Franchising Classroom Lesson 5: Finding out about the franchisors.
 
Now take a closer, long-term look at the industry (or industries) your "possibles" are in. Are they up, down, stable, and why? What do the forecasters say about the future? How will the industry fare the next time the economy changes?
 
Next, do more research on the individual franchises you are considering. Are they selling more or fewer franchises than they have in the past? If the answer is more, is this true growth or just a temporary upswing? Ask the same question about gross sales at the franchised units? Are they growing? Simply because of a recent price increase or due to actual, steady growth?
 
Visiting the franchisor. You should allot sufficient time and financial resources to visit at least three franchisors. (You're about to start your own business amd alter the course of your life with this franchising investment; don't be penny-wise and pound-foolish!) You should expect to be treated professionally and as if your time is valuable.
 
At headquarters, you are also going to be evaluated and, if you are acceptable to the franchisor, are also going to be more or less continuously persuaded of the advantages of this franchising system.
 
Documents. A big part of visiting is obtaining the necessary documents and forms, most notably the offering circular and franchise agreement. The other major form is the franchisee application. This is usually sent out to prospective franchisees ahead of time, but may be provided during the visit instead.
 
Talking to current franchisees. Start with the list of franchisees provided to you by the franchisor, which may or may not be complete. Not every state requires that all franchisees be listed, but the total number of franchisees must be provided. So your first bit of analysis is to determine how forthright the franchisor has been in disclosing this information. A partial list may be only their system's best franchisees, in which case, you should do some independent research and come up with the names of few franchisees not on the provided list.
 
We suggest that you make calls to a random sample of at least 25 franchisees. It's also a good idea to poll franchisees in various areas of the country, perhaps with a heavier concentration on franchisees in and around the area in which you are most interested in locating your outlet. And, if such information can be obtained from current franchisees or another source, it can be additionally illuminating to talk to one or more former franchisees, especially those who have recently left the system.
 
Fully identify yourself, telling them that you may want to own a franchise. Don't be surprised if some do not with to talk or want to take down your questions and get back to you (they may want to clear you and your questions through the franchisor, or they may just be very busy running their businesses) But most will be used to such calls and happy to share information.
 
Begin with nonfinancial questions: How long have you been an XYZ franchisee? Have you been satisfied with the support you received from the franchisor?
 
You may want to preface your financial questions by telling the franchisee that you realize this information can be both a speculative and personal thing, but you would appreciate getting their input on purchasing an XYZ franchise as a purely financial endeavor. Try questions such ass: In your experience, what sort of annual rate of return on investment can an XYZ franchisee expect in their first few years of operation? How much money should an XYZ franchisee plan to have to pay for the total franchise investment? What amount of money would you counsel an XYZ franchisee to have in reserve for "unexpected" expenses in the first year or two? How much did your franchise gross last year?
 
Looking at earnings claims. Franchisors are not required to disclose this information. A growing number, however, seem to be doing it more regularly.
Even when franchisors do provide earnings claims, they are often skewed by a desire to be safe or to err on the side of conservatism. Some claims show only the performances of company-owned units or an "average" of all outlets in the system. Some franchisors use earnings claims not to inform but to reduce their risk of a lawsuit by showing only stores that aren't doing well. You should be suspicious about as if a franchisor gives you figures that aren't in the franchising offering circular.