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Buying a Franchise: An Overview of the Sales Process ft. Dan Durney of FranMaster - Episode 10

Erin Carpenter
May 8, 2018 7:42:43 AM

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Dan Durney is the owner of FranMaster, an outsourced franchise development and coaching company for emerging franchisors. Best known for his involvement in the launch of franchise behemoth Massage Envy, Dan has seen it all and is a true leader in the world of franchising.

As he’s helped emerging franchises grow, Dan has had an up-close look at the sales process - how it can vary from brand to brand, and how it always stays the same. This week, Dan takes a deep dive into the the steps involved in buying or investing in a franchise.

Every brand is different so the specifics will vary, but the process of buying a franchise typically follows the same four steps:

  1. Qualification
  2. Disclosure
  3. Validation
  4. Discovery Day

Here’s an overview of what you can expect to experience if you’re considering buying or investing in a franchise.

Step One: Qualification

Woman on phoneThe very first step in the franchise sales process is Qualification, where you have your initial conversation with the franchise. There are generally two main pieces to qualification:

  1. Determining whether you are financially qualified to buy or invest in the franchise.
  2. Uncovering the reasons you’re interested in buying or investing in the specific brand.

These questions are typically answered via online form on the franchisor’s website, through a form from your broker or coach, or in conversation over the phone.

First, you’ll be asked questions about your finances to see if you’re financially qualified. Every franchise has a requirement of net worth and how much liquid capital you must have to determine whether you qualify to buy into the concept.

Dan believes the number one reason for business failure, franchise or not, is undercapitalization, or not having enough cash flow to ramp up until the business is cash flow-positive. Further, it’s never a good idea to get involved with a business using your last dime because there will be a lot of desperation. For these reasons, financial capability is one of the major pieces of qualification.

The other aspect of qualification is figuring out the “why”.

First, they’ll dig into the why through general questions. Why are you interested in buying or investing in a franchise? Are you trying to escape corporate America? Are you looking to buy something for your children? Are you trying to work for yourself?

Then, they’ll get brand-specific. What’s the reason behind your interest in the brand itself? Are you looking at this brand only, or franchises in general? Which other concepts are you looking into? 

Franchising is all about fit, so it’s essential you are truthful and authentic when answering these questions.

You can approach your qualification discussion like a job interview, where you know to be open and honest, but also to do your homework and prepare ahead of time. Research the company ahead of time to see whether your values align with theirs, and whether the brand seems like it’s a good fit for you. Then, during the call, put your best foot forward while being 100% truthful.

Step Two: Disclosure

Man signing papersOnce it’s determined you meet the minimum financial qualification and the franchisor feels comfortable with the reasons you’re interested in their brand, the disclosure stage begins. 

The franchisor will send your their Franchise Disclosure Document, or FDD. The FDD is a 200-page legal document that includes all of the FTC’s mandated disclosures about the franchise including business experience, and any litigation or bankruptcy filings.

The FDD is generally comprised of 23 items, or sections. The FDD covers investment, fees, training, proof of purchases, a sample franchise agreement, and more. It’s important to read the entire document, and Dan recommends going through with a pad of paper and pen to take notes and jot down questions.

 Item 19 is one of the sections prospective franchisees are most interested in, because it gives the most accurate answer possible to the question everyone wants to know: “How much money can I make in this franchise?”

Franchising is highly regulated by the FTC, which does not allow franchisors to answer this question straight up. The franchisor can’t make any claims or promises as to how much money you can make, so Item 19 was designed to help answer this question within FTC regulations.

Item 19 gives you a glimpse into what other franchisees in similar markets have experienced financially. Some are very detailed, getting into cost of goods, labor, rent, etc. Others just disclose gross revenues. It’s up the franchisor to determine how much they want to disclose. Either way, all Items 19 are tightly wrapped in disclaimers (ie “Results may vary.”), so there is no guarantee you’ll make what’s projected in this section.

Review all of the information in the FDD carefully, then go over it again with your coach or broker to discuss any questions you may have. It’s also helpful to have a franchise attorney go through the agreement with you to help you understand even further. 

The most common question coaches and business development reps like Dan hear during this stage is why a franchisor wouldn’t allow a franchisee to do something. Often, you might have an idea about something you’d like to do differently if you were to buy the franchise, and may find that your idea may not be incorporated. While it can feel suppressive, generally the more tightened up the agreement is, the better the system is.

If innovation and freedom are important to you, you may want to consider looking into opportunities with an emerging brand vs. a huge franchise system.  The definition can vary, but an emerging brand is typically anything with fewer than 10 units open. It could be a business that’s been around for a while as an independently-owned business, and now is offering franchise opportunities. These newer brands tend to offer more opportunities for creativity.

If you’ve made it to this stage of the sales process, there’s just one reason you wouldn’t receive the FDD from the franchisor - because the franchise isn’t registered in your state. If the franchise isn’t registered in the state you’d like to open one, they are actually legally prohibited from sending the FDD to you.

In this case, you can only have very limited conversations with the franchisor, getting into almost no detail at all. Once the franchise is registered in your state, the sales process can rev up again.

Step Three: Validation

validationOnce you’ve gone through the FDD and feel comfortable with all of the information within it, you should put together a pro forma spreadsheet, projecting your finances in your specific market. It should include things like profits, ramp up time, etc., and is typically done through a combination of looking at Item 19 and the validation process with existing franchisees.

Validation is the process of calling current and former franchisees to ask them questions about their experience. Of course you’ll want to know about their financials, so Dan recommends asking how long it took them to get cash flow positive, and whether they had any unexpected finances.

But, make sure to dig deeper that finances only. Dan’s all-time favorite validation question he recommends prospective franchisees ask is “Would you do it again?” Their answers can give you incredible insight into what it’s really like to be a franchisee in this particular system. 

Validation is done most effectively once you really understand what the brand is about. If you do your research first, you’ll maximize your time.

Step Four: Discovery Day

discovery dayThe fourth and final step of the franchise buying process is Discovery. Discovery Day is an opportunity for the franchisor and franchise candidate to meet each other to see if they’re on the same page and whether they’ll work well together.

On Discovery Day, you go to the corporate office to meet the executive team and support team and visit different locations.

Just because you’ve made it to Discovery Day doesn’t mean you’ll automatically be awarded the franchise. Again, fit is essential, so this is the time to decide if you and the franchisor are really the right fit for each other.

If it’s a good match, the franchisor will put the agreements together and determine the territory. The documents will be sent to you for review. If it all looks good, you’ll sign the agreement, wire the funds, and then onboarding begins. It’s that fast!

While each brand may have its own spin on some of these steps the overall process is always the same. The franchisor needs to determine whether you’re a match for what the brand is trying to accomplish, and whether he or she sees a long-term partner in you. 

When you have the financial capability and have found a brand that’s a great fit for your goals and values, you have a much higher potential of thriving as an owner of a franchise.

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