Video Transcription

Into assessing the reasonable time periods that a franchisee would incur in opening a new franchise. You also have to ask the franchisee how many costs had he incurred, what types of cost he incurred in opening up. There are many hidden and unexpected costs that are not put in the franchise disclosure document and that are clearly secreted by a franchisor, with respect to disclosing things through a franchisee. Now are these things…is that kind of omission or failure to disclose legal? Many times it is, but that’s an issue for another discussion. The hidden or unexpected costs are something that a franchisee can obtain from the previous franchisee by going through a timeline and asking him what he incurred first, whether there were any permitting costs, whether there were legal fees or accountant fees that were not disclosed in a franchise disclosure, the FDD, that that particular franchisee incurred. And those are…and that’s a good proxy for obtaining those gaps in the franchise disclosure document, with the respect to costs that aren’t disclosed.

The question also you’re gonna ask former franchisees has to do with suppliers, how much does it cost, whether the delivery is on time and reliable, whether the goods and services that are required to purchase from the franchisor are quality goods, and whether they are able to be sold by the franchisee. You also wanna check the backgrounds of these franchisees before they purchase the franchise. If this particular franchise had nothing to do in his or her history with the franchise services or products, and they were successful, that’s some indication, obviously, that you can make the transition and be a success. If you’ve seen prior franchisees unsuccessful when they didn’t have a background in this particular field, obviously that’s an indication to look at the training issues more closely. Another issue that you’d want to ask a franchisee is whether they receive ongoing help, so the help test that we discussed earlier, whether when the franchisee needed help and called, it was available and provided, and provided efficiently and effectively. And again, that’s a very crucial issue, and the only way you’re gonna get it is from a former or a current franchisee.

The advertising programs that we’ve discussed, you’re gonna find out from that franchisee where the advertising has been, whether it’s been effective, whether it’s been oriented towards a different part of the country, whether it’s actually increased sales and revenues for that particular franchisee. Another issue that the franchisee’s gonna do with respect to due diligence, has to do with whether that particular franchisee would invest in another franchise in addition to the one they’re operating, or whether if they had the chance, they would still have invested and purchased the franchise. Clearly relevant information that can only be gotten from a franchisee himself or herself. And a very general question is whether that franchisee would recommend the franchise. And it’s as simple as that sometimes, just asking a very general question and getting that franchisee to begin to speak to you.

The next always issue that a franchisee needs to look at seriously, has to do with renewals. And some franchisees figure, “Well, I’m not gonna be around in 5 years or 10 years to worry about a renewal when I’m signing the initial franchise agreement.” It’s a big mistake. First of all, a franchisee who’s buying the franchise has to believe that he or she is gonna be successful. Why you’re gonna buy a franchise if you believe you’re not gonna make it 5 or 10 years? That may not turn out to be true, but you’ve gotta have that initial instinct, or feel, or wish that you are gonna be successful, obviously. So you’ve gotta look at the renewal provision seriously. Most franchise agreements now state that on a renewal, the franchisee has to sign what’s called the then-current agreement being offered by the franchisor at that time. And as you can imagine, the new franchise agreement five iterations in the future, is gonna be way more costly, and expensive, and onerous, than the one that you’re signing at that time, your initial franchise agreement. And when that happens, I’ve had many franchisees that were profitable, but on the renewal, given the additional costs and the additional royalty fees, it flips from being profitable to unprofitable, and all the good will that the franchisee developed over a long period of time is lost.

Thanks for being with me today. And if anybody has any questions, feel free to give me a ring. Thanks again.

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