Franchise Performance Questions

Questions Relating To Franchise PERFORMANCE

Business Coaching Franchise Financial Performance Questions

When you select a Business Coaching Franchise, you’ll be excited and motivated about your potential life changing opportunity.  In this section we’re going to provide a few questions and challenges to make sure that you ask the RIGHT questions.

We’re going to highlight what those questions are, and why they are important. 

It’s important that during the Due Diligence process that you don’t allow your emotions to make the decisions.  Res Ipsa Loquitor, let the FACTS speak for themselves.

Here are a few questions that you may want to consider asking.

Finances

Almost certainly you’ll be asking about the financial performance of the franchise, the franchisor and the franchisees. You’ll naturally be curious about the financial performance of others who are on the same road you are thinking about travelling on.

You need to word these questions VERY carefully.

Question 1 – When asking about financial performance ask for the turnover figures excluding any VAT. Some franchisors provide VAT inclusive figures.

Some business coaching franchises refer to “banking amounts” which means they are quoting the banking figure of the franchise, so that figure will be VAT inclusive, that could perhaps be confusing as “banking amounts” are not turnover.  It could be argued that such information is designed to inflate the true turnover figure by 20%. Be sure to ask for TURNOVER figures - that exclude VAT.

Question 2 – Turnover means nothing – it’s the P&L that’s crucial.

You may get the turnover figure you are asking for, however, in many instances this is meaningless and can paint a very misleading picture.

Once you have established what an average or “sensible” turnover figure is, you want to ask for a franchisees published Profit and Loss accounts from that turnover bracket.

These of course will be redacted for the confidentiality of the franchisee. You will ask for those accounts and a written declaration that they are from a trading franchisee. Why is this so important?

You need to ascertain the REAL trading position of a franchisee that takes into account the sales and marketing expenses, running costs, franchise fees etc.  Many franchisees find themselves in a position where they are surviving on minimum wage or LESS, yet have what some may perceive to be a “good turnover”.   

Question two is about asking for published ACCOUNTS and a declaration of their authenticity. 

If the franchisor will not provide you with P&L statements, either unwilling or unable, you need to ask yourself WHY that is.

Question 3 – Be wary when asking for average turnover figures.

You also want to ask what the AVERAGE turnover or banking is. You’ll be given a figure. Make sure you get that in writing as this can sometimes be provided by way of a phone call. 

Every business has its highfliers and poor performers, and while these are important to know, do they portray and accurate AVERAGE image? Ask for the average turnover or banking figures removing the top and bottom 5-10%.

You may also want to refine your answer and ask specifically for “the financial performance of ALL franchisees still under a valid contract”.  You’re not asking for personal details, just the figures. Franchisors will have all this information readily available, whether they pass that to you is another question.  Information you don’t get can often be as valuable as information you do.

Question 4 – You need to ask about the Failure Rate in a VERY specific way.

Another common question relates around the failure rate. Every franchise has highflyers and those who simply never make it. Let’s be 100% clear here, every franchise has poor performers so beware of those poor performers looking to blame the franchise. You also need to be aware of a franchisor over inflating high performers.

You’ll be keen to know what that failure rate is in order to gauge your chances of success and to mitigate risk. Who wouldn’t want that? You want to be clear in your own mind if the Business Coaching Franchise you are looking at has a higher than average “failure rate”.

What you absolutely MUST be clear on is the question you ask. This is the most important question that you’ll ask in your due diligence process.

DO NOT ask for the franchisees that have failed, as often franchisees can be held “in dispute” for many, many years and as such have not technically failed. So the figure you could get will not be reflective of the TRUE position and the franchisor will not have answered dishonestly. Unethically yes, dishonestly no.

The question you want to ask is this.

1)     Currently, how many franchisees are (or have been in the last 5 years) behind more than three months with royalty payments?  (whether pre-agreed or not)

2)     In that last five years, how many franchisees, past and present, have defaulted from their contractual payment obligations. The more specific you can be here the better – see below for our sample question.

3)     Avoid asking how many have opened, closed etc as they may still be held in a contractual dispute therefore in the technical eyes of contractual law, are still “open”.

Our power question, feel free to use this:

“Over the last 5 years (or 10 years), please provide the total number of franchisees / licensees that have entered into a formal franchise agreement with your organisation.  Of that number, how many i) continue to trade ii) how many are/have behind with 3 months or more franchise royalties, irrespective of whether this has been agreed or not iii) How many franchisees are under “legal challenge” either internally or externally.

Your solicitor should be used to reword this. The key is to find out not how many have “failed” but how many are behind with their financial obligations which clearly indicates an issue with the profitability of the franchisee.

If you get resistance from this, you need to draw your own conclusions. A possibility to consider is that the franchisee is NOT making enough money to cover their basic payments.

Intimidation – Your Feedback May be Compromised.

Peer pressure is a driver in business, and also a DANGER. Consider that franchisees may be under pressure, perceived or otherwise, about answering questions.

Some franchisors will provide you with franchisees that are poor or low performers, you would be forgiven for thinking this is very open and honest. Remember, a franchisor will not volunteer ANY information or source of information that they don’t want you to have.

Of course, speaking to franchisees that are performing well is important, it’s vitally important. 

Don’t forget Due Diligence is about finding the FACTS to determine if a particular business coaching franchise has a disproportionate number of poor or low performers and/or a disproportionate number of franchisees that have left or "failed".

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