3 Types of Questions to Ask Franchisees During Peer Review (Also Known as “Validation”)
January 11th, 2023
If you’ve made it the peer review stage of the franchisee application process, good for you! This is one of the latter stages and suggests you have a fair shot at becoming a franchise owner with your chosen brand. This stage is all about getting your questions answered, but don’t forget that franchisors will be observing how well you mesh with their current franchise owners.
Still, so long as you display the common characteristics of a successful franchise owner, you’ll have nothing to worry about. So, remember to be yourself and ask the three types of peer review questions that we’ll review in this article.
As a reminder, my franchise development company, Raintree, is an industry leader in national franchise sales because of our robust, evidence-based, and highly effective methodology. This article will explain the purpose of the peer review stage and share our strategy for getting the information you’ll need to make an informed final decision about the brand.
We’ve talked in other articles about the need to follow each franchise brand’s discovery process. You’ll want to follow any guidelines the franchise representatives provide to you, since your behavior will undoubtedly factor into the franchisor’s final decision. Now, let me guess what you’re saying here (especially if you’re new to franchise ownership):
“In the FDD Review Stage, I saw all the franchise owner names and contact information. Why can’t I just go ahead and contact them?!”
This is understandable, but there’s a few reasons why you should take a moment to reconsider before dialing:
- The average franchise brand recruits approximately 4.5 new owners annually.
- During the franchisee candidate screening process, anywhere between 25 to 50 candidates can be expected to go through the peer review/validation stage annually.
- The number of franchise candidates far outnumbers the number of franchise owners. If each candidate called just one franchise owner, it would still place a hefty, unpredictable burden on each franchise owner’s time.
At Raintree, we are especially protective of the franchisees we successfully guide through our processes, and we see them as an ongoing investment in Raintree’s overall success. This requires us to highly discourage a peer review free for all, since Raintree brands often grow by roughly 50 new franchises a year—meaning there are about 500 qualified applicants who reach the peer review stage per candidate cycle.
Can you imagine being asked to have the same 1-hour conversation up to 500 times per year? On top of that, franchise owners are not compensated for taking those calls; in fact, it would be illegal for franchisors to pay their franchise owners to speak with franchisee candidates, since in theory, franchisors could require that the franchise owners say only good things about the brand.
So, when a franchisor says, “please don’t dial away”, understand why that is, ask what other options are available on demand for your peer review research before any direct peer review opportunities, and trust in the brand’s peer review process if it seems reasonable.
Franchisors don’t want their franchise owners to be endlessly distracted with questions from aspiring franchisees, since current franchisees need to put their energy into running the brand’s franchises. The strategies that franchisors use to protect their owners from unsolicited questions are referred to collectively as “Validation Management”, where direct communication is limited only to certain times and under pre-established conditions.
It never hurts to know all the validation management tools currently employed by your chosen brand. Peer review opportunities are often conducted through:
1. Group Conference Calls
Group conference calls involve one or more franchise owners participating in a call with candidates. These calls often arrange franchise owners into panels, which allows them all to chime in on candidates’ questions.
Not only will you be able to get multiple answers to a single question, but other candidates may ask useful questions you hadn’t even thought of yet.
Quality and transparent franchise brands often get permission from all parties to record these conference calls and can offer franchise owner candidates access to a library of recently recorded calls. When made available to candidates, these recorded calls offer a great tool for learning about the brand.
2. Pre-Recorded Video Interviews
I once had two separate franchise owners approach me in the same week with almost identical feedback regarding the Peer Review process:
“Brent, I have almost the same conversation on each call. Of course, the questions are slightly different, but the information I provide on my experience is largely the same each time. Can’t we just record a version that people can reference so I can stop wasting the time I spend repeating myself?”
As it turned out, these franchise owners were onto something!
Because of these conversations, most Raintree brands now offer candidates the opportunity to watch long-form interviews with franchise owners. You’ll get to see their faces and have basic questions answered, freeing up your time to ask more in-depth questions during in-person peer review opportunities.
But beware of any franchise brand that only offers pre-recorded video interviews. Obviously, this might be a way for a franchisor to cherry-pick the best franchise owners and hide negative or unflattering opinions of the brand.
Just like no marriage is perfect, no franchisor-franchisee relationship is perfect, either. So realistically, when you speak with franchise owners, you should expect honest answers to reflect those imperfections. But how can you accurately put those answers into perspective?
There are a few data points and bits of evidence highlighting what to look for in answers given during peer review. When it comes to newly formed franchise relationships, data shows that these relationships develop over the course of four unique periods:
1. The Honeymoon Stage
The honeymoon stage is the first, and the relationship quality is fairly positive, as is financial performance. This is early on in the franchise relationship before the franchisee hits the inevitable challenges that accompany business ownership.
2. The Routine Stage
Once the franchise unit begins to hit a few stumbling blocks, the relationship moves onto the routine stage, where financial performance takes a dip, the realities and challenges of running a business set in, and the franchisee’s expectations adjust, all of which temporarily strains the relationship.
3. The Crossroads Stage
Once the kinks get worked out, the relationship moves onto the crossroads stage, which means better financial performance and an improved relationship.
4. Stabilization
The final stage is stabilization, where the relationship reaches its full potential, and the franchise unit reaches its full financial potential. At this last stage, franchisees are generally far happier and more successful than at any other stage of the franchise relationship.
Understanding these four franchisor-franchisee relationship stages helps to provide you with a framework for interpreting franchise owner responses and understanding their various perspectives. So, how should these bits of evidence help to inform your approach to peer review?
Whether you’ve been given a list of franchise owners to speak with or the brand’s franchise representative says, “feel free to contact anyone in the FDD”, you’ll need to formulate a peer review strategy and stick to it.
The questions you ask should be strategic, and each should offer new insights into whether the brand you’re considering:
- … is successfully managing its franchise system.
- … has an approach to franchisor-franchisee cooperation that you’re comfortable with.
- … has franchisees reporting experiences generally in-line with what you’d expect at their respective franchise relationship stages.
While you can set a goal to ask a full list of questions during peer review, know that if you put together an ambitious list, you may not get all of your questions answered.
For that reason, it’s important to have a systematic approach to asking questions, making sure that you divide your questions into types and ask enough questions about the franchise opportunity to leave you feeling fully informed. And as with any process, don’t work harder—work smarter by having a strategy.
In analyzing close to 1000 brands throughout my career in franchise development consulting, I’ve learned that franchise systems are remarkably consistent in terms of performance:
- 25% of the system are “A” grade owners: These are the top performing franchise owners. They have typically exceeded their own financial performance expectations and love the brand.
- 50% of the system are “B” grade owners: The majority of owners are making a nice living and enjoy what they do. For these owners, their performance and experiences meet their expectations.
- 25% of the system are “C” grade owners: These owners are struggling, either financially or in terms of enjoying running their business. They are often looking to exit the system and, in a quality franchise brand, they are often trekking through the “routine” stage of the franchise relationship.
Set a goal to speak with at least one franchise owner from each category. Your job is to collect as much information as possible.
While learning about obstacles is critical in developing fully informed expectations for the brand, remember to focus just as much time and energy on the top performers. Understanding if we share similar characteristics to the Top Performing Franchise Owners is the best way for us to predict how well we are going to perform, and enjoy, the brand in question.
Learning directly from the franchise owners of the brand you’re evaluating will perhaps be the most important part of the discovery process. Known more commonly as “Validation”, at Raintree we call this stage “Peer Review.”
Here, you’ll have the opportunity to verify much of the information the franchisor has provided you with, and, if you ask the right questions, learn even more than you have in all of the weeks’ worth of cumulative information you’ve collected prior to this stage.
Over the years, through trial and (too much) error, we’ve developed a strategic process of interviewing franchise owners of brands we are looking at either investing in as franchise owners, or representing at Raintree as a franchise development company.
Here are the three types of questions you should prioritize:
1. It’s Important to Ask, “AM I LIKE YOU?”
No matter the franchise or type of franchise owner, we recommend that you prioritize asking current franchise owners:
- What is your professional background?
- What would you say are your strongest skills?
- How would you describe your personality? (If the franchise system uses DISC tests, ask what their results are.)
- What was your income expectation coming into owning this franchise?
- How many hours do you put in each week and are you happy with that amount of work?
- What is the primary reason(s) you invested in this franchise?
- Outside of “work”, what is important to you?
- What are your goals for this franchise over the next 5-10 years?
2. It’s Important to Ask, “ARE YOU PROFITABLE?”
In the previous article, we looked more at the quantitative data for a franchise opportunity. But bottom-line profits and ROI potential, as communicated in numbers, are only one part of the puzzle. During peer review, you can dive into a more qualitative understanding of the franchise opportunity’s profitability.
You can look at profit through a number of lenses. In our opinion at Raintree, the three most valuable lenses for assessing profitability are via an understanding of franchise opportunity revenue (sales), profit, and benefits.
Here’s our list of helpful questions we associate with each:
Revenue
- How long until you were cash-flow positive?
- What were your gross sales in year 1 / year 2 / year 3?
- How are you trending this month/year?
- How are you trending this year?
- What do you think you should be doing differently to reach your revenue potential?
Profit
**Sometimes, this answer can be difficult for franchise owners to answer. Your goal, at the bare minimum, is to get a sense of sales percentages so that you can estimate net profit potential (by reverse engineering profitability).
- What was your net profit in year 1 / year 2 / year 3
- Approximately what did you take to the bank in year 1/2/3?
- As a percentage of sales, what are your costs for Labor?
- As a percentage of sales, what are your costs for Cost of Goods/Sales?
- As a percentage of sales, what are your costs for Total Occupancy/Rent
- As a percentage of sales, what are your costs for Marketing
Franchise Owner Benefits
- Do you pay yourself a salary? If so, how much?
- Does your business pay for your childcare?
- Do you lease a car(s) through the business?
- Do you get to mix in some family travel among business trips?
- Are there any other franchise owner benefits or tax benefits that this business affords you?
3. It’s Important to Ask, “ARE YOU HAPPY?”
Franchisee satisfaction not only influences profitability, but it also influences the long-term trajectory of the franchise relationship. For that reason, you absolutely want to know more than the profitability of a franchise opportunity.
Franchisor-Franchisee Relationship Quality
- Do you feel you have a good relationship with the franchisor?
- Do you feel that you get value for the royalties you pay?
- Do you get regular field visits?
- When you have an issue, are they quick to respond and effective with the help offered?
- Do you trust the franchisor?
- Has the support you’ve received met your expectations in terms of:
- Training and opening phase?
- Marketing?
- Ongoing operational assistance?
- Profit coaching?
- Recruiting and hiring employees?
General Franchising Experience
- Do you enjoy running this business?
- What are your favorite parts?
- What do you least enjoy about the business?
- What surprises did you find in running this business you didn’t account for prior to being awarded a franchise?
- If you had the chance to do it all over again, would you?
These three types of questions uncover whether the brand truly offers a high-quality franchise business model and give the questioner a sense of whether he or she would be likely to succeed as a franchise owner within that brand.
1. Be Considerate
Remember that franchise owners attending peer review opportunities are donating their time to you. Be respectful and courteous. Becoming a franchise owner involves a learning process. If franchise owners are willing to be vulnerable and share potential early failures in running their businesses, focus on being curious, not judgmental.
Also note: some brands allow the franchise owners to play a role in the franchisor’s evaluation process. I’ve seen quite a few brands ask each franchise owner to evaluate the candidates they spoke with. Once again, it’s a two-way street; peer review is just as much about you reviewing franchise owners as it is about those franchise owners assessing how well you’d fit within the brand.
2. Be Genuinely Curious
Peer review offers a unique opportunity to begin building relationships with your future peers. In any strong franchise brand, you’ll find genuine camaraderie among franchise owners, along with franchise support networks designed to leverage your skills and support your growth as a franchise owner. These networks will encourage franchise owners to communicate freely in the spirit of collaborative problem-solving, which allows everyone to benefit from working together towards a higher quality, stronger franchise brand. The franchise owner you interact with during peer review, may one day be the franchise owner you go to for advice in a year or two as a franchise owner yourself. These are real people with genuine experiences, and they all have something to offer.
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