Speak to Franchisees: How to Validate a Franchise Opportunity (Step 10 of 18)
Speaking to Franchisees is also called Validation
This is arguable the most important step in the process because it informs everything from how well the franchise implements support promised in the FDD to how to realistic are the financial items in the FDD
How to approach validations
Look for top owners- you want to know how many territories they have, did they start with that many, their background, how long they were in the business, when they started pulling money from the business, their numbers, their biggest challenges to growth, etc
Look for bottom and failing owners- where do they live, what is missing from their territory, what is there that isn’t in other places, what is their background, did they start in the business or “semi-absentee”, etc. Really drill down on them and their territory to find out what you need to look for to avoid. Most failing owners will blame their problems on their territory and the franchise business model when it is usually the owner’s own shortcomings in addition to the reasons they state so take their advice with a grain of salt.
The territory or a failing of the franchise itself can definitely be a factor, but in a great franchise system, the owner is usually 60-70% of the reason why a location does well or not. Don’t believe me? Many failing franchisees sell their location to another franchisee who turns it into a profitable location.
Look for owners like you- same background, same type of market, same goals, same ownership model
Stay away from potential neighbors- they may buy your territory after speaking with you because they were thinking about growth. The franchisor should be able to tell you if a franchisee is eyeing your territory or not. Definitely speak to someone in the same state as you to understand state specific regulations. City specific regulations don’t typically play a major role in your success unless they have extremely high tax rates but you can find that data online.
Ask quantitative and qualitative questions- you have to get a good picture of the startup costs, P&L, and growth plan but you also need to know their relationship with the franchisor, any disputes they had, how the franchisor helped them overcome personal challenges, training quality, support quality, business model quality, do they accept feedback, and more.
Record the calls if they are ok with it, otherwise write down the answers as quickly as you can. Store them in the app which allows you to compare answers across franchise systems.
Speak to as many owners as you can. At some point, the answers will all start sounding the same and that is when you know you spoke to enough owners. Start with the owners that the franchise suggests but eventually branch out into random franchisees. You can find the name, number, and/or email of every franchisee in the FDD. Keep good notes so you don’t mix up the owners of different franchises, this can easily happen especially if you are looking at franchises with similar business models or in similar industries. Lastly, keep a shortlist of the franchisees you really connected with. At the end of the process, you will realize you have a few important questions you forgot to ask and they will welcome your call.
