For prospective franchisees, one of the best ways to learn about a franchise is to speak with current franchisees. Franchisors are required to list current franchisees and franchisees who have recently left the system in the Franchise Disclosure Document. Before purchasing a franchise, a prospective franchisee should contact as many current and former franchisees as possible. The Bundy Law Firm has coached hundreds of prospective franchisees in Washington, Oregon, and California, and around the country through validation, and these are our top tips for a successful validation process:
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Ask Specific Questions.
There is a direct correlation between the quality of questions a prospective franchisee asks and the quality of information they receive through franchise validation. If you ask, “Are you happy with the franchise?” you are likely to get a brief surface-level response. Better questions look for specific and detailed answers. Consider asking the following questions during your franchise due diligence:- Did the franchise training prepare you to operate?
- Was the cost of franchise build-out and start-up similar to the estimate the Franchisor gave you? What cost more?
- How has the franchisor helped you succeed? What do you wish they did differently?
- Are you making a profit with your franchise? Are you taking a salary? When did you become profitable? How much did you make each month during your first year? Second year? How do you define “profit”?
- Do you feel like you are getting good value for your royalty fees?
- If you had the chance to do it again, would you purchase this franchise?
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Contact Franchisees Like You.
Franchise units are like people. They may perform differently based on their location, region, age, and the type of franchisee operating them. If you are a first-time franchisee opening a single unit in a new market, you may not receive helpful information from a multi-unit operator in an established market. An experienced franchise attorney can help identify franchisees like you. -
Trust But Verify.
During franchise due diligence, you may hear that a franchisee is “doing great” or “very happy.” Conduct thorough validation by requesting documents such as profit and loss statements, balance sheets, or other accounting information. -
Avoid Franchisor Steering.
A successful franchise validation requires independent contact with franchisees. Brokers or salespeople often direct you to only happy franchisees. Use the FDD to contact franchisees directly so you hear the good, the bad, and the ugly. -
Ask to Visit.
Most franchisors show you polished units on discovery day. Visit existing units in their natural state. Shadow an existing franchisee or secret shop nearby locations to see real operations. -
Talk to a Variety of Franchisees.
Speak with both new and experienced franchisees. Different franchise systems have different performance curves, and you need broad input to understand long-term expectations. -
Track Down Former Franchisees.
Franchise terms last many years, and not all relationships work out. Contact former franchisees to understand why. If multiple people report the same issue, it is a major red flag. -
Pay Attention to Red Flags.
Many unhappy franchisees later realize they ignored early warning signs. Be alert during the validation process. -
Hire an Experienced Franchise Attorney.
A franchise attorney can help identify system issues and evaluate whether fees, support, and growth are reasonable for the industry. They can help you determine whether the franchise is a good investment.