Validation Questions: Handbook

Topics Covered in this Handbook:

Why interview current franchisees?
Private equity in franchising
Franchise sales process
Franchisee testimonials & surveys
Pitfalls to avoid
Building trust with franchisees
Suggested questions to ask franchisees, organized by topic

Overview: Franchisee Interviews

Prospective franchisees can partially de-risk their franchise investment and give themselves a better opportunity for success by conducting rigorous due diligence before buying a franchise. One of the most critical steps in this process is to interview current franchisees. This handbook outlines what questions to ask and why, common pitfalls in the interview process, and provides an extensive list of questions you can use as a starting point to develop your own list of questions.

Why Interview Current Franchisees?

Commit now to speaking to as many franchisees as possible as part of your due diligence process. (If the brand is private equity owned, be sure to speak to franchisees who were around before the transfer so they can also help you understand what has changed.)

Franchisees are one of your best sources for information
They are “living the operating model”
They are also “living the relationship” with the franchisor – what is the quality of that relationship?
You can ask as many questions as you want
Franchisees can provide specifics about financial returns (franchisor may not be allowed to provide)
They will be your peer-franchisee owners if you join, so it is important to start building those relationships
They have been in your shoes as a prospective franchisee!

Keep in mind that private equity buyers themselves usually don’t move forward in their own due diligence if there are no franchisee satisfaction surveys available or if they are not allowed to speak to franchisees. For concepts with fixed locations, I also encourage you to make site visits to several locations at different times of day to understand what’s going on in the business and get a sense for pacing and the customer experience. If there is no fixed location, ask to spend a day with a franchisee or do a ride-along on a few jobs to get out in the field and see what franchisees, and their employees, handle on a typical day.

Franchise Sales Process

Some franchise candidates try to go around the sales team and start calling franchisees from the beginning. Often franchisees will push back on this behavior because they don’t want to waste time with a potential competitor or a tire-kicker who doesn’t yet have an approved application. This is appropriate. But once your application is approved, you should be able to start talking to franchisees. Usually the franchise sales process has 8-12 steps including:

Submit inquiry online
Initial screening call (financial requirements, territory availability check)
Formal overview call
Submit application (including financial qualification)
Application approved
Review Franchise Disclosure Document (FDD)
FDD Review call (Q&A)
Franchisee validation calls
Discovery Day
Decision / franchise awarded
Kick off with operations & real estate (if applicable) teams

How Many Franchisees Should You Interview?

If this is going to be a full-time business for you or represents a significant amount of money, then weight that accordingly. In an emerging brand, I suggest interviewing all franchisees. Up to 50 units, interview at least half. Above that, interview franchisees in your market, recent exits, and at least 20-30 beyond that list.

Franchisee Testimonials & Surveys

If the franchise has video or written testimonials from any franchisees, be sure to confirm if those franchisees are still in the business. If they have exited, try to track them down and find out why they left. Often their contact information may change from what’s in the disclosure document, but LinkedIn can often help you find those ex-franchisees. Also, confirm that any franchisee testimonials are NOT compensated as area representatives or otherwise have some conflict of interest, and that they are not given consideration (gift cards, etc) for hosting site tours or providing feedback to prospective franchisees. Remember that if the amounts are small enough such consideration doesn’t have to be disclosed, but all of those market tours and conversations can add up.

If the franchisor has more than 50 units and doesn’t conduct annual surveys of its franchisees, that should be a red flag for you and usually is also a red flag for private equity investors. If the company conducts regular surveys, ask them what they do with that information. Ideally, they should be willing to openly share the survey results (including the comments section) with you before you sign a franchise agreement. Did they say they are “transparent?” Now is their chance to prove it. If they refuse to share the information or don’t conduct formal surveys, consider that carefully before moving forward.

Pitfalls to Avoid

By the time you get through the FDD Disclosure call, the franchise sales team has already invested a significant amount of time talking to you and answering your questions. The sales team also knows that if you get to Discovery Day, you are much more likely to close the deal. They will encourage you to speak to franchisees but also by this point will likely be encouraging you to choose a Discovery Day date that works for you. It is easy to get busy (or get excited about moving forward) and not do as many franchisee calls as you should. Common pitfalls to avoid include:

Only talking to top performers
Not talking to enough franchisees
Not asking probing questions
Not verifying fit with data: economics, operating model, & return on investment
Not verifying your projections / business case assumption with franchisees
Discounting negative feedback
Not uncovering underlying reasons for franchisee success or failure

Every prospective franchisee expects to be successful. There is thus a natural tendency to favor interviewing mostly top performing franchisees because that's where candidates see themselves. But keep in mind that none of the franchisees with underperforming locations planned to be under-performers! Be sure to interview franchisees with a variety of outcomes.

Building Trust with Franchisees

The sales team will ask you which franchisees you are speaking with as you continue to make phone calls and site visits so they can keep tabs on which franchisees are helping move the process forward and which may be turning off candidates. They are also gauging your seriousness as a candidate. (e.g. Are you following the due diligence process? Are you doing appropriate due diligence? This is a signal of how thoroughly you will follow the operating model later.) The best brands don’t micromanage you and simply push you to speak to as many people as possible. Brands with something to hide or weak models are often much more sensitive about this phase of due diligence. As you go along, I suggest simply telling the team that you believe you’ll get better information from franchisees if they can speak to you candidly and confidentially.

If you are a franchisee, there are unspoken benefits of being a franchise cheerleader and sometimes costs to becoming known as a negative validator. Franchisees may also be reluctant or unable speak candidly due to non-disclosure agreements, non-disparagement agreements, and because they are busy business owners with limited time. If franchisees seem very cautious about speaking to you, this is a potential red flag. You are considering joining this owner community. If you don’t get a vibe of helpfulness and candor, I suggest moving on to franchise concepts that are more transparent about unit level performance and have a more open culture and sharing of best practices.

To build trust with franchisees:

Do your homework ahead of time (e.g., read the FDD, complete info calls w/ franchisor)
Respect franchisees’ time
Make an appointment
Come prepared with good questions
Keep feedback confidential

Suggested Franchisee Interview Questions

Many franchise guides will tell you to start build rapport first and only then gradually build toward more personal questions when interviewing franchisees. I disagree with this approach. It chews up time and may not discover the information you need. Some franchisees are “talkers” and you can easily burn half of the call or more just socializing and never get to the substance you need to make an informed investment decision. Franchisees know that getting calls from prospects is a part of franchising. It’s their turn to try to help you just as someone else helped them when they were candidates. Be prepared with a list of questions and be respectful. Make an appointment ahead of time and be prepared to talk during non-business hours. You can be friendly and build a relationship while still being efficient with both your time and that of busy franchisees!

You won’t get through this entire interview list with every franchisee! As you conduct interviews, you’ll start to hear the same story over and over. For example, you may hear repeatedly that training is great, but the digital marketing program is weak. Probe first in new areas you haven’t yet explored and you can always circle back to confirm other things you’ve heard.

I suggest opening with something candid like the following:

“My name is ____________. I’m thinking about becoming a franchisee. This is a big investment of my time and money, and I want to make a good decision for me and my family. I’m hoping you can help me by candidly answering a few questions.”

Because franchisees are busy, I suggest starting with a simple, but powerful question in case your meeting is cut short:

“Knowing what you know now about this business, would you invest again Why or why not?”

Variations of this question include:

“If you were to invest again, what would you do differently?”

“Are you planning to add any more units/territory? Why/why not?”

This will set the tone and potentially cause you to ask more questions in a particular area. This question has the added advantage of helping you to also uncover key pain points and things franchisees like about the business, as well as whether their expectations are being met. Their answer gives you a strong jumping off point to take the conversation in a productive direction as you ask more questions to help them elaborate on their answer.

Before ending the call, finish with the following question:

“Is there anything I’m not asking that you wish you had known before you purchased this franchise?”

Following are sample questions to get you started in your franchise due diligence process. Use these as a jumping off point to develop your own list of questions.

General Questions / Business Experience

Did you have prior franchising experience? Prior business ownership experience?
What is your professional background and is this helpful (or not) for this type of business?
What does it take to be successful as a franchisee?
Which franchisees do you look to for best practices? Why? (Get names and ask for referral introductions.)
Have any franchisees failed? Why?
If franchisees in this concept struggle, what are typical themes/causes you have observed?
Do you own any other franchise concepts? If yes, how does this compare? What are key differences?
Why did you think this franchise would be a good fit? What were your goals?
How much time do you spend in the business? How has this changed as the business ramped up and you gained more experience?
What do you like most/least about the business?
Please walk me through your typical week. Where do you end up spending the majority of your time? Do you spend more time on things that make you money, addressing chronic pain points, or putting out fires? Why?
Did you initially purchase one territory/location or multiple? Do you plan to follow through with your development agreement (if multi-site.)
What did you think owning this franchise would be like compared to reality?
Is this your full-time focus or are you managing other companies or employed?
How long have you been a franchisee? What changes have you observed in the business since you joined?
Can this business be run absentee? If yes, how difficult it is to find a manager to run it for you, what is their typical background/qualifications, and what are salary expectations in your market?

Profitability

What are the key profitability and customer success metrics in your business?
Would you mind sharing a unit level profit and loss and cash flow statement with me and walking me through how you make money in this business?
What is the revenue for your unit(s)? How long after opening did it take you to achieve that revenue?
Is there seasonality?
What level of marketing spend is required to maintain that revenue?
What is your monthly breakeven revenue? What are your largest expenses?
Does the franchisor collect P&Ls/franchisee financials (and how often)? What do they do with that information? Does corporate share cohort analysis so franchisees can see where their unit performance tracks against the rest of the system? How is this information used in coaching franchisees?
How many new customers do you need to recruit each month to maintain that level of performance? What percentage of your customers are repeat customers, referrals, subscription of membership customers, etc?
What would it take to make your business more profitable and how much of this is under your direct control?
The FDD mentions that the average unit volume is $X. At this revenue, can franchisees make money?
What are the top performing franchisees doing to achieve better than system-average performance?
What revenue should I expect in Year 1, 2, 3? How much can I expect to take out in owner distributions in Year 1, 2, 3?
Are you paying yourself a salary? How much? Are any other family members working/drawing salary?
Is your profitability improving each year?
Do you have any capacity limitations? How does that impact your profitability?
How much customer turnover do you experience?
Please explain your pricing model. Do customers see the value and are there different packages available? Have you been able to make regular price increases to keep up with inflation? Do you control pricing decisions or the franchisor?
If the franchisor controls pricing decisions, what is their process for taking price and how is franchisee feedback considered?
What product/service/customer is your biggest money maker? What percentage of your revenue does that represent?
Does the franchisor require you to do/sell anything that is unprofitable for you as a franchisee?
What product/service/customer/activity would you eliminate from the model if you could?
Have you recommended the franchise to anyone else? Why, why not?
What are your key profitability pain points and what can you and the franchisor do to improve the situation?
How much compensation are you personally taking out of the business?
Please walk me through your staffing model, salaries and roles – what is the optimal structure?
Do you own or rent your location? Please share the costs and what (if anything) you would do differently in choosing a location.
Do you believe that required purchases and vendors are priced competitively? If you have ever complained about pricing from required suppliers, what was the response of the franchisor?
Is there adequate visibility to franchisor rebates from required suppliers?
Do you feel disclosures prior to buying the franchise were accurate? Was any information missing or not what you expected once you got into the business?
How much did you initially invest? How long did it take you to repay that investment? How long did it take for you to become profitable?
How much money (how many months) of working capital would you recommend new franchisees to start with?
How did you finance your start-up and your on-going working capital needs? Are there seasonal cash flow pressures I should be aware of?
As I continue to do interviews and build my business case, would you be willing to review my business case assumptions to make sure I’m not missing any expense categories and have realistic expectations?

Growth

Is your revenue growing? How much as your revenue grown each year? Please walk me through the ramp up and how you built your customer base.
How much customer traffic is attributed to having a specific location in a high traffic area and how much is marketing driven? Is having the “right” location a big factor in this business?
Do you plan to add new locations? Acquire existing locations from franchisees? If not, why?
What are the top opportunities to grow your business?
What would need to happen to increase your revenue by 25%? 50%? Customer traffic by 25%? 50%?
What has the biggest impact on your net promoter scores / customer reviews?
How dependent are you on corporate marketing initiatives to drive customer demand?

Relationship & Community Culture

How would you rate the quality of your relationship with the franchisor? Key members of the management and support team?
Does the franchisor conduct regular surveys of franchisees? What do they do with that information? Have you ever seen management make changes based on feedback?
What would need to change for this relationship to improve?
What is their main method of communication with franchisees?
Is there an open franchisee forum online to share tips and issues? Is this monitored by the franchisor?
Is there a Franchise Advisory Council? Independent franchisee association? What is their role and how effective are they in addressing issues with the franchisor? How are members selected?
Are there any major areas of franchisee disconnect?
How would you describe the culture of this franchise? Why?
Are best practices openly shared?

Management Team & Ownership

Is the management team well respected by franchisees?
How would you describe the relationship between franchisees and the franchise management team?
Does management focus on unit level profitability?
Does management prioritize building a strong culture and productive relationship with franchisees?
What would you change about your relationship with management?
What role or support is missing?
Which functions are strongest? Weakest?
Does the management team conduct franchisee satisfaction surveys? What do they do with the information? Do they openly publish the results, including franchisee comments?
How frequently does management ask for franchisee feedback?
Is this franchise owned by private equity? Publicly traded? If PE-backed, how visible and active is that PE firm engaging with franchisees?
Have any issues been escalated to the Board or to the PE owners? What was the nature of the issue, and what was their response?
What changed in the business after ownership changed?

Competition

Describe the competitive landscape. Who is your main competition?
What are competitive differentiators of this business model?
Is competition increasing?
When competitors win the business, why?
Do you face any competition from the franchisor or from other third parties working with the franchisor? What impact does that have on your business?
What can franchisees do to stand out and get attention in a crowded marketplace?

Marketing

What are key marketing success metrics?
What is your cost per lead?
The FDD says that franchisees must spend ___ on local marketing initiatives. Is that enough? Why or why not? What is your own local marketing spend per month?
Is there a brand fund? What does corporate share about brand fund spend and return on investment?
How do you break through the noise and attract new customers?
Where do you find customers? How resilient is customer demand and what specific marketing strategies increase demand, customer awareness.
Please describe the customer journey and how marketing influences that journey. Who engages with customers at various touchpoints?
How do you create repeat customers or higher frequency?
Who owns the customer relationship?
What are the key touchpoints of the customer experience?
How much control do you have over local marketing? Does the franchise use any third party local marketing agencies? Is working with these agencies optional? What return on investment metrics are shared with franchisees?
What is the required local marketing spend? Do you have to spend more than the required minimum to drive enough customer traffic to achieve profitability? How much are you spending on local marketing?
Is there any seasonality in the business?
What local marketing techniques are most effective?
Do you do any events and if yes, how does that help build the business?
How critical is social media to your marketing efforts? Who manages that for you? What is the average monthly investment? How much control do franchisees have over their social media?
Is there a loyalty program / app? What percentage of your customers are part of the loyalty program? How does this impact profitability? Visit frequency?
How does the corporate brand fund operate? How do you know if it’s working? What visibility and say do franchisees have over how the fund is spent? What visibility is provided over how the brand fund is allocated and what results are achieved?
Describe corporate level marketing efforts – are those efforts effective at driving franchisee profitability? Is corporate overly reliant on discounting?
Who controls pricing decisions? How often do you raise your prices? Is there an approval process you need to go through with the franchisor and how is that managed?
How often are new products and services launched? How are those tested prior to launch and what marketing efforts are put behind new launches?

Territory & Site Selection

How did you assess your local market to determine viability for this concept?
Did you receive any help from the corporate team and was their advice helpful?
Are territories exclusive?
How did you choose your location? How important is location to this business?
How difficult was it to find the right location? How long did it take? Did you open on time and if not, what happened?
Is encroachment by corporate or other franchisees a problem in this business?
Which customers are most profitable for you? Are there enough of them in your territory? Have demographics shifted during your ownership period for the better or worse?
What are typical customer issues or dissatisfiers and how do you handle those? How personally involved are you in managing customer issues that come up?
Knowing what you know now, would you choose a different territory, make adjustments to your existing territory, or select a different site?
Can franchisees make a good return on their investment with just one territory/site?

Ramp-Up

If you had to go through the start-up phase again, would you approach it differently?
Were you adequately capitalized to get through the ramp up? What would you recommend in terms of working capital?
What specific help was provided by the franchisor? Was this enough? What was the most helpful to you? What was missing?
How hard was it to build your initial customer base?
How critical are pre-sales to this model? What is a realistic number of pre-sales to expect? How/where do you find those early customers?
How much customer turnover do you experience? How have you changed operations, management or marketing efforts to reduce turnover?
What were the biggest growing pains and learnings for you and your team?
If you’re opening additional units, what will you change in your approach to new unit development?

Expenses & Mandatory Suppliers

Was the Franchise Disclosure Document (FDD) accurate in terms of build-out cost and ongoing expenses in the business?
How many months of expenses should I have reserved to cover the site selection, build-out, and ramp-up period?
Were there material differences between your expectations about expenses and the reality of running the business? What surprised you?
What are the greatest profitability pressures on this business?
Where do you focus your energies as the owner of the business?
Do required suppliers deliver on time, with appropriate quality?
Would you have selected these required suppliers if you could choose?
Any problems or complaints with suppliers? What did the franchisor do to resolve any issues?
Is pricing of required products/suppliers fair/aligned to market pricing?
Are rebates paid to the franchisor based on your mandated purchases? Is the franchisor transparent about what that rebate is and how the money is used to help grow the business? Is it a profit center for the franchisor?
Does the franchisor or affiliates own any mandated suppliers?

Support

Now that you’ve been in the business for awhile, what type of support do you need from the franchisor team and do you receive it?
Is the franchisor adequately staffed? (Right people in the right roles?)
Where are there gaps and pain points that impact franchisee support?
What support did you receive during the recent pandemic? Was corporate helpful? How? Did they cancel or defer any payments to assist franchisees?
How much does corporate proactively reach out to you?
Does management monitor your key performance metrics (KPIs)? What happens when metrics decrease?
Is there a common language around what KPIs matter most to the business and to unit level profitability? Are there any disagreements on this issue between franchisees and the franchisor?
Is there a common point of sale system used by all franchisees? How is this information used by the corporate team?
Have you seen an increase/decrease in support?
If there was an ownership change, support change as well?
What support for franchisees is missing?
What is the experience level of the field support team? What happens when they visit? Do those visits boost your profitability and operational quality?

Employees / Labor Model

Who are you typical employees? What are their professional backgrounds? Is this their first job? Where/how do you recruit them?
How do you manage them? (Discuss organization structure.)
What do you pay them? (By job and level.)
How difficult is it to maintain adequate staffing? What is the turnover?
Were you given any job descriptions? Did you change the job description?
What are you greatest training challenges for your team? How do you manage this and what tools/assitance/training are available from the franchisor? How much has joint employer concerns altered the level of support corporate provides to franchisees?
How do you train staff? What are common daily operating challenges experienced by your staff and what is your process to address those issues?
If you could hire more staff, what positions do you most want to fill?
How much can be delegated to managers? Discuss unit operating manager turnover and key challenges. How do you compensate managers? Do you do any profit sharing? In your model is it typical for managers to own any equity in the business?
How much time do you personally need to spend “in” the business (covering for managers or staff) rather than “on” the business (strategic planning, etc.)?
What positions are the most critical to customer satisfaction? Profitability?
What key hire do you wish you’d made earlier?

Platform

If the brand is part of a platform (holding company that owns many brands in the same category, for example restaurants or home services), does being part of the platform bring any benefits to franchisees? What are those benefits?
How much cross-selling and cross-marketing lift have you experienced from being part of a platform?
What back-office corporate functions are shared across brands in the portfolio and what support is siloed under your specific brand?
Has being part of a multi-brand platform increased the value / sustainability / profitability of your business?
Have you considered adding a brand from the portfolio to your own holdings? Why or why not?

Resales

Are there buyers for franchisees who wish to exit the system?
Is there a formal resale function/process on the franchise development team?
How does the franchisor decide which franchisees are “approved for growth” (approved to acquire new territories or resale opportunities)
What are resale values in this system?
Is private equity active in the system acquiring units? If not, why?

Wrap Up

Knowing what you know now, would you invest in this franchise again? Why?

After each franchisee meeting revisit your notes and review your goals. Is this likely to be a strong fit or are warning signals flashing? Do financial returns experienced by franchisees meet your expectations? What are the greatest risks in this business? Do you feel comfortable that the level of risk is acceptable to you given your personal obligations and investing timeline? Don’t talk yourself into something that’s not a fit, or that doesn’t provide ample evidence of being a high-quality business for franchisees to own and operate. Buying a franchise is a significant investment, often with personal guarantees to the franchisor, as well as to loan providers, landlords, and equipment leasing companies. It should be undertaken only after thorough due diligence.

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Validation Questions: Handbook

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