There are four steps that a franchisee should always consider when they are thinking about making a franchise investment.
As a franchise consultant, I’m often asked what the process is for researching a franchise. There are a few steps that my clients, who are considered franchisee candidates, go through to get to a decision about investing in a franchise. In this article, I will break the process down into four basic steps. There are other sub-steps within each of the four steps that I’ll discuss along the way.
The goal of this process is to help candidates do the proper due diligence to make a good decision about a franchise investment, whether that decision is a YES or NO. It is designed to reduce the investment risk because it helps prospects get answers upfront, to ensure the franchise is a good fit for both the franchisee candidate and the franchisor.
Before the Research Starts
Before the research even begins, a franchisee candidate should narrow down their franchise selection. That’s where I start with each of my clients, and where I specialize. I use FranNet’s unique matching process before any of the research starts to help my clients uncover potential franchises. The research process then helps them to fully understand the franchise model and how it would fit them and their family. The selection of franchises is like dipping a toe in the water at the beach to check the temperature. Then, the research begins.
Step 1: Talk with the Franchisor
Step one in the four-step franchise investment process is talking with one or more selected franchisors. Nothing happens unless candidates take this step and it’s a critical first step. If the selection of the franchises is like dipping a toe in the water, talking with the franchisor is like wading in ankle-deep. If candidates don’t want to talk with the franchisor, then they will not invest in that franchise. People are generally surprised when I tell them that this is where many of my clients stop. It’s definitely a reality check.
There are likely going to be several calls with the franchisor in this step. Franchisee candidates will receive the all-important Franchise Disclosure Document (FDD), probably right after the first or second call. The FDD is a legal document and will take some time to read through. Franchising is regulated by the Federal Trade Commission so every franchise has to have a tailored FDD, and has to update it every year. This document is useful to compile a list of detailed questions to ask the franchisor on every follow-up phone call. My job is to help my clients with the question creation as well.
Other franchisor calls may break down topics such as marketing, projections, calls with key officers, etc. There could be many calls with franchisors or as few as one, depending on the franchisor’s process.
Step 2: Franchisee Validation
Validation is where franchisee candidates get to talk with the people who run the business every day. This is where the rubber meets the road, so to speak. Now candidates are going in knee-deep and moving further out into the water.
Validation may include calls and/or visits to franchisees. In this step, candidates get to ask questions of the current franchisees, and that includes any and all questions. While franchisors will likely have more restrictive answers, in validation, current franchisees are not restricted in giving answers. I encourage my clients to talk with low, medium and high performers in the system to get a full perspective.
This step in the franchise investment process takes the most time because current franchisees are busy running their businesses and may not be able to talk immediately with candidates. Lots of phone and e-mail tag can take place during this phase of the research, but again, it’s very necessary. My clients tell me they learn the most candid information about the franchisor and the system in this step.
Step 3: Discovery Day or Meet the Team Day
In step 3, franchisee candidates visit the franchisor at their location, probably a home or main office. It may be called discovery day or meet the team day. Not every franchisor offers a day like this, but most do. This is when candidates have the opportunity to meet the people behind the scenes who help run the franchise from a high level.
This is not a vacation so it has to be treated very seriously, which also means franchisee candidates will probably be paying something out of their own pockets. This may include hotel stays, airfare, or the entire visit. The franchisor may pick up some of the costs but more than likely, the candidate be paying for this part of the process on their own. This is skin in the game at this stage, since up to this point there is no cost for investigating.
N ow franchisee candidates are getting into the water chin deep and should be pretty close to committing to the investment. If candidates get to this point, franchisors are expecting them to have a definitive answer about whether or not they will join as a franchisee shortly after attending discovery day. A decision is expected!
Step 4: Consult With Professionals
When franchisee candidates verbally commit to the franchisor, the next step is working with local professionals to pull the final details together. Now candidates are treading water! It can be a bit scary but also very exciting.
While this is considered a step, candidates have probably been gathering names of professionals throughout the process in anticipation of a “yes”. These professionals include a CPA, a franchise attorney, a funding professional, and a banker. By the time my clients get to the point where they need to talk with professionals, I have a list of local resources for them to call on.
Wrapping it All Up
Not every franchisor has these exact steps but will all follow a similar pattern, and they expect prospects to follow their process. It helps the franchisor understand if the prospect is a good fit for their system.
Ultimately this entire process gets clients to a final decision. Will it be yes or no? The information they gather in this process helps them make that decision. Being able to make an important decision like investing in a franchise is the hallmark of an effective business owner. Doing the research through the Four Step Research Process is a simple outline that can help franchisee prospects understand what they will be doing in their research.
It’s important for potential franchisees to remember why they are going through this process. I find that my clients are always surprised at what they learn. It can be quite exciting and fun. So enjoy the process!
Guest post by Cindy Rayfield franchise consultant
Cindy Rayfield is a SCORE colleague and a serial entrepreneur. We are super fans of each other’s work and sit on a panel at the U.S. Air Force Academy each month to help transitioning service members interested in entrepreneurship understand their options.
