Before you buy a franchise: the questions to ask the franchisor and its owners

Three groups of people, three sets of questions

Ask the franchisor about money, control and support; ask current franchisees whether those promises held up in practice; and ask former franchisees why they left. The Federal Trade Commission's consumer guide calls talking to franchisees possibly the most reliable way to verify what a franchisor claims. Put every answer next to what the disclosure document says, and treat the gaps between them as your real findings.

I am Avinash Nichkawde, founder and Group CEO of AN Global Group Holdings. As a Certified Franchise Consultant I represent hundreds of U.S. franchise brands, and our group also owns franchise brands of its own, so I have sat on both sides of these conversations. The buyers who end up in the right franchise are rarely the ones who asked the most questions. They are the ones who asked the right people the right questions, and wrote the answers down.

Read the disclosure document before the first call

The FTC's consumer guide explains that you must receive the Franchise Disclosure Document at least 14 days before you are asked to sign any contract or pay any money, and that you can ask for any updated information before you sign. Use those days. Your questions will be sharper, and the franchisor will notice that you have done the reading.

Some items deserve a first pass before anything else, because they shape which questions matter.

• Item 3: litigation history, including disputes between the franchisor and its own franchisees
• Item 4: any recent bankruptcies
• Items 5 to 7: what you pay to get in and what you pay to stay
• Items 8 and 12: required suppliers, product limits and what your territory really covers
• Item 11: training, opening support and advertising programs
• Item 17: renewal, termination, transfer and how disputes are resolved
• Items 19 to 21: earnings claims, outlet openings and closings with owner contacts, and audited financials

What to ask the franchisor directly

Your questions to the franchisor should test whether the support you are paying for is real, and whether the people running the system will still be there in five years. Ask for specifics rather than descriptions. A franchisor who answers with names, dates and documents is a different proposition from one who answers with adjectives.

• How many units opened and closed in the last three years, and why did the closed ones close?
• Who will train me, for how long, and can I see the training materials before signing?
• What does field support look like after opening: who visits, how often, and what do they do?
• How is the advertising fund spent, and do owners see an annual accounting?
• Which suppliers am I required to use, and does the franchisor earn anything from those purchases?
• What has changed in the system in the last two years, and what changes are planned?
• What happens if I want to sell the unit, or if I cannot keep it open?

Questions for owners who opened recently and owners who have lasted

Item 20 lists current franchisees with their contact information. Call owners you choose from that list, not only the ones on a reference sheet the franchisor hands you. The FTC suggests a useful split. Owners in business about a year can tell you whether they opened in a reasonable time and whether training, opening help and advertising matched what they were told. Owners in business about five years can tell you how long it took to break even and recoup the investment, whether the franchisor meets its obligations, and whether they would buy another unit.

That last question is the one I value most. An owner who has lived with a system for years and would buy again is telling you something no brochure can. An owner who hesitates, then changes the subject, is telling you something too.

Ask every owner the same core questions so you can compare answers, and leave room at the end for the question that often produces the most useful reply: what do you wish you had known before you signed?

Why former owners are worth the awkward call

Former franchisees are the people the sales process is least likely to introduce you to, which is exactly why you should call them. The FTC recommends asking why they left, whether they broke even, and what problems they had. Some will be bound by confidentiality agreements and unable to say much. Even then, a pattern of people who cannot talk is information worth weighing.

Listen for the difference between a business that failed because of the owner's choices and one that failed because of the system. Owners who left for retirement, health or a good sale are a healthy sign. Several owners in one region who closed for the same reason are not. If the system has an independent franchisee association, ask its leaders what problems have come up and how the franchisor resolved them.

Earnings claims: reading Item 19 without being misled

Franchisors are allowed to tell you about sales, income or profit only through Item 19 of the disclosure document. The FTC's consumer guide is blunt about this: no other spoken or written financial performance claim may be made if it does not appear in Item 19, with narrow exceptions such as the actual records of an existing outlet you are considering buying. If a salesperson gives you figures that are not in Item 19, write them down, and treat it as a warning about the culture of the system.

When Item 19 does contain numbers, read them carefully. The FTC warns that averages can be inflated by a few top performers and that gross sales say nothing about costs or profit. Ask whether the figures include company-owned outlets, which often have lower costs, and whether they reflect your part of the country. You can ask for written substantiation, and the franchisor must provide it if you request it.

Finally, if a franchisor asks you to sign a questionnaire at closing, answer it truthfully. The FTC notes that saying no earnings claims were made, when they were, can waive your right to challenge them later.

Red flags that should slow you down

None of these automatically means the franchise is bad. Each one means you should stop, ask more and get professional advice before going further.

• Pressure to sign or pay before the 14-day period has passed
• Earnings figures offered in conversation that do not appear in Item 19
• Training materials you are not allowed to see, even under a confidentiality agreement
• High turnover in Item 20, or many units that changed hands
• A litigation history with franchisees that keeps repeating the same complaint
• Owners who sound coached, or a franchisor who wants to choose every owner you call

The questions to ask yourself first

The most important interview is the one you hold with yourself, ideally before any franchisor's discovery day. A brand can pass every test above and still be wrong for you if it asks for skills you do not have, hours you will not work, or a role you will not enjoy. Write your answers down and share them with your spouse or business partner, because they will be living with the decision too.

If you plan to open in Dallas–Fort Worth, add a local layer: ask owners in this market, not only owners elsewhere, how demand, staffing and rent here compare with what the franchisor's averages assume.

• Do I want to run this business every day, or manage the people who run it?
• Have I managed staff, inventory or customers in a business like this before?
• How much can I invest without putting the household at risk?
• Am I comfortable following someone else's system, even when I disagree with it?
• What would I need to see in a year to feel the decision was right?

Questions to ask any consultant or broker, including me

The FTC's guide points out that franchise brokers often work for franchisors and may be paid only if a sale is made. It suggests asking how many franchisors a broker represents, how those franchisors are selected and how the broker is paid. Ask every advisor those questions, including me. A good consultant answers plainly and is comfortable with you checking everything against the disclosure document and the owners themselves.

Ask, too, whether the consultant will tell you when a franchise is wrong for you. The value of working with someone who represents hundreds of brands is breadth: if one brand fails your questions, there are others in the same sector and investment range to look at instead of forcing a poor fit. Before comparing brands on fit, make sure you are comparing them on the full cost, not just the franchise fee.

How we help you run this process

When we work with a buyer, we start with the buyer: capital, goals, skills, and the life you want the business to support. Then we shortlist brands in the sector and investment range that fit, help you read the disclosure documents, build the question list for each brand, and debrief the owner calls with you so patterns stand out. Many buyers find that comparing two or three brands side by side makes the right choice obvious.

Two other professionals belong in this process. A franchise attorney should review the agreement and explain your obligations; a business lawyer such as a Dallas business attorney who works with owners on contracts can tell you whether you need a franchise specialist for your situation. Your CPA should review the financial statements and your projections. If the franchise is in Texas, what Texas rules mean for buyers and sellers covers the state side, and the beliefs that cost first-time buyers money is a useful read before your first discovery day.

Questions people ask me