10 Questions to ask to Avoid a Dodgy Franchise Deal
The promise of franchising is that you’ll be your own boss running your own business. And that is what mostly happens and franchising is arguably the most successful business model around. However, like any business model, there are scams and you cannot simply place your faith in a trusting face and plausible story. The reality of franchising is that head office has almost all the power—and sets the rules. Franchisees need to do their homework, and to this end you need to double- and triple-check the disclosure documents.
Do your research by asking questions
Franchisees’ research must fully interrogate the franchisor, given how much power they have in the relationship once you’ve handed over your franchise fee. The principle is that your research finds you a committed franchisor, with a proven and evolving brand, and one that will support you well. When any of these components is missing franchises can quickly become unprofitable and things can turn ugly.
To avoid having your dreams shattered, there are some important questions you, as a prospective franchisee, need to ask of franchisors when doing research. No pro forma list can hope to deal with each type of franchise, so these should be tailored to the specific industry you might be interested in:
10 Questions to ask the Franchisor
- How much working capital will I need?
- Will you assist me with raising finance, and what form will this assistance take?
- Can you supply me with a complete breakdown of all costs (and history of escalations) I stand to incur when I open the business?
- What is the cost of stock (and the history of escalations)?
- What guarantees do I have that when I pay for a particular franchise location, you will not have simultaneously sold it to someone else?
- What will my training consist of, and are all training costs included in the up-front cost of the franchise?
- If training is a separate cost, and the franchise deal for any reason falls through, can I get a refund?
- What help and guidance do you offer in site selection and the setting-up of the business?
- What help and guidance do I get with marketing my franchise?
- How will you assist me once my franchise is operational, how often will you visit me and what will your assistance entail?
Then ask more questions
The above are basic questions to ensure the franchise is the ideal one for each franchisee. There are many other questions you should ask, and these can be found here
An essential part of your research should be to talk to existing franchisees who are established and who will know first hand what assistance the franchisor provides and whether the franchisor is fair in its dealings. The disclosure document should contain an updated list of franchisees and their contact numbers. Don’t rely on the franchisor to nominate franchisees to talk to, make a selection from the list and contact franchisees who are both close and far away from head office to get an accurate picture.
For more information on what a disclosure document should contain, click here
There have been cases in South Africa and elsewhere that prices of stock and other costs have increased exorbitantly once the franchise is paid for, potentially altering the viability of a store. You should make absolutely certain you do not fall into that trap.