Questions to Ask Before You Invest in a Franchise
Twenty questions for anyone weighing a franchise, covering the true cash needed to open, how royalties and supply margins are calculated, what a territory really protects, what the outlet closure numbers say, and what the agreement lets the franchisor change after you sign.
The questions
Open any question for the note
What is the total cash I need before the doors open, including working capital?
Why ask it
Franchisors quote the fee and applicants budget for the fee, then run out of money in month four. Ask for the full range the disclosure document gives, and ask what the last five openings actually spent against it.
What did the most recent openings cost compared with the published estimate?
Why ask it
The estimate is a range built from older builds, and construction and fit-out costs move fast. A franchisor who cannot answer this for recent openings either is not tracking it or does not want to say.
How is the royalty calculated, and is it on gross or net sales?
Why ask it
A royalty on gross revenue is charged on money you may never keep, including discounts and delivery commissions. Ask for the calculation applied to a real week from a real store.
What else do I pay you or your affiliates every month?
Why ask it
Beyond royalties there are commonly technology fees, national marketing levies, local spend minimums, software licences and supply margins. Ask for a single list with amounts, then add them up yourself.
Do you make money on the products and equipment I am required to buy?
Why ask it
Required purchasing through the franchisor or an approved supplier can be a larger profit centre for them than royalties. If they take a margin, ask what it is and whether it is disclosed.
What does my territory actually protect me from?
Why ask it
Exclusivity usually covers new physical outlets and nothing else. Ask specifically about your own brand selling online, through delivery apps, in supermarkets, or in a nearby airport or hospital.
Can you or another franchisee deliver into my territory?
Why ask it
Delivery radiuses overlap in ways that maps drawn ten years ago do not reflect, and this is a frequent source of franchisee disputes. Get the answer in writing rather than in a meeting.
What earnings figures are you willing to put in writing?
Why ask it
In the United States a franchisor may only make financial performance claims through the disclosure document, so verbal projections in a sales meeting are a warning sign in themselves. If the document contains no earnings section, ask why.
If you publish average revenue, what does the bottom quarter look like?
Why ask it
An average is pulled upward by a handful of strong sites and tells you almost nothing about a typical new outlet. The weaker end of the range is the realistic planning case.
How many outlets opened, closed, were sold or were taken back in each of the last three years?
Why ask it
Closures and transfers are the most honest measure of how the system is going, and this table is a standard part of a US disclosure document. A rising number of transfers can mean owners are quietly leaving.
Can I have contact details for every current and former franchisee, not a shortlist?
Why ask it
A curated list of three enthusiastic owners tells you nothing. The former franchisees are the most valuable calls you will make, and reluctance to hand over the full list is itself the answer.
How long is the term, and what happens at the end of it?
Why ask it
Renewal often requires a new fee, a full refurbishment to current standards, and signing whatever the then current agreement says. Ask what the last group of renewing franchisees had to pay.
What can you change unilaterally once I have signed?
Why ask it
Many agreements let the franchisor revise the operations manual, the supply chain, the pricing rules and the required technology at will. Ask for examples of changes imposed in the last two years and what they cost owners.
What refurbishment or upgrade will I be required to fund, and when?
Why ask it
Mandatory remodels arrive on a schedule and can cost as much as a small fit-out. Ask which of your questions about this are covered by the contract and which rest on goodwill.
What training do I get before opening, and what support exists in month six?
Why ask it
Pre-opening training is usually generous because it helps sell franchises. The number that matters is how many field support staff serve how many outlets once you are trading.
How many hours a week do your franchisees actually work in year one?
Why ask it
Semi-absentee ownership is often implied and rarely real in the first year. Ask the former franchisees this question too, and compare the answers.
What are the most common reasons franchisees in this system underperform?
Why ask it
A candid franchisor will name site selection, undercapitalisation or a specific operational failure. An answer that blames only the owners' attitude tells you how support conversations will go later.
If I want to sell, what do you control about the sale?
Why ask it
Transfer clauses commonly include franchisor approval of the buyer, a transfer fee, and sometimes a right to buy the outlet first. These terms set the ceiling on what your business is worth.
What are the restrictions on me if I leave or am terminated?
Why ask it
Non-compete terms can stop you working in your own trade in your own area for years, and can require handing over your lease, phone number and customer data. Read this clause before the earnings pages.
How are disputes handled, and where would a claim be heard?
Why ask it
Mandatory arbitration in the franchisor's home state, with costs on you, changes the practical value of every other protection in the agreement. Ask how many disputes have gone to arbitration in the last three years.
Doing Franchise Due Diligence
Practical guidance for the conversation itself
How to Run the Process
Read the Disclosure Document Before You Meet Anyone
In the United States a franchisor must give you a disclosure document before you pay or sign, and it contains the fee schedule, the estimated initial investment, the outlet count history and the litigation record. Bring your questions to the meeting rather than collecting them from a presentation.
Call Former Franchisees First
Current owners have a business to sell one day and a franchisor to stay on good terms with. People who have left have nothing to protect, and they will tell you what the first eighteen months cost them.
Pay Your Own Advisers
A franchise lawyer who is not recommended by the franchisor, and an accountant who has seen this kind of business before, will cost less than one month of a failing outlet. Have them read the agreement, not just summarise it.
Build the Model on the Weak Case
Plan on the lower end of the revenue range, with your own rent and wage quotes, and enough working capital for a slow first year. If it only works on the strong case, you are buying a lottery ticket with a personal guarantee attached.
Things to Verify Yourself Rather Than Ask About
- Get your own rent, fit-out and wage quotes for your actual location instead of using the franchisor's national averages.
- Visit three outlets unannounced at their busiest hour and at a dead hour, and count customers.
- Check the litigation history in the disclosure document and search court records for the franchisor's name.
- Confirm whether the lease will be in your name or the franchisor's, because that determines who really controls the site.
- Find out whether you will be personally guaranteeing the lease and the franchise agreement, and for how long.
- Ask your bank what it will lend against this brand, since lenders track failure rates by system.
Warning Signs
Verbal Numbers
Any revenue or profit figure given in conversation but absent from the written disclosure should be treated as marketing. Ask for it in writing and watch what happens.
Pressure on the Deadline
Territory about to be taken, a fee discount expiring this week, a queue of other applicants. Genuine systems are more worried about a bad franchisee than a slow one.
A Curated Reference List
Being offered three names rather than the full list is a filtering exercise. Ask for the complete list and note the reaction.
Focusing Only on the Upfront Fee
The fee is a single payment and the agreement runs for a decade. The royalty formula, the supply margins and the exit clauses will cost you far more than the entry price.