In the hunt for a great franchise investment, the long-time advice has been to talk to existing franchisees. There is something intrinsically valuable about talking to business owners who have already made the plunge you’re considering. Their experience is certainly more independent and reliable than the enthusiastic banter delivered by the franchisor’s sales representative, and the information you’ll gather goes far beyond the rather clinical facts delivered in a Franchise Disclosure Document (FDD).
FDD Information on Current Franchisees. Every franchisor is required to list in Item 20 of the FDD the business contact information (names, addresses, and telephone numbers) of all of its franchisees located in your state as of the end of the franchisor’s most recent fiscal year. If the number of franchised units in a state is fewer than 100, the company also must include the contact information for franchisees based in contiguous states, and then the next closest states, until at least 100 franchised outlets are listed. Most small franchise systems simply include a national listing.
Franchisee Associations. The FDD requires franchisors to list in Item 20 contact information for all brand-specific franchisee associations of franchisees operating under the same trademark as the program described in the disclosure document.
FDD Information on Former Franchisees. Some investors think that franchisees who have left a franchise system can offer the most valuable and most objective information about the franchise. The FDD provides limited contact information about former franchisees who’ve left the system — and only about those who have left in the franchisor’s prior fiscal year. The contact information is limited for a good reason: the privacy of these former franchisees. The FDD should show the former franchisee’s name, city and state, and current business phone number, if known. If the current business number is not known, then the franchisor may include the last known home number. Alternatively, the former franchisee may request that the FDD list an email address or post office address in lieu of a business number or home number, so don’t be surprised if the information on former owners seems a bit sketchy.
Buying a Former Franchised Location Now Under Franchisor Control. If you are buying a company-owned location that was formerly franchised, you must receive additional contact information for all owners of that unit during the last five years, the time periods of franchisor and franchisee ownership, and the reason for each ownership change.
Caution: Plants and Shills. The Amended FTC Rule expressly prohibits the use of “fictitious references,” or what it calls “shills.” Even if the people to whom you are referred are actual franchise owners, as opposed to fraudulent stand-ins, you want to make sure you talk to a good sampling of franchisees, not just one or two that are handpicked by the franchisor. A better move: Choose your own franchisees to call on using the contact information in the FDD.
Caution: Referral Payments. It’s not uncommon for the franchisor to offer referral payment/commission payment/thank-you benefits to existing franchisees who refer prospects who subsequently purchase the franchise. Since most of these payments are in the modest $1,000 to $2,000 range, they’re not likely to create a substantial bias or motivation to mislead you; however, it’s still good to know who will benefit if you decide to buy into the franchise. A description of referral payments may or may not be included in the FDD. Ask the franchisees you talk to whether they will receive any benefit if you buy the franchise.
Questions to Ask
In a busy franchise system that is attracting the attention of a sizeable number of prospects, existing franchisees can receive a large number of cold calls from people wanting to ask questions. Therefore, it’s important to keep in mind that you want to minimize the interruption of your call and/or visit. This may mean proposing to meet over a cup of coffee before the franchisee starts business; it may mean talking on the phone at a convenient hour. Always be polite. Ask what would be most convenient for the franchise owner.
Some key questions to ask a franchisee: