There are plenty of questions you should ask before you decide on a franchise business. But there’s one that would-be franchisees often fail to ask — and yet it can be one of the most informative.
Here it is: “Why did these franchises close?”
You’ll have plenty of opportunity to talk with current franchisees, and you’ll find them a valuable source of information. Here are some questions you should ask:
You’ll also be given some opportunity to contact former franchisees. However, that opportunity may be very limited. That’s why you have to ask the franchisor.
You’ll want to discuss turnover rates with the franchisors you talk with. You’ll find this information in Item #20 of the Franchise Disclosure Document. The turnover rate is the percentage of franchises that close in a given time period, and Item #20 will give you this data, state by state, for the three years prior to the current year. You’ll also find contact information for some franchisees who’ve closed their franchises within the past year. However, franchisors are allowed to choose which franchisees they want to offer for this item, and it is just good business for them to choose people whose experience has been positive.
How can closing a business be positive? Easily!
- A franchisee wanted a short-term business for his or her retirement.
- The franchisee retired from the franchise.
- The franchise was sold at a profit.
- The franchisee had a good experience, but was ready to leave for another opportunity.
- The franchise was successful, but the franchisee wanted to leave for health or other reasons unrelated to the business.
If you speak with franchisees in this kind of situation, but they actually make up only a small proportion of the franchisees whose businesses have closed, you won’t be getting an accurate picture. What’s more, franchisees often sign NDAs, or confidentiality agreements, which can keep them from discussing any disagreements or problems they may have had. This information will be in Item #20 as well.
But NDAs are quite common in some industries, and may not be a response to a problem. They can be intended to protect the details of the franchise’s system from competitors. In businesses today, the intellectual property can often be among the most important assets, and it is not a sign of bad faith to protect it.
So, in addition to talking with the franchisees whose contact information is provided, you should ask franchisors questions like these:
- “I see that 12 franchises in my state closed in the past three years. Why did they close?”
- “When you fail to renew a franchise agreement, what are the most common reasons?”
- “I know that businesses can fail. What would you say are the most common reasons for failure within your franchise?”
Sales people will not want to bring any negative points into the conversation, but someone in the franchise will certainly know the answer to the question, and it’s worth being persistent to get the answer.
