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Questions to Ask When Buying a Franchise

Questions to Ask When Buying a Franchise (featuring Steve Stovall of BeneTrends)


Amanda: All right. Steve, welcome back to Franchising With Purpose. How have you been since we talked last?

Steve: I have been fine, thank you. How about you?

Amanda: Doing well, doing well. I’m glad to have you back on the podcast today. Look forward to talking more specifically, so just as a recap, last time you joined us, we talked a lot about franchising for small businesses in general, what are some of the options there, and talked a lot about kind of the concept of not really putting all your eggs in one basket, so to speak. But working with financial advisors and different folks in the industry to figure out really what is a good customized approach for you for your specific situation because everyone’s financial needs and financial picture looks very different. So really finding somebody that you can trust, and that’s got your best interests at heart to put together the best plan for you and for your business needs.

So today, where I wanted to pick back up with that conversation, because we are on Franchising With Purpose, is specifically about what questions you should ask your franchisor about financing and what are some of the things to consider on that end, right? This is kind of a three-way conversation, if you will, between you and your franchisor and potential financing options, and kind of how do we bring those things full circle? So I’ll start the conversation with the question of what should you be prepared for when you meet with your franchisor from a financial perspective?

Steve: That’s a great question. When you meet with a franchisor, and I might have made reference to, you know, kind of meeting the parents or something like that on the earlier call, but it’s kind of a mutual feeling out ground. You should be ready to live up to everything that you put down on your franchise application, but by the same token, the franchisor has some work to do as well. You’re both trying to impress one another. One is trying to impress another on what the franchise has to offer, the viability, the strength, the ability to expand, the length of time in business, things like that. And the person that is visiting the franchisor, well, they want to prove that they’re financially sound and have a solid business mind and business acumen so that they are able to take the franchise to a different level, a higher plane. So it’s really the franchisor has something to prove, and they want to do something just like the visitor, the potential franchisee has something to prove but they also want to see what’s going on and they want to get the real nitty gritty, if you will.

Amanda: Yeah, I like the analogy of meeting the parents, right, because it’s on both sides of the equation. This isn’t an interview. You know, we talk about job interviews in the same vein,right, that you’re interviewing where you’re going to be employed just as much as they’re interviewing you. So really it’s kind of that two-way conversation, right?

Steve: Exactly.

Amanda: What are some questions you recommend being prepared to ask your franchisor when you sit down and have that kind of face to face? What are some things that I can prepare for ahead of time? What are some questions that you find when folks kind of get further down in the process and they go, “Oh, I never thought to ask that” or “I don’t know.” What are some of those things?

Steve: Well, and that’s kind of difficult, because a well-oiled machine of a franchise should basically make all of these questions part of the conversation, so that ultimately, the only thing you really want to know is, you know, “When can I speak to the franchisees? How long does it take to get open? Things like that. How long has the franchise been in business? How many franchisees are in the system? There should be a program for the franchisor to facilitate conversations between the prospective client and the existing franchisors. You know, those things should be just natural. I think that everybody wants to ask the franchisor questions that the franchisor is not able to answer. And that’s, “How much money can I make?” Things like that. And that’s what you need to ask the franchisees. So a good franchisor that has done a bunch of discovery days in the past, has a good history to be screaming from the rooftops, ” We’ve been in business for 20 years. We have 400 franchisees. You know, the median revenue is $700,000 or whatever that may be. That should be part of the bylines. Everybody’s going to come into discovery day and have their general questions but for any prospective franchisees out there, just like you wouldn’t ask your prospective partner, you know, if there are any genetically transferred diseases in the family or something like that, that would be handled a little bit different than just dinner conversation. You don’t want to talk to the franchisor about, you know, let’s say, failures in Chicago or, you know, delicate things like that, because you, as the franchisee, could blow up the entire discovery day, asking an inappropriate question. It’s not a wrong question, but the franchisor might want to deal with that in a more delicate fashion than just making a broad-based answer in front of a crowd, where everyone will hear something different. So I would say definitely ask your questions, but certainly know what should be handled behind closed doors and what should be spoken about in a general forum.

Amanda: Absolutely. There is some tact involved, right, because you do want to ask the hard questions. You want to make sure that you get answers to something. Because it is a huge investment when you’re looking at purchasing a franchise, but do it in a way that makes sense, right? There’s not going to be every question that you want to yell from the rooftops or get the answers to in a large group. So I think there’s a lot of validity in that.

But let’s flip the coin there, flip the script and talk about the other side of the equation. So what should you, as a potential franchisee, be prepared to answer from your franchisor from a financial perspective? What are some things that they may be asking during that discovery process or leading up to validation that you should be prepared to answer? On the other side of that, what are maybe some red flags that you may be asked that you shouldn’t answer?

Steve: Okay. and that’s an equally good question. I would say that, about the finances, there should never be pressure from a franchisor to bring X amount of dollars to the discovery day or anything like that. That screams of desperation to me. And that screams of a franchisor not giving a franchisee the mandatory 10 day cooling period between discovery day and making a deposit, or paying your franchise fee. So I would say that any franchise that mandates that you bring a check or bring a means of payment to discovery day, is probably someone that you ought to look out for. A franchisor that has a long list of Better Business Bureau or that type of complaints against them, you might want to be careful about and anyone that has had truly negative press, like a class action suit from the existing franchisees, that might be someone that you’d want to steer clear of, as a franchisee. As a franchisor, you definitely want to make sure that, if they have bad credit or a bankruptcy or something like that, is on the franchisee’s franchise application. You want to at least have started the conversation of why, where, when, before they come in. And a franchisor shouldn’t be finding out that I have 600 credit. I’ve had 2 [bankruptcies] in the past five years. They shouldn’t find that out when I get to discovery day. So I would say that on the franchisor’s side, if I am receiving a franchise application, I just want to ensure that the information on the franchise application is accurate and valid, as they come to discovery days, because then, literally, the franchise discovery day should be about sitting around talking about the vision of the franchise, versus the vision of the franchisee. You should talk about growth objectives. You should talk about multi-unit development, if that franchise model has those kinds of opportunities. It should be talking about just the general business ideals of the franchisor. And there should be some commonality between the vision of the franchisor and the vision of the franchisee, be it for development, be it for generalized numbers for revenue, be it for amount of clients served in a specific market, be it for opportunities to get even more business from a specific opportunity. So again, the franchisee should be looking for the franchisor to take the lead, to be the leader, to objectify and delineate all of the things that the franchisor brings to the table in the market and the franchisor should be looking for the people that are be able to deliver the vision of the franchisor, and they should start showing that at discovery day.

Amanda: Great answer to, I think, that was three questions packed into one. So really just to kind of sum everything up, right, it is about doing your homework on both sides of the equation. So not just you’re doing your homework on the potential franchise that you’re looking to purchase, but as a franchisor, that you’re doing your homework on the application and making sure that everything checks out, because that discovery day should, again, to your point, be about the conversation, about the mission, vision, and values of the company, both, you know, the franchise and what you’re looking for when you’re purchasing one, so that all that other stuff is kind of out of the way and taken care of. And as much as we want to say that every franchise company is on the up and up, and I would like to think that that’s the case, but it’s important to be an educated consumer and to know what you’re getting into, so I love what you mentioned about the, you know, Better Business Bureau ratings, and what other franchisees have to say, and all that kind of stuff that goes into it, to be aware of, you know, what questions you’re being asked, what you should and shouldn’t answer.

Steve: Yes, and I will say on the franchisor’s side, you could have franchisors that are newer in the industry that have some challenges with Better Business Bureau, and things like that. So at least, if something is going on that you don’t like and you have taken the time to show up at the discovery day, you know, as a potential franchisee, you want to give the franchisor the opportunity to answer those questions. But again I would never ask anyone, any franchisor, or any client a potentially embarrassing question in an open forum. I would certainly handle that a bit more discreetly.

Amanda: Absolutely. All great advice as usual. So let’s shift gears a little bit and talk about, when your franchisor is explaining their particular financing options, and what those are, it can tend to… Some people, if that’s not your wheelhouse, your cup of tea, right, there’s a lot of information being thrown at you. But what advice would you give to a franchisee or a potential franchisee when their franchisor is explaining those things? What are some key things to focus on and to be aware of in that particular conversation?

Steve: Well, as a franchisee, I want to make sure that I understand what my fees are and what can be financed. So if someone has a $300,000, all-in franchise expense, and I have to come up with 20 to 30% of that in order to get a small business loan, then that means that I am responsible for $50,0000 to $90,000. The franchisee should understand that part of my equity injection for that small business loan, or what the franchisee is responsible for, includes the licensing or the franchise fee. Let’s say that’s $50,000. And if I have to come up with $90,000, the franchise fee is a big chunk of that. That $50,000 will be paid out pretty quickly. Then I have another $40,000 to come up with, and then the other things in the franchise fee, as far as getting the franchise billed out, the construction or the retrofit for a shell of the business to make it a specific thing that is part of the small business loan, the technology fee, the proprietary signage, all of those things, that can be part of the small business loan, as well. But I want to know what I need to pay for, and what is typically picked up by a small business loan or other type financing.

Amanda: All right. So really knowing the difference in… I mean, you just referenced a couple of different fees or options there, but really knowing the difference between what you have to cover and what you can finance. Because I may be able to finance the entire thing. There are certain things that are going to fall in that category and some that aren’t.