25 Questions to Ask Existing Franchisees About Economics

WHY FRANCHISEE INTERVIEWS ARE YOUR MOST IMPORTANT DILIGENCE TOOL

The FTC explicitly points prospective franchise buyers to existing franchisees as a primary diligence resource. Item 20 of the FDD lists every current and former franchisee with contact information. This is not optional reading — it is the single most important section of the FDD for understanding real-world economics.

The FDD tells you what the franchisor discloses. Franchisees tell you what it actually costs to operate. Most FDDs do not include a full unit-level P&L. The only way to understand your likely economics is to ask people who are already running the business.

Call at least 8-10 current franchisees. Call at least 3-5 former franchisees (listed in Item 20 as having left the system). Former franchisees will tell you things current franchisees may not.

REVENUE AND ITEM 19 QUESTIONS

1. What was your gross revenue in your most recent full year? How does that compare to the Item 19 average? Were you above, below, or at the average?

2. What was your revenue in year 1? Year 2? Year 3? How long did it take to reach the system average disclosed in Item 19?

3. Is the Item 19 number representative of what you actually experience? Or does it feel inflated by a few top performers?

4. Has your revenue been growing, flat, or declining over the past 2-3 years? What is driving the trend?

5. What is your busiest season and your slowest season? How much does monthly revenue vary?

6. What is your cost of goods sold (COGS) as a percentage of revenue? Has it been stable or increasing?

7. What is your total labor cost as a percentage of revenue? Include wages, payroll taxes, benefits, and workers comp.

8. What do you pay in rent/lease per month? What percentage of your revenue goes to occupancy (rent, CAM, property tax, utilities)?

9. What are your monthly utility costs? (Electric, gas, water, internet, phone)

10. What do you spend on local marketing beyond the required ad fund contribution? Is the ad fund effective in your market?

11. What are your insurance costs? (General liability, property, workers comp, auto if applicable)

12. What other operating costs surprised you that were not in the FDD? (Repairs, supplies, uniforms, permits, accounting, legal, etc.)

PROFITABILITY QUESTIONS

13. After all expenses — not just franchisor fees, but all operating costs — what is your approximate annual pre-tax income from this business?

14. How does your actual income compare to what you expected when you signed? Is it higher, lower, or about the same?

15. If your revenue dropped 20% from current levels, would your business still be profitable? What is your approximate break-even revenue?

16. How much of your own time does this business require? Are you full-time, or do you have a manager running day-to-day operations? What does a general manager cost?

INVESTMENT AND PAYBACK QUESTIONS

17. What was your total out-of-pocket investment to open? How did it compare to the range disclosed in Item 7 of the FDD?

18. Were there significant costs that were not included in the Item 7 estimate? (Working capital shortfalls, build-out overruns, longer-than-expected ramp-up)

19. How did you finance your franchise? SBA loan, conventional loan, personal savings, home equity? What are your monthly debt payments?

20. How long did it take to pay back your initial investment from business cash flow? Or have you not reached payback yet?

FRANCHISOR RELATIONSHIP QUESTIONS

21. How responsive is corporate support when you have a problem? Can you give me a specific example?

22. Have you ever had a serious disagreement with the franchisor? How was it resolved?

23. Do you feel the royalty and fees you pay are justified by the support and brand value you receive?

EXIT AND FUTURE QUESTIONS

24. If you decided to sell your franchise tomorrow, what do you think it would sell for? Have you seen other units in the system sell recently, and at what multiples?

25. Knowing everything you know now, would you sign this franchise agreement again? What would you do differently?

HOW TO INTERPRET THE ANSWERS

Listen for patterns, not individual anecdotes. If 8 out of 10 franchisees say labor costs are 35% of revenue, that is a reliable benchmark. If one says 20% and another says 40%, dig deeper — the difference may be geographic, operational, or a sign of inconsistent support.

Pay special attention to former franchisees. They have no incentive to sugarcoat. If they left voluntarily, ask why. If they were terminated, ask whether the process felt fair.

The answers to these 25 questions, combined with the FDD data, give you a complete picture that no disclosure document alone can provide. This is the diligence that separates successful franchise buyers from those who regret their decision.