In a previous article, we highlighted the importance of asking questions during the due diligence process, and we discussed four types of issues that demonstrate why franchisees should not rely on franchisors’ Franchise Disclosure Documents (FDDs) and marketing materials alone. We also mentioned the importance of talking to both current and former franchisees. This article covers some basic tips and questions to ask when contacting current and former franchise owners.
How to Find Current and Former Franchisees
But, before we get ahead of ourselves, how do you contact current and former franchisees? Fortunately, the requirements of Item 20 of the Franchise Disclosure Document (FDD) make this simple. In Item 20, franchisors must disclose contact information for:
- Current franchisees,
- Franchisees who have left the system within the past year, and
- Franchisees who have not communicated with the franchisor within the past 10 weeks.
When contacting these individuals, keep in mind that they may have additional references as well. They may have an older version of the FDD that they are willing to share; or, they may know of other current or former franchisees who can impart particularly-valuable information.
Questions to Ask Current and Former Franchisees During Due Diligence
Once you start reaching out to current and former franchisees, what types of questions should you ask them? Here are some general recommendations:
10 Questions for Current Franchisees
- Has the franchise opportunity met your expectations?
- In what ways is operating your franchise different from what you expected?
- Are you consistently able to meet your royalty, advertising fee and payroll obligations?
- How long did it take you to become profitable?
- Were you able to negotiate any provisions of your franchise agreement? If so, which ones?
- Are you planning to renew your franchise?
- How responsive is the franchisor when you have questions?
- How often does the franchisor make changes to the operations manual?
- Do you see value in being a franchisee as opposed to operating an independent business?
- If you were starting again, would you buy the same franchise?
10 Questions for Former Franchisees
- How long were you a franchisee?
- Why did you leave the franchise system?
- When did you realize that the relationship was not going to work?
- What were the most difficult aspects of being a franchisee?
- How was your experience as a franchisee different from what you expected?
- What is your overall impression of the franchise opportunity?
- How did the franchisor handle your termination?
- What did you have to do when your franchise agreement ended?
- Would you consider a different franchise opportunity in the future?
- Have you considered (or are you considering) legal action against your franchisor?
The idea is to get as many different perspectives as possible, so ideally you should speak to several of the franchisees identified in Item 20. If the franchisor attempts to steer you to specific franchisees, while it can be helpful to speak those who have had highly-successful experiences, you should be sure to reach out to other current and former franchise owners as well.
Get Help Evaluating Your Franchise Opportunity
For more information about how to evaluate a franchise opportunity, we encourage you to contact the Goldstein Law Firm. We provide free initial consultations and offer three different flat-rate franchise review packages. To speak with national franchise attorney Jeffrey M. Goldstein, please call (202) 293-3947 or get in touch online today.