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Interview Both Sides of the Franchise Equation

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You've researched your franchise choice on paper. Now get some real world information by talking to the franchisor and visiting current franchises.

After you've received all the documents from the franchisor, you'll enter a preliminary negotiation stage before you sign. This is the most critical period in your dealings with the franchisor. At this point in time, 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.

The representative of the franchisor may be one of three people: the franchise owner/company president, an in-house salesperson or a franchise broker. 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, experience and 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're just protecting their interests.

Prepare questions of your own about the company. You might even want to have your attorney present or have an attorney highlight areas of the franchise agreement and UFOC 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 a whole day. Your primary goal should be to satisfy all your doubts so that you feel comfortable with the data supplied by the franchisor

What to Ask the Franchisor

During your interview, you really want to concentrate on some key areas that will help you determine the strength of the franchise:

  • Ask what the pretax net profits of existing operations are and compare them against the earnings statement or pro forma that the franchisor has already supplied you.
  • Find out what is included in the training program, field assistance, store design, facility construction, site selection, and feasibility studies.
  • 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 to investors in the state you will be operating in during the last 12 months, and how many have opened a franchised business in that time.
  • 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?
  • Find out if any franchisees have been terminated. If some have, have the franchisor 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 it does.Whether it does or not, do your own demographic study so you are familiar with the profile of the audience within the market area.
Don't be afraid to ask questions. And don't be afraid that you'll appear foolish because, frankly, very few people understand the franchise agreement or the UFOC in full. Primarily, you're trying to pinpoint any problems that may exist in a franchise. Don't just settle on any franchise.

If you run across a franchisor that is reluctant to pass along a list of current franchisees, makes promises that you'll earn a fortune on a limited investment, insists on deposits for holding a franchise unit, tries to convince you to sign before someone else does, or is full of empty rhetoric when answering your questions, head for the door. These are franchisors that are probably trying to pull a fast one to get your money.

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