Franchise Evaluation
The Power of Franchise Validation
There are many critical factors to consider when researching a franchise to determine if it’s truly the right opportunity for you. However, few stages are as valuable as the step called Validation.
During Validation it’s not only important to ask the right questions, but to know how to read between the lines, filter the responses and truly determine if a particular franchise is a model you can be successful and happy with choosing.
What is Validation?
Franchising validation is the process of conducting interviews with current and former franchisees to gather feedback on their experience with the franchisor’s systems, including their overall satisfaction, financial performance, and support received.
It is a way to gauge whether the franchisor is meeting its commitments, providing adequate support, and offering a viable and successful opportunity.
Franchisees are legally required to receive a Franchise Disclosure Document (FDD) from their franchisor. This document contains information about the franchisor, the franchise system, and the franchise opportunity. It also includes contact information for current and former franchisees within the past three years. Many franchisors will also provide a “suggested validation list” of franchisees for you to contact. However, even if they do not provide such a list, we strongly encourage you to speak to as many franchisees as possible before making a decision to buy a franchise.
Keep in mind that the list of franchisees that the franchisor suggests may be biased towards satisfied, top-performing franchisees. Consider using the contact list in the Franchise Disclosure Document (FDD) to select additional franchisees to speak to that represent a variety of experiences, including:
- Top producers
- Struggling franchisees
- Franchisees who have owned their business for many years
- Franchisees who are fairly new to the system
This will give you a more balanced view of the franchise system and help you to make an informed decision.
Here are some additional tips for selecting franchisees to speak to
- Try to speak to franchisees in markets similar to yours.
- Speak to franchisees who are similar to you in terms of their experience, skills, and goals. This will help you to get the most relevant information.
- Be prepared to ask tough questions. Don’t be afraid to ask about the challenges that franchisees have faced and how they have been resolved. The important thing is not that there are challenges because they’re always are. The important thing is how they are handled.
The more information you can gather from current and former franchisees, the better equipped you will be to make an informed decision about whether or not to invest in a franchise. Don’t be afraid to ask tough questions and to get into the nitty-gritty of the business. The more you know, the better prepared you will be to succeed.
All franchisees have gone through the validation process themselves and are usually happy to speak with you and share their experience. However, it is important to be respectful of their time, as they are most likely busy running their own business. Therefore, be willing to speak with them at a time that is convenient for them; which may be outside of business hours or during the day when business is slower.
Key Considerations When Speaking To Franchisee During Validation
The objective of speaking with other franchisees is to get their feedback about their experience of owning the business; but remember, your ultimate goal is to determine if this is the right opportunity for you. What one person loves about a business, another person might hate. No business is right for everyone, so it’s important to consider your own personal goals, skills and financial resources when making a decision.
General Validation Questions To Ask The Franchisee
- What did you do for a living before you became a franchise owner?
- Can you tell me about the other franchises you were considering?
- Why did you decide to invest in this franchise?
- When did you first start your business?
- How would you rate the adequacy of your initial training in preparing you to open your business?
- How did the franchisor support you during your grand opening and launch?
- How often does the franchisor reach out to you?
- What are the most helpful aspects of the franchisor’s support?
- Has networking with other franchisees been helpful to you?
- What have you learned from the other franchisees in the system?
- Would you recommend the franchisor to other potential franchisees?
- What advice would you give to the franchisor on how to improve their support for franchisees?
- What have been the most difficult aspects of running this business?
- What are some lessons that you have learned from your experience as a franchisee?
- What are the things that top producers in this franchise do differently than other franchisees?
- What advice would you give to a new franchisee?
Financial Validation Questions To Ask The Franchisee
To properly Validate a franchise opportunity, you will be talking to franchisees in all phases of their business; from those who are wildly successful to those who are new and still working hard to break even. It is important to keep this in mind when comparing their financial information.
Depending on the franchisees individual circumstances and goals, some may choose to pay themselves a salary, while others may prefer to take dividends or distributions. Some may choose to drive company-owned vehicles, take frequent business trips or work out of a designer decorated office; while others may operate with a restricted budget.
No matter the situation, be mindful that there is no one-size-fits-all approach to financial management, so be prepared to hear different perspectives.
Here are some additional financially related questions to ask. However, be aware that the nature of the franchisees answers may vary depending on the phase of the business that the franchise is in:
- What are the typical gross revenue expectations for a franchisee in their first year, second year, and third year of operation?
- What is your current gross revenue, and what percentage of that is profit?
- Do you get any perks from being a franchisee of this business? For example, do you get a car, health insurance, or pleasure trips built into work trips, or anything else?
- How long did it take for you to break even?
- How accurate were the franchisor’s operating capital projections? Did you spend all of the money that they projected that you would need? Did you have to go into your own pocket for more?
- What percentage of sales typically goes towards labor? Occupancy? Other overhead costs?
Assuming a franchisee is running a fairly streamlined operation, what should I expect the typical profit margins be before taxes, debt service, etc. (Earnings before interest, taxes and amortization, EBITA)?
And Finally, The Question On Everyone’s Mind…
If you had it to do all over again, would you?
Evaluating Franchisee’s Responses!
When evaluating a franchise opportunity, it is important to keep in mind that no franchise system is perfect. Every business has its challenges, and some franchisees will inevitably be dissatisfied with their experience. Don’t let the occasional negative review or complaint discourage you, and don’t expect everything to be smooth sailing. Be prepared to face some obstacles, but know that you can overcome them with hard work and dedication.
It’s natural to dwell on negative feedback, but it’s important to resist doing so. Negative feedback tends to stick with us more than positive feedback, but that’s just human nature. Instead, focus on the overall sentiment of the feedback rather than specific experiences. Look for patterns in the feedback rather than individual reviews to get a sense of the general satisfaction of franchisees.
Ask questions about the context of the feedback and get good, accurate information. Just like reading online reviews, some people may have unrealistic expectations, while others may not have followed the franchisor’s systems or put in the required time and effort to succeed.
Identify With The Franchisees!
When Validating a franchise opportunity, it is important to identify with the franchisees you speak to. Ask yourself if you share similar values and strengths. If you are like the most successful franchisees, then that franchise may be the right opportunity for you. But if you are more like the less successful franchisees, then that franchise may not be a good fit.
Identify With The Franchisees!
When Validating a franchise opportunity, it is important to identify with the franchisees you speak to. Ask yourself if you share similar values and strengths. If you are like the most successful franchisees, then that franchise may be the right opportunity for you. But if you are more like the less successful franchisees, then that franchise may not be a good fit.
