weeks.

All and all, in spite of our desire to get what we want when we want it, waiting two weeks to buy a franchise has proven to be a good thing for the majority of people. It’s also good for franchisors and for franchising in general.

2.  Why won’t the franchisor give me the disclosure document when I ask for it?

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.

How “serious” are you?

Basically, a franchisor wants to be certain that you are a qualified candidate for buying the franchise, so the franchisor gets to decide when the meeting is “serious.” As such, the answer varies from franchisor to franchisor.

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.

Or, give the franchisor enough information to deem you a “serious” candidate and you’ll get the disclosure document. Keep this in mind: franchisors are eager to give out disclosure documents because in the USA they can’t sell a franchise until they’ve disclosed the candidate.

3.  What does the franchisor do with the upfront franchise licensing fee that I’m required to pay? Is this all profit to the franchisor?

Every franchisor will have a different answer for that question as every franchisor has the right to use the money that comes from upfront franchise fees as they see fit.

However, it’s your money, and you have a right to know how it will be used. 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, wouldn’t you agree?

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?

You should never hesitate to ask these basic franchise questions when you attend a franchisor’s Discovery Day, or when you have a private opportunity to do so.

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 shy away from asking them how much, if any, of the licensing fee they put into their own pocket. But don’t begrudge them for making a profit. After all, are you willing to invest in a business and work it without any financial returns?

4.  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.

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 and say 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 you’re probably limited to the number of franchises you can sell. So if you can only sell one in a market, you need that one to be wildly productive. Otherwise, you’re losing opportunity dollars. If the market should produce $200,000 in royalties per year, but the franchisee is only producing $100,000, 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 renew the franchisee’s license?

Franchising isn’t for everyone

Some franchisees, sad to say, simply should not be franchisees. And it’s not entirely their fault that they became franchisees. The franchisor must shoulder some of this burden. Good franchisors know that, and they’ll often help a franchisee sell their business to avoid being disenfranchised.

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!

There’s one other important point to make regarding this matter. The reason for disenfranchising cannot be capricious. If a franchisee fails to meet the terms of the franchise agreement, the franchisor must give the franchisee advance notice with time to “cure” the default.

5.  Franchisors seem to have it all figured out for the franchisees. So if I become a franchisee, it’s like I’m a puppet of the franchisor. I just do what the franchisor says and I make money. But it doesn’t really work that way, does it? I don’t want to be a puppet, but I do want to make money. Is franchising the way to go?

As franchise questions go, you just asked a mouthful. Some franchise questions aren’t easy to answer, and some franchise questions can’t easily be answered in a blog. But here goes.

There are no guarantees in franchising

First, I don’t know any franchisors that claim to have it all figured out for their franchisees, or 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.

Good franchisors continuously try to improve their operating systems. They do so by listening to their franchisees; especially to the feedback that comes from end-users, the customers who buy the products and services. Most franchise systems are ever evolving, so they require constant attention. As market situations change, franchise systems must change as well.

Now some franchisors are better than others. Some franchisors do a better job of figuring things out for franchisees. If the franchisors don’t “figure it out,” or they get it wrong, franchisees will likely lose money. And so will the franchisors.

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.

Categorised in: Franchise FAQ's

This post was written by John Hayes