Questions to ask a franchisor before you invest
By CA Shrenuj Jalan · · 4 min read
A due-diligence list you can take into the first meeting: unit economics, support, supply, territory, franchisee churn and exits. Written for investors who want evidence, not brochures.
Good franchisors expect scrutiny. The ones who resist it are telling you something. Take this list into the meeting and write the answers down.
About the business
- How many outlets are open today, and how many are company-owned versus franchised?
- How many opened in the last twelve months, and how many closed?
- Why did the closed ones close?
- How long has the oldest franchised outlet been running?
Churn is the single most informative number a franchisor can give you, and the one least often volunteered.
About the money
- What is the total investment, itemised, excluding my rent deposit?
- Which parts of that must be spent with you or your nominated vendors?
- Is royalty on gross or net sales, and is there a monthly minimum?
- What other recurring charges exist — marketing, technology, audit, training?
- What is a typical monthly revenue for an outlet of my size in a city like mine, and is that a median or a best case?
- What does your payback estimate assume about rent and staffing?
About the territory
- What exactly is my territory, in writing?
- Is it exclusive, and does exclusivity depend on targets?
- Do you sell online or through marketplaces into my territory?
About support
- What training do I get before opening, and who pays for it?
- Who is my point of contact after opening, and how many outlets do they handle?
- What happens in the first month if the outlet underperforms?
- What marketing do you run nationally, and what am I expected to run locally?
About supply
- Who supplies the core products, and can prices change without notice?
- What is the lead time, and what happens when supply fails during a festival week?
About the exit
- If I want to sell in year three, what is the process and the fee?
- What is the non-compete after I exit?
The one thing you must do yourself
Ask for the contact details of five existing franchisees, then call all five without the franchisor arranging it. Ask each the same question: "if you were deciding again today, would you sign?" The pattern in the answers is worth more than any projection.
Red flags
- Pressure to pay a "blocking" amount to hold a territory.
- Refusal to share the agreement before payment.
- Revenue projections with no stated assumptions.
- No franchisee you are allowed to speak to freely.
- Claims about returns stated as guarantees.
Next
Frequently asked questions
What documents should a franchisor share before I pay anything?
Ask for the disclosure pack: the franchise agreement draft, a sample unit profit and loss, the fit-out cost sheet, the trade mark registration number, company incorporation details and a list of operating franchisees you may contact. A brand that will not share these before a deposit is asking you to buy blind.
How do I verify the numbers a franchisor gives me?
Treat the brand's deck as a claim, not evidence. Verify it by speaking to at least three existing franchisees you chose yourself, sitting at an outlet for a few hours on a weekday and a weekend to count footfall, and checking the trade mark on the public registry. Then rebuild the profit and loss yourself with your own rent and salary numbers.
How many existing franchisees should I speak to?
Three at minimum, and try to include one who has closed or exited. Ask each the same questions: actual monthly sales, months to break even, how supply and support really work, and what they wish they had asked before signing.
What are the warning signs in franchise due diligence?
Pressure to pay a deposit quickly, refusal to share a franchisee list, revenue promises with no cost side, a trade mark that is only "applied for", frequent outlet closures the brand cannot explain, and any income guarantee. None of these are illegal on their own; together they are a pattern.
Is a franchisor allowed to promise a guaranteed return?
A promise of assured returns is a commercial red flag and can attract regulatory scrutiny depending on how it is structured. A credible franchisor gives you ranges from real outlets and lets you test them. If a guarantee is offered, ask what happens contractually when it is not met, and get the answer in the agreement rather than in an email.