Starting a franchise can be a dream come true for many investors and entrepreneurs. However, while operating a franchise can give you access to an established brand’s services and a loyal customer base, there are certain risks and potential drawbacks that you need to be aware of. The best way to gain an understanding of these risks is to ask your franchisor.
Before signing any legal contracts or paying the franchise fee, make sure you’ve prepared plenty of questions. Below, I’ve listed 30+ essential questions you should ask a parent company before buying a franchise.
General Questions
1. Do you have an operations manual, and can I review it?
Having an operations manual proves that the franchisor is organized and committed to helping each franchisee be as successful as possible. All successful franchisors should have an operations manual or training materials of some sort.
2. What are the renewal terms of the franchise agreement?
By finding out about the initial length of your franchise term and its franchise renewal conditions, you can start making plans for long-term business commitments.
3. What limitations are there concerning the franchise and its products and services?
As a franchisee, you’ll have limited flexibility when it comes to the products you can stock and sell. You may also be required to stick with rigid pricing requirements. I recommend discussing these limitations with your franchisor as it can help you decide whether operating a franchise is the right investment opportunity for you.
4. What happens to my investment in the event the agreement is terminated?
All franchisees must comply with strict operational guidelines when operating a franchise under the trademark of a parent company (franchisor). Understanding the terms of a potential termination can help you evaluate the risks involved in doing business.
5. Have you refused to renew a franchise agreement with any of your franchisees in the last three years? If so, what were the reasons?
Disputes can arise between franchisors and franchisees for all sorts of reasons. If the franchisor has previously refused to renew a franchise agreement, you’ll want to know the reasoning behind the decision.
6. What happens if my franchise agreement terms ends before my lease term?
Does your franchisor have any contingency plans in place to help you with unexpected costs and setbacks? It is important to understand the terms and what may occur if your lease agreement is longer than the franchise agreement.
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Marketing Questions
7. What assistance do you provide with marketing?
As marketing will be a key component of your new franchise’s success, you should find out how involved the franchisor will be with advertising efforts. In most cases, you’ll be responsible for most of the local marketing, while the franchisor handles company-wide and national advertisements.
8. Do you have a national marketing fund? If so, how are the funds collected and allocated?
Many franchise agreements require franchisees to contribute a percentage of their revenue to a marketing fund supporting the brand. Find out how much you’ll be expected to contribute to this fund and how the funds are allocated. I also recommend analyzing how effective this marketing will be for your particular location.
9. Do you provide marketing materials, and can I customize them to my target market?
Some franchisors may provide you with marketing materials and strategy to help ensure the success of your business. It’s worth asking what limitations are in place and how you can adapt these materials to fit your franchise marketing plan.
10. What processes are in place to protect my contributions to the national marketing fund if you sell your business?
If a franchisor decides to sell the entire business, you need to know what happens to the funds you’ve already contributed to the national marketing pot.
11. Do you accept feedback from your franchisees on your national marketing strategy?
Find out whether you have any say in how your marketing contributions are spent.
Questions About Franchise Training
12. What challenges do franchises in your organization most commonly face, and how do you help your franchisors overcome them?
Starting a new franchise business comes with many challenges, and support from your franchisor can go a long way. Franchisors should provide resources to help franchisors become successful. After all, the more profitable your franchise becomes, the more money goes into their pocket!
13. How do you make sure your franchisees uphold your service and quality standards?
All franchises have quality standards to maintain brand consistency. It is important to understand how your potential franchisor maintains its reputation and what may be required from you.
14. Do you provide some form of sales training?
In many cases, you’ll have minimum sales targets to meet as part of your franchise agreement. Find out whether your franchisor has any systems in place to improve your sales techniques. Also, ask about how sales goals are set and tracked.
15. What if I require extra training?
Try to find out whether your franchisor offers additional training to struggling franchises and the associated costs.
16. Do you offer support in situations where the franchise isn’t profitable?
Some franchisors may have systems in place to help struggling franchises. They may see more value in helping a franchise attract more customers than simply allowing the franchise to close.
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Investment and Financial Questions
17. What does the initial franchise fee include?
Your initial franchise fee typically covers some expenses for getting your franchise up and running. Ask your franchisee what the fee includes and determine the value of your investment.
18. How are your royalty and advertising fees calculated and what do they include?
Clarify not only the amount of the ongoing costs but also how they’re calculated. This will allow you to assess your long-term expenses and potential for profitability. Make sure you understand how your franchisor arrives at its figure and, most importantly, whether the fees may change in the future.
19. How much capital do I need to cover startup costs, including inventory and equipment?
You’ll obviously need to understand how much the franchise costs. You should ask about not only the minimum investment but also the ongoing operation cost estimates, such as inventory, rent prices, etc. In many cases, the franchisor may require you to have access to a minimum amount of unencumbered funds.
20. Do you offer financing plans to help cover the initial fees and startup costs?
Some franchisors may offer loans directly to franchisees or at least help connect you with a reputable lender. Unless you have the available capital to purchase the franchise, you’ll need to borrow money, and financing a franchise directly with the franchisor is often the best option.
21. How long does it usually take for your franchisees to start making a profit?
Ask the franchisor about the profitability potential of the franchise and when you can realistically expect to start making a profit. Of course, every franchise location will differ, so ask for some real examples from recent franchisees within the parent company.
22. What are the highest, lowest, and average gross revenue and profit margins across all your franchises, not including corporate-owned stores?
Often, franchisors will buy out high-performing franchises, which can slightly obscure the reality of your potential profits.
Questions About the Business Model and Operations
23. How do you adapt to and stay on top of changing industry developments?
Every industry changes, so find out how your franchisor adapts its operations and business model to keep up with ever-changing market conditions and consumer demands.
24. How is your business model unique in comparison to your competitors?
Find out what your franchisor does to remain competitive in their industry. This will help you decide whether or not their business model can adapt to changing market conditions.
25. How do your franchise’s profit margins stack up against typical industry standards?
Understanding how the parent company’s profit margins and revenue streams compare to the industry as a whole is a great way to assess the business opportunity. For example, gas station franchises typically see a profit of under 2% on the sales of gas alone, but the overall profitability of their property can be as high as 30% when accounting for the sales of other value-added services.
26. How has your business model been developed over time?
Dig into the franchisor’s past to understand how adaptable they are as a business.
27. What are your plans regarding your franchise for the next ten years?
Any successful business should have a solid business plan that lays out its goals for the future and how it plans to achieve them. Your franchisor’s answer to this question can help you determine whether they’re trying to make a quick buck or whether they’re in for the long haul.
Questions About Ongoing Franchisor Support
28. What support and training do you offer new franchisees, and how long does it last?
If you’re a new franchisee, you’ll need comprehensive training and support to learn the ropes as efficiently as possible.
29. What support do you offer to franchisees after they are up and running?
In addition to the initial training, you’ll want to know what ongoing support the franchisor offers.
30. Are there any costs associated with ongoing support?
Some franchisors charge additional ongoing fees for providing support, training, and materials to franchisees.
31. What support do you offer with financial and legal matters?
You need to find out what you may be liable for in the event of a dispute. This can help you evaluate the business risks associated with operating a franchise and any potential financial setbacks that may arise.
32. Will I have the rights to operate a franchise in an exclusive territory?
Some franchisors grant you exclusive rights to operate a franchise in a particular territory, while others will allow multiple franchises to operate in close proximity.
Why Is It Important to Ask Franchisors Questions Before Buying a Franchise?
Getting to know your potential franchisor is simply part of the process of buying a franchise. Before you sign any legally binding documents, don’t be afraid to ask as many questions as you can think of, no matter how simple they may sound. You should feel completely at ease with the relationship before you enter it, especially when such a substantial investment is involved. And don’t forget to interview a few current franchisees, too!
By asking the right questions, you’ll gain a deeper understanding of the franchise system’s ins and outs, such as the services offered and the parent company’s operational guidelines. You’ll also have a chance to evaluate the overall business model, assess your financial requirements, and gauge the level of support you’ll receive. When you’re ready to take the next step, Franzy is here to help. Franzy empowers new franchisees to make smart, informed decisions. Whether you’re comparing industries or seeking the best opportunities in your chosen field, Franzy connects you with the franchises that align with your goals—ensuring a successful start to your journey.
