We have established the importance of the Franchise Disclosure Document (FDD), which franchisors share with prospective franchisees early in the due diligence process.
There are 23 items in the FDD that contain information about the franchisor, the franchise system, and the franchisee’s initial investment. In this post, we will focus on Item 20, which contains details on the number of franchised units and company-owned units in existence for the prior three years.
It is customary to leverage the information in Item 20 to connect with others currently and previously in the franchise system. By speaking with these franchisees, you will receive pragmatic and honest information about the franchisor and its industry.
Approaching the Reference List
The scope of the reference list could be in the hundreds because a large franchise could have a nationwide presence, but do not let that overwhelm you. A strategic approach to the list will get you the details you need to make a smart decision and even help you network among potential peers.
Consider dividing the reference list into two categories:
- Experiential: Any franchisee can speak to their history with the franchisor and the industry[JL1] . This category can be further subdivided into (i) current franchisees and (ii) former franchisees who will also discuss why they left the system.
- Geographic: Those who can also answer specifically about the geographic region in which you will operate.
There is a book’s worth of questions you could ask franchisees about their career and experience with the franchisor. Some might be limited with their responses if, for example, they are still new to the system. Others may not answer each question, but all insight is valuable.
Consider starting the dialogue with open-ended questions, such as, “What inspired you to join this franchise?” and follow-up with “Are you happy you did?”
Once they are comfortable conversing with you, ask them about training and support (which is addressed in FDD Item 11). “Was the initial training sufficient?” and “Is the system evolving?” are reasonable questions. If the franchisee has been operating for a while, ask what type of ongoing support they have received.
There are more avenues to explore in the way of revenues, business planning, their own challenges and successes and the entire enterprise.
But if you had to ask – or close with – one question, make it all-encompassing: “Knowing what you know now, would you join this system again? Why?” You can ask that same question 50 times and receive 50 unique and valuable answers; each will broaden your perspective.
The benefit of speaking with other franchisees who are in your state, county or city or is that they have the insight about permits, licenses and other local issues. They already have their boots on the ground and they can provide answers to specific questions you may have about your territory.
Those questions might include:
- What permits, if any, were required by the local/state governments?
- How long did it take to get those permits
- Were there any new or unexpected fees?
This is a chance to obtain street-level information, and you can build a rapport in this first batch of questions regarding paperwork, licenses and logistics. Once those details are solidified, ask them the experiential questions we will explore next.
One caveat of reaching out to a franchisee near your preferred location is that they may not want the competition that your unit would bring and may even seek to acquire your proposed territory if they know someone is looking. Barring that, you should feel confident calling anyone on the list.
It is easy to get lost amid the avalanche of information from speaking to several franchisees. But by categorizing their answers into “experiential” and “geographic” feedback, you will be empowered to make an informed decision about whether to make an investment and join the franchise system.
Current and former franchisee contact information is included in the FDD for the very reason of allowing prospects to reach out and interview them. Do not let this opportunity pass by and do not let shyness prevent you from engaging by email or phone. And remember, if you buy the franchise, your information will be included in the franchisor’s future FDDs and someone may eventually contact you for your insight.
Contact a Franchise Lawyer
Lusthaus Law has a long history of guiding franchisees and franchisors through the FDD process. Before you sign an agreement or invest, contact us.