What to ask before deciding to buy a franchise

Questions to ask former and current franchisees

Asking former and current franchisees questions can be a good way to find out the realities of being a franchisee in a particular franchise system. You should speak to at least 5 former franchisees and 5 current franchisees to get a range of perspectives.

Your franchisor should give you a list of franchisee contact details when they provide the disclosure documents. You don’t need permission from a franchisor to speak to current or former franchisees.

Understand what it means to be a franchisee

How long have you been a franchisee of this brand?
Why did you become a franchisee of this brand?
Did you have a background in business before you became a franchisee for the first time?
How many hours do you work each week?
What is the most important advice would you give to anyone buying any franchise, or a franchise in this brand/system?
Has the franchisor kept promises made to you before you signed up?

Find out if current franchisees are successful

If you could go back in time, would you buy your franchise again?
Have you been able to pay off your initial investment? How long did this take?
Is your cash flow positive or negative? What are the main factors affecting your cash flow?
What are your costs of goods?
Does the franchisor require you to pay more for supplies than you think is fair?
Where is your franchise located? For example, is it in a shopping centre, strip shop or mobile?
What is the rent?
What are your staffing costs and are you able to pay yourself a wage?
Do you feel like you can live comfortably off the money you make from the franchise?

Understand if former franchisees were successful

Did you make a return on your investment? What were the main reasons for this?
What happened at the end of the franchise agreement?
If you could go back in time, would you buy your franchise again?

Find out if franchisees feel supported by the franchisor

What is your relationship like with the franchisor?
Do you have a choice about whether to take part in promotions or product discounting?
Tell me about the support you receive from the franchisor. Is it what you expected?
Do you think training was adequate to help you operate the business?
Does the franchisor respond to your questions quickly?
Does the franchisor encourage or facilitate communication between franchisees?
Are you in competition with the franchisor, the franchisor’s other brands or other franchisees?
Have you had an issue or a dispute with the franchisor and was it resolved to your satisfaction?
Tell me about the marketing strategy and if you are happy with it?
Has the franchisor made any changes to the system that has impacted your business?

Learn about the pros and cons of the franchise

What is the best thing and worst thing when it comes to being a franchisee?
What are your favourite and least favourite things about this franchise system?
Have you been able to renew your agreement, or do you intend to?

Questions to ask the franchisor

Asking a franchisor questions about a franchised business will also help you to decide whether or not to buy one. You should get these answers from the franchisor in writing. You should also get a business adviser, accountant or legal adviser to check the information a franchisor gives you.

Get a general idea about the franchise business

What is a typical day as a franchisee and am I expected to work full-time?
How much money do I need to set up the franchise, and for the first year of operation?
Do you have an operations manual and can I review it?
How many times in the last 3 years has the franchisor not renewed a franchise agreement and what were the reasons for not renewing? What happened with the franchise businesses that weren’t renewed?
What happens if my lease and franchise agreement don’t end at the same time, or one ends early?
Can I exit the franchise agreement before the end of term and what costs are involved?
Can the franchisor end the franchise agreement early even without the franchisee being in breach?
In the next 10 years does the franchisor have plans to grow or sell the franchise system?

Understand if other franchisees are making money

Across all franchised businesses, not including corporate stores, what is the highest, lowest and average gross revenue? Remember, gross revenue is different from profit. Just because there is a high gross revenue doesn’t mean there is also a high profit, or even any profit.
What is the average time it takes for a franchisee to pay off their investment and start making a return? What is the shortest and the longest time across all franchised businesses?
How many franchisees are behind in their franchise fees and/or, if applicable, rent?
What capital expenditure is planned during the term of my franchise agreement? Is this in the disclosure document? How am I likely to recoup the expenditure having regard to where my franchised business is based?

Find out about the training and support

Will I receive training before I open for business and ongoing training? What costs are involved?
Does training cover the operations, such as how to use a particular machine, as well as general business skills, such as how to manage cash flow?
What happens if I need extra training or support?
Can you provide a typical field support schedule? What happens during visits by support staff?
What are the key performance measures and does the franchisor help me to meet them?
How will the franchisor help me build revenue in the first 12 months?
What support will the franchisor provide if the business isn’t profitable?

Understand how marketing works

Are franchisees expected to contribute to a common marketing fund? If so, how much will I pay in marketing fees?
What happens if the franchisor sells or my agreement ends but there is unspent money in the common marketing fund?
Whose salary in head office is paid from the marketing fund, and what do those staff do?
Tell me about your marketing strategy and what it means for my franchise business.
What further information will the franchisor provide me if I don’t understand the marketing statement?
Do you consult or take on feedback from franchisees about the marketing strategy?
Am I expected to commit time and money to local area marketing and do I need franchisor approval?

Find out if there are supply restrictions and how this impacts your costs

Are there specific suppliers that I must use and what happens if I find a cheaper supplier?
What rebates or incentives does the franchisor receive from suppliers?
What do you do to make sure the best price is secured for products supplied to me?

Find out about the culture of the franchise system and the people you have to work with

How long does the typical franchisee stay with the franchise system?
How many franchisees have failed in the past 3 years?
Who founded the business? What was their motivation to start the business, and are they still involved?
What experience do key staff have in operating or managing a franchise business?
What is the process for handling disputes in this franchise system?

Asking questions is just one of the steps you should take before deciding to buy a franchise. You may also want to complete the free online franchising course and read more about the key steps you should take before signing a franchise agreement.