Franchising is regulated by the Federal Trade Commission (FTC) and the Attorney General’s office in some states. They are not permitted to make financial earnings claims. However, you can ask if they have an Item 19 in their FDD, Franchise Disclosure Document.
Whether it’s an emerging brand with a hot new concept or an older brand that’s become a household name, the market and consumer’s needs are always changing. The new programs should be well-tested and consistent with the franchise’s core competency. What R & D resources are in place to deliver new ideas, services and products? Does the franchisor seek new ideas from existing franchise operators in the field? The Egg McMuffin was conceived by a franchisee.
This is related to the number of franchisees that have closed and are no longer in business. Anything below 85% is suspect and anything over 95% is outstanding. You can read about these statistics in Item 20 in the FDD.
Most franchise agreements stay in effect for 5, 10 or 15 years. This means that the franchisor can’t change the terms you’ve agreed to in the franchise agreement…you’re grandfathered in to the current royalty, ad fund and territory size. This is a protection for you! So when you’re ready to exit, Item 17 comes into play. Be sure to read this over and have a discussion about this.
Mature franchises will answer yes. Emerging brands will have the provision written into the franchise agreement, but may not implement the fund until they have enough franchisees to merit it. The issue here is how effective the marketing and advertising campaign is. Does it drive business to the locations and get the phone to ring? I suggest you take notes on the franchisor’s perspective and then compare that with how the franchisees perceive the value. Is input and feedback from the franchisees solicited, evaluated and implemented or is the mothership unilaterally making all the decisions?
This is a hidden fact but vital if you are to get adequate support. If the brand is rapidly expanding and awarding many new franchises, do they have an operational infrastructure in place to train and support them? Growth is needed, but it must be balanced with a strong support organization.
Outstanding franchises have a support ratio of 20 to 1, meaning for every 20 franchise locations there should be 1 dedicated field support representative. Standard to the franchise industry is a ratio of 25/30 to 1. Pay close attention if the ratio is pushing 40 to 1 or more. The field support is being stretched too thin and it’s likely you won’t get the help you need in a timely manner.