Once you’ve received all the required information from the franchisor, you will enter a preliminary negotiation stage before you sign.
This is the most critical period in your dealings with the franchisor. At this point, you’ll meet a representative of the franchisor and conduct interviews with as many franchisees as possible in order to evaluate the franchise package.
This provides an opportunity for both you and the franchisor to form first impressions and determine whether negotiations will proceed any further.
On the day of the meeting it is important that you arrive on time and are well presented. After all, first impressions count.
Take a good look around the premises, so you can get a feel about the franchisor. For instance, if it is in a hotel or motel room, you will probably get a good indication that the franchisor might not be all they claim to be. However, if they are nice offices, and the receptionist seems busy taking telephone calls, the business might be the right one for you.
The representative of the franchisor may be one of four people: the franchise owner/company president, an in-house salesperson, a franchise broker (an outside salesperson retained by the franchisor to act as a representative), or a consultant.
No matter which one of these people you meet, he or she will want to know more specific information about you.
The franchisor is going to want to know more about your financial status, your experience and your general background. If the franchisor doesn’t ask these questions or show any interest in your previous background, that should be a danger signal to you.
When they do ask you questions regarding these topics, however, don’t feel they are prying into your personal life. They aren’t. They are just protecting their interests.
Be prepared with questions of your own about the company. You might even want to have your lawyer present or have a lawyer highlight areas of the franchise agreement that should be questioned. Don’t leave until you’ve been supplied with all the information that you need. This could take anywhere from a few hours to all day.
The primary goal here is to satisfy all your doubts so that you feel comfortable with the data provided.
Through your meeting with the franchisor, you’ll be discussing specific subjects that will affect your decision to purchase a franchise. Those subjects will be covered in both verbal and written form. Take notes and after the meeting, date those notes, detailing who you received the information from, their docproperty “Chapter Title 0004”, etc.
Do this with any phone conversations you have with the franchisor as well. This will help you in the future should any problems develop.
Key questions to ask
During your interview, you really want to concentrate on some key areas that will help you determine the strength of the franchise:
What is the special / unique process that they are selling and replicating?
How did they start, and more importantly, do they have a pilot operation (and how does it perform)?
Ask what the pretax net profits of existing operations are and compare this figure against the earnings statement or pro forma that the franchisor has already supplied you.
Find out specifically what is included in the training program, field assistance, store design, premises construction, site selection, and feasibility studies.
How will the initial franchise fees and investment be segmented?
Will there be any additional working capital required after the initial fee and investment, and if so, how much?
How will the franchisor arrange for the supply of product to the business? Ask to see a current price sheet.
Ask the franchisor to detail exactly what the territorial restrictions and protections are.
Find out how many franchises have been sold in the state you will be operating in during the last 12 months.
Ask if the company has any plans for further expansion in the state. Has it identified any locations it plans to develop?
If purchasing a current franchise, ask to see the operating books and records of the business for the past two years.
What type of support will the franchisor provide once your franchise has opened its doors? Will the support be ongoing?
Find out if any franchisees have been terminated. If some have, ask the franchisor to detail the reasons. Have any franchisees failed or gone bankrupt?
What kind of financing is available from the franchisor, if any?
Find out if there are any current lawsuits pending against the franchisor. Have them elaborate on any past judgments.
Find out how disputes between the franchisor and franchisees are settled.
Will the franchisor assist in site selection? It will be of enormous help if they do. Regardless of whether they do or don’t, do your own demographic study so you are familiar with the profile of the population within the market area.
Don’t be afraid to ask questions. And don’t be afraid that you’ll appear foolish, because very few people really understand the franchise agreement. Primarily, you’re trying to pinpoint any problems that may exist in a franchise. Don’t just settle on any franchise. That’s an easy way out and a very risky use of the capital you’ll be investing.
If you come across a franchisor who is reluctant to pass along a list of current franchisees, makes promises of earning a fortune on a limited amount of money invested, insists on deposits for holding a franchise unit, tries to convince you to sign before someone else does, or is full of empty advice when answering your questions, warning bells should ring.
Any secrecy on the franchisor’s part is not a positive sign, and you will probably be better off looking elsewhere. Crosscheck all the information supplied. Are the franchisor’s claims backed by performance? Are the advertising claims applicable at the store level? Are the profitability claims justified? You can check this information by contacting as many franchisees as possible.
As mentioned, some franchisees will be very supportive. After all, they were once in your shoes. However, some people may feel their business is none of yours. This could also be a danger signal. If a franchisee doesn’t want to talk to you, it might be an indication that the franchise isn’t doing nearly as well as expected.
Do all you can to convince franchisees to talk to you. Stress that the conversation will be kept confidential, and be as candid as possible to establish a good rapport. Remember, franchisees aren’t required to provide any information.
The more amiable and upfront you are with them, the better your chances of obtaining information. However, if a franchisee continues to be uncooperative, just move on to the next franchisee. Someone else will surely talk to you.
You want to ask the franchisees questions that will let you know whether or not the franchisor has been upfront with you. Try these:
Is the franchisee happy with their investment, the support from the franchisor, and entry into the business?
If a second franchise became available in their market area, would they purchase it?
Do they feel they were well trained for the challenges of the business?
What is their income and what are their expenses? Compare them against the sample information provided by the franchisor. Find out if they have any cash-flow problems.
What are sales patterns like? Are they seasonal? Ask them to describe the busy season.
What type of ongoing assistance have they received from the franchisor?
Are their advertising fees reflected in the marketing support received?
Are the franchise and royalty fees fair and competitive with other franchises in the same industry?
Is local market penetration in line with national figures?
Were equipment, signage, logos, etc. provided for free or at an additional cost?
What hidden costs, if any, have been incurred by franchisees?
What degree of autonomy are franchisees allowed? How tightly regulated are they by the franchisor?
Are there any disputes that are the subject of discussion among franchisees?
What are the actual costs of the products, and are they competitive in the marketplace?
Have they had any problems with product supply?
Do they have any complaints about the franchisor?
What were their initial start-up costs? What major hurdles did they experience during the first few months of start-up? How did they finance the business?
How long have they been a franchisee and will they renew?
Have franchisees encountered clauses in the franchise agreement that have caused them problems?
How long are their workdays and do they take holidays?
You’ll gain a lot of valuable information from the franchisees, but don’t stop there. You should also check out all the bank references supplied by the franchisor to determine the solidity of its financial situation. Run a credit check on the company. Thoroughly check out any references supplied by the franchisor.
After you’ve completed a thorough evaluation of the franchisor, then you can make a truly informed decision and enter serious negotiations. Remember that you can negotiate items within the franchise agreement.
That’s why you’ve gone through a complete analysis of the company. When negotiating with the franchisor, it is a good idea to have your lawyer is present.
Once you’ve found a franchise you are interested in, don’t be the first person to mention price. Let the franchisor name the first figure and negotiate from there.
If there’s a broker involved, remember that brokers are selling agents who make their money from the commission the seller pays. Though it may not be necessary, consider hiring someone skilled in business acquisitions to represent your interests.
Settling on a price is only the first step in negotiating the sale. Actually, the structure of the deal is often more important than the actual price. Be prepared to pay between 30 and 50 percent of the price in cash and finance the remaining amount.
You may finance through a traditional lender, or the seller may be willing to function as a lender would, accepting payments over a specified period of time.
Remember, you can walk away from the deal at any point in the negotiation process before a contract is signed.
If you don’t like the franchise or if you don’t like the deal, you don’t buy. Just because you spent a month looking at a business, does not mean you have to buy it. You have no obligation.
Tips for Negotiating Franchise Agreements
Ensure the Franchise Agreement complies with the Franchising Code of Conduct
Ensure the Franchise Agreement does not contain elements that may constitute unconscionable conduct
Outline in writing for the franchisor a list of objections to the franchise agreement and the changes that you seek. This will highlight the willingness of the franchisor to negotiate
Make a note of all correspondence and communication with the franchisor.
The following is a list of things to be aware of when considering buying a franchise:
If the franchisor asks you to sign a disclaimer stating that you haven’t relied on any representations not contained in the written agreement. Such a requirement could indicate the franchisor doesn’t want to be held responsible for claims made by its sales representatives.
Offers that depend on advertising which will not take place until after all the participants have signed up.
Offers which are vague about exactly how the system will operate.
Operators who claim that there franchising scheme has been approved by the Franchise Council of Australia, the Trade Practices Commission, or any other public agency.
An advertisement for a job vacancy that turns out to be a franchise.
Offers to sell you manufacturing equipment with ‘guaranteed’ buyers for the goods produced.
Operators who are not offering a true franchise package, but just a name and an idea.
Promises of getting rich quick with little work.
Pyramid selling schemes
Unrealistic income projections
Franchisors giving you the hard sell
Passing fads and trends (seasonality)
Conflicts of interest
Franchisors with no pilot operation
Fee arrangements on a fixed basis rather than a percentage of sales.
By keeping a check on these prominent issues, your chances of becoming a successful franchisee will be greatly enhanced.