franchise-evaluation-coach

by charlie-morrison

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SKILL.md About

---
name: franchise-evaluation-coach
description: Coach a prospective franchisee through evaluating a franchise opportunity end-to-end — reading the FDD (Franchise Disclosure Document) Items 1-23 with red-flag focus, validating Item 19 (financial performance representations) against actual franchisee numbers, calling 15-30 current and ex-franchisees the right way, mapping total investment vs realistic ROI by year 5, understanding territory protection / encroachment risk, decoding royalty + ad-fund + tech-fee structures, surfacing renewal + transfer + termination clauses that trap operators, comparing franchise vs starting an independent in same vertical, and avoiding the high-pressure "Discovery Day" close. Use when prospect says "thinking of buying a franchise", "FDD review", "evaluate franchise", "Discovery Day", "franchisee validation calls", "Item 19", "should I franchise [brand]". Triggers on phrases like "franchise evaluation", "FDD review", "buying a franchise", "Item 19 validation", "franchisee calls", "franchise ROI", "franchise vs independent", "franchise discovery day", "FTC franchise rule", "franchise broker", "franchise consultant".
---

# franchise-evaluation-coach

Coach a prospect through evaluating whether to buy a specific franchise — before they sign. The franchise sales motion is engineered to close fast (Discovery Day, "limited territories", "we've got someone else looking at this market"). This coach slows the prospect down, walks the FDD systematically, runs the franchisee-validation calls properly, and produces a go / no-go recommendation grounded in actual unit economics rather than franchisor marketing.

Most franchisee failures aren't the fault of the franchisee — they're the fault of the franchisee not doing the diligence the FDD makes possible. Item 19 (Financial Performance Representations) is optional but most franchisors include it; when paired with 15-30 honest validation calls, the prospect can usually identify a no-go before they sign. This coach builds that capability.

## When to engage

Trigger when the prospect mentions:
- Direct franchise terms: FDD (Franchise Disclosure Document), Item 19, franchise broker, franchise consultant, "franchise concept", "franchisee validation calls"
- Discovery Day: "they invited me to corporate", "Discovery Day in [city]", "they want me to fly out"
- Specific brands: any QSR (McDonald's, Subway, Jersey Mike's), restoration/home-services (Servpro, 1-800-Got-Junk, Mosquito Joe), childcare (Goddard, Primrose), fitness (Orangetheory, F45), or emerging franchises
- Investment categories: total investment range, royalty %, ad fund %, tech fee, brand fund, training, real estate, equipment package
- Financing: SBA 7(a) for franchise, ROBS (rollover for business startups), seller financing, royalty-based financing
- Territory and rights: protected territory, area development agreement (ADA), multi-unit agreement, sub-franchising
- Exit / problems: "I want to exit", "selling my franchise", "transfer fee", "terminated my agreement"
- Comparing options: franchise vs independent, multi-brand portfolio, semi-absentee model

Do not engage for: franchisor-side strategy (a franchisor wanting to franchise their concept needs different skill), advice for current franchisees in active disputes (refer to franchise attorney), or pure SBA loan advice (different skill).

## Diagnostic sweep — before reading the FDD

1. **Goal honesty.** Why does the prospect want a franchise at all? Common motivations:
   - Owner-operator income (work full-time in the business)
   - Semi-absentee passive income (a manager runs it, owner has day job)
   - Multi-unit empire (3-10+ units over 5-10 years)
   - "I want to be my own boss" (often disguises something else)
   - Tax / Section 1031 / wealth shelter (rare and usually wrong reason)
   - Retirement project / second-act
   Each goal demands different franchise types. Semi-absentee with $100K SBA loan and a Goddard School don't match.

2. **Capital reality.**
   - Liquid net worth (cash + securities, not retirement)
   - Net worth required by franchisor (often $200K-$1M+)
   - Available financing: SBA 7(a) capacity (banks typically lend up to 4-5x post-money DSCR), ROBS feasibility, seller note possibility
   - Working capital: at least 6-12 months of operating cash on top of buildout. Most failures happen in months 3-12 when revenue ramps slower than expected.

3. **Vertical / industry experience.**
   - Restaurant / QSR experience? (Without it, multi-unit QSR rarely works.)
   - Home services / contracting?
   - Childcare / education licensing background?
   - Sales / B2B background (matters for service franchises)?
   - None: candidate for "concept does the work" categories (e.g., Subway, gym franchises with proven SOPs), not high-skill verticals.

4. **Real estate readiness.**
   - For brick-and-mortar: do you have access to the kind of real estate the brand needs? (Anchor strip, end-cap, drive-thru lot, residential adjacency, mall location)
   - For service-territory: does the territory the brand is selling actually have demand density (households, target B2B count, demographic match)?

5. **Time horizon.**
   - First-year revenue ramp: most franchises break even at month 12-24 in unit-level cash flow. Owner draw lags further.
   - Recoup full investment: typically 3-7 years for QSR, 2-5 years for service franchises, 5-10 years for childcare.
   - Are they ready to commit 7-10 years (typical initial term) and 14-20 years with renewals?

6. **Franchise broker disclosure.**
   - Are they working with a franchise broker / consultant? Brokers are paid by franchisors (commission of $15K-$50K+ per closed deal). They are not unbiased advisors. Useful for menu of options, biased on individual recommendations.
   - The IFPG, FBA, and similar broker networks have strong financial incentive toward closing. Consider this when the broker says "this is the perfect fit for you."

## Reading the FDD — Items 1-23 with red flags

The FDD is a federally mandated 23-item disclosure (FTC Franchise Rule). The franchisor must give it 14 days before signing or paying any money. Read every item.

### Item 1: The Franchisor and any Parents, Predecessors, and Affiliates
- How long has the franchisor existed?
- Is there a recent change of ownership? (Private equity rolled up many franchise systems 2018-2024; behavior change is common after PE acquisition.)
- Are there affiliated entities (real estate, supply, software) that the franchisor will require you to use?

**Red flags:** Franchisor founded <3 years ago, multiple recent name changes, complex affiliate web that profits from required vendors.

### Item 2: Business Experience
- Backgrounds of officers and directors. Have they run franchises operationally before, or just sold them?

**Red flags:** Officers exclusively from sales/marketing background; high officer turnover in last 2 years.

### Item 3: Litigation
- Lists pending and settled litigation involving the franchisor for prior 10 years.
- Look for: franchisee lawsuits (especially class actions), violations of state franchise laws, fraud claims, encroachment suits.

**Red flags:** Multiple franchisee suits in last 5 years, settled-but-not-dismissed cases, AAA arbitration mentions.

### Item 4: Bankruptcy
- Bankruptcies of franchisor, parent, or officers in prior 10 years.

**Red flags:** Any officer-level bankruptcy, parent-company restructuring, predecessor entity bankruptcy.

### Item 5: Initial Fees
- Initial franchise fee. Typically $25K-$75K for emerging, $30K-$100K for established. Some single-unit fees go to $250K+ for top brands.

### Item 6: Other Fees
- Royalty (typically 5-10% of gross revenue, sometimes flat fee)
- Advertising / brand fund (often 1-4%)
- Tech fee (rising — many systems charge $300-$1500/month for proprietary software)
- Renewal fee (often 25-50% of then-current franchise fee)
- Transfer fee (typically $10K-$25K)
- Training fee (additional $5K-$25K beyond initial)
- Audit fee, late fee, multiple-unit discount terms

**Red flags:** Total fee load >15% of revenue (royalty + ad fund + tech + other), renewal fees that are punitive, any open-ended "additional fees as franchisor determines".

### Item 7: Estimated Initial Investment
- Range from low to high for opening one unit.
- Look for: working capital line item (often understated — should be 6-12 months of OpEx).

**Red flags:** Working capital understated relative to industry standard, "additional funds" range so wide ($50K-$300K) that it's useless.

### Item 8: Restrictions on Sources of Products and Services
- Required suppliers (often franchisor-owned or affiliate). Required equipment vendors.
- Markup on required supplies (sometimes 15-30%+ over open-market).

**Red flags:** Multiple franchisor-affiliated required suppliers, equipment leases mandatory through franchisor finance arm.

### Item 9: Franchisee's Obligations
- Cross-reference table to where each obligation appears in the agreement.

### Item 10: Financing
- Franchisor-offered financing terms.
- SBA preferred lender list (most established franchises are on SBA's franchise registry).

### Item 11: Franchisor's Assistance, Advertising, Computer Systems, and Training
- What you actually get for the fees.
- Training duration: 1-2 weeks for service franchises, 4-12 weeks for QSR.
- Pre-opening / post-opening field support.
- Software systems (POS, scheduling, customer database) — proprietary or open?

**Red flags:** "Optional" training, no field-support hours specified, ad fund described vaguely without spend reports.

### Item 12: Territory
- Protected vs unprotected territory.
- ADA (Area Development Agreement) terms if multi-unit.
- Encroachment policy: can the franchisor open another unit / channel (online, third-party delivery, kiosk) in your territory?
- Reservation rights: franchisor's reservation to sell direct, online, or via alternative formats inside your territory.

**Red flags:** "Non-exclusive" territory, online-sales reservation, mall / airport / institutional channel reservations, alternate formats (kiosks, food trucks) reserved by franchisor.

### Item 13: Trademarks
- Registered trademarks list. Pending applications. Active oppositions.

**Red flags:** Recent trademark disputes, foreign-country trademark issues, vague licensing.

### Item 14: Patents, Copyrights, and Proprietary Information
- Software, manuals, recipes, processes.

### Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
- Do you have to be the operator? Owner-operator vs absentee allowed?

**Red flags for absentee buyers:** Mandate to be on-site full-time when prospect intended to be passive.

### Item 16: Restrictions on What the Franchisee May Sell
- Approved product/service list. New product approval process.

### Item 17: Renewal, Termination, Transfer, and Dispute Resolution
- Initial term length (typically 5-20 years)
- Renewal term + conditions
- Transfer process: who has to approve, transfer fee, right of first refusal by franchisor
- Termination "for cause" definitions (varied — some are very broad)
- Post-termination non-compete (typically 1-2 years, geographic scope varies)
- Dispute resolution: mandatory arbitration, choice of venue, choice of law

**Red flags:** Termination "for cause" defined as "in franchisor's sole discretion", no right of cure, post-termination non-compete >2 years or covers area larger than territory, mandatory arbitration in franchisor's home state.

### Item 18: Public Figures
- Endorser arrangements.

### Item 19: Financial Performance Representations
- THE MOST IMPORTANT ITEM. Optional for franchisor; if included, must be audited (or use specified data).
- Look for: average gross sales / median / range / unit count by tenure / cost-of-goods / labor / royalty-paid / unit-level operating profit (rare — usually only sales reported)
- Subset reporting: top quartile vs bottom quartile / new units vs mature
- Definition of "company" vs "franchised" units (company units often outperform, look only at franchised data)
- Geographic stratification

**Red flags:** No Item 19 (forces you to find numbers via validation calls), only "top performer" averages reported, gross-sales-only without expense detail.

**This is where franchisee validation calls fill the gap.**

### Item 20: Outlets and Franchisee Information
- THE SECOND MOST IMPORTANT ITEM. Lists openings and closures by year.
- Closures: "transferred", "ceased operations", "terminated", "non-renewed", "reacquired by franchisor".

**Red flags:**
- High closure rate: >5% annual closures = warning, >10% = serious warning
- High "ceased operations" or "terminated" categories vs "transferred" (transferred can be voluntary; terminated is involuntary)
- Many franchisor-reacquired units (sometimes franchisor buying back failed units to clean up the FDD)
- Net unit growth flat or negative for 2+ years

**The contact list:** Item 20 also gives you names + addresses (sometimes phone) of current franchisees AND franchisees who left in the last 12 months. THIS IS YOUR PRIMARY VALIDATION POOL.

### Item 21: Financial Statements
- Audited financials of franchisor for 3 years.
- Look at: revenue trend, profitability, cash position, debt, related-party transactions.

**Red flags:** Negative equity, recent loss years, large related-party receivables.

### Item 22: Contracts
- Sample franchise agreement and any other agreements.
- Read every word of the actual franchise agreement, not just the FDD summaries. The agreement controls.

### Item 23: Receipts
- Acknowledgement that you received the FDD.

## Validation calls — the real diligence

Item 20 gives you names. Call 15-30 of them. This is non-negotiable. Most prospects call 0-3 and rely on franchisor curation. That's how they end up surprised in year 2.

### Call list strategy
- Call BOTH currently-operating franchisees AND those who left (especially "ceased operations" / "terminated" / "non-renewed")
- Mix of tenure: <1 year, 1-3 years, 3-7 years, 7+ years
- Mix of geography: don't only call the markets the franchisor brags about
- Mix of single-unit and multi-unit operators (multi-unit operators often have inside info on franchisor relations)

### How to introduce yourself
"Hi [Name], I'm evaluating buying a [brand] franchise in [my market]. I got your name from the FDD. Could I ask you 10 minutes of questions about your experience? I'm not connected to the franchisor and won't share what you tell me with them."

### The 12 questions to ask every franchisee

1. **Did you achieve the revenue numbers in Item 19 (or what the franchisor told you to expect)?** Most-failed-prediction question.
2. **What was your actual total investment vs FDD Item 7 estimate?** Overage by 20-50% is common.
3. **How long until you reached unit-level break-even? Owner draw?** Reality check on cash flow.
4. **What's your unit-level EBITDA / cash flow margin today?** Honest number; some franchisees know, some don't.
5. **What were the surprises post-opening?** Hidden costs, supply chain, regional customer behavior, regulatory.
6. **How is the franchisor support — pre-opening and ongoing?** Field support real or theatrical?
7. **What's your relationship with the franchisor like today?** Adversarial / neutral / collaborative?
8. **Have they raised royalty, ad fund, tech fee, or required new equipment in the last 3 years?** Often yes; quantify the impact.
9. **What about encroachment?** Did the franchisor put another unit / online / kiosk near you?
10. **What about renewal?** Have they renewed once already? What changed?
11. **If you could go back, would you buy this franchise again? Why / why not?** The most useful question, asked last.
12. **Who else should I talk to?** Often surfaces names not on the standard contact list.

### How to read the calls
- 15-30 calls give you a real distribution. Patterns matter, not single voices.
- Some franchisees are reluctant to speak (NDAs, pending disputes, fear of franchisor retaliation). Note who refused.
- Closed/terminated franchisees often share most candid info but are biased negative. Weigh accordingly.
- Top performers will sometimes oversell because they want the brand to look good (their resale value depends on it). Calibrate.
- Fundamental signal: if 30%+ of operators say "wouldn't do it again", that's a no.

## Unit economics modeling

Build a 5-year P&L for your specific situation, NOT the franchisor's pro forma.

### Revenue
- Use Item 19 median (not average — averages are pulled by outliers).
- For service franchises, build from your-market household / business count × penetration assumption.
- Year 1: typically 50-70% of mature year. Year 2: 70-85%. Year 3+: at maturity for that location.
- If the brand has no Item 19, use validation-call data — average the bottom-50% (you don't know yet if you'll be top-half).

### Costs
- COGS: from Item 19 if reported; otherwise validation calls.
- Labor: actual market wages × required staffing schedule × benefits. Don't trust franchisor labor model — they're optimistic.
- Rent: actual market rate × franchise SF requirement. Most franchisor brochures understate rent in tier-1 markets by 30-50%.
- Royalty + ad fund + tech fee: % of revenue.
- Other: utilities, insurance, supplies, equipment maintenance, credit card fees (2-3% of revenue), professional services.
- Owner draw: do you need to draw $X/year for personal expenses? Subtract before "profit".

### Capital
- Initial buildout / equipment / training: midpoint of Item 7 + 20% buffer.
- Working capital: 9 months of operating expenses.
- Annual reinvestment / equipment refresh: typically 2-4% of revenue.

### Output: 5-year cash flow + IRR + payback
- Year 1-2 are usually negative cumulative cash flow.
- Year 3-5 should turn cumulative positive.
- IRR target: 20%+ for owner-operator (lower than starting independent, premium for brand). Below 15% IRR = the franchise isn't pulling weight; consider independent.
- Payback period: aim <5 years for restaurant, <4 years for service.

## Specific franchise categories — common pitfalls

### QSR (Quick Service Restaurant)
- Real estate is harder than the franchise. Many failures are real-estate failures, not concept failures.
- Required equipment packages from franchisor often have 20-30% markup vs market.
- Labor pressure: $15-20+/hr in many markets squeezes traditional QSR margins below 10%.
- Third-party delivery (DoorDash, UberEats) compresses margins another 10-15%.

### Service / Home Services
- Territory size matters more than concept. Walk the territory; count households / businesses; estimate addressable demand.
- Equipment is often modest, but vehicles + uniforms + tech stack add up.
- Lead generation: many service franchises now require franchisee to spend on local digital ads in addition to the brand fund. Confirm.

### Childcare / Education
- Long ramp (12-24+ months to fill capacity).
- Real estate is the constraint — need 8K-15K SF in residential-adjacent location with parking.
- Regulatory complexity: state licensing, ratios, food safety. Franchise system value is high here.
- Insurance requirements significant.

### Fitness
- Highly cyclical (Jan-Mar peak, summer drop).
- Member churn 35-50% annually for most concepts; new-member acquisition cost rising.
- Class-pass / national gym oversupply has compressed pricing.

### Emerging / new franchise concepts
- Higher risk by definition. Franchisors with <50 units typically still working out unit economics.
- Lower fees often, but less proof + less support.
- Could be opportunity (early protected territory) or trap (concept fails before maturity).

## Anti-patterns / red flags in the sales process

- Franchisor pushes Discovery Day before you've finished FDD review
- Broker says "I can't share contacts beyond [3-4 they recommend]"
- Franchisor declines to provide Item 19 OR provides only "potential" numbers ("our top-third make $1M")
- Franchisor pressures: "we have other candidates for this territory"
- Required to sign non-disclosure / non-circumvent before reading FDD
- Required to use franchisor-affiliated lender / accountant / attorney
- Site selection assistance vague ("we'll help you find a location")
- Significant past litigation (Item 3) without clear systemic explanation
- Recent ownership change (PE acquisition) within 2 years — the system you're evaluating may not be the system you operate

## When to walk away

- 30%+ of validation calls give negative "wouldn't do it again" answers
- Item 19 numbers don't match validation-call reality (>20% gap)
- Total fee load >15% of revenue
- Working capital realistic estimate >50% above franchisor's stated estimate
- Closed-unit rate >5% per year for last 3 years
- Franchisor refuses to extend Discovery Day deadline / pressures fast-close
- Your specific market shows lack of demand (validation: visit existing units in similar demographics, count traffic)
- Royalty + tech fee structure has changed twice in last 3 years (signals more changes coming)
- IRR model below 15% for owner-operator under realistic assumptions

## Output to prospect after diagnostic

Produce a written go/no-go memo:

1. **Goal alignment** (does this franchise type match what you actually want?)
2. **Capital + financing realism** (does the math work?)
3. **FDD Item-by-Item findings** (with red flags called out)
4. **Item 19 reality check** (your model vs reported numbers)
5. **Validation call summary** (15-30 calls, distributional findings)
6. **Unit economics 5-year model** (your specific market, conservative)
7. **Competitive comparison** (vs starting independent, vs other franchises in same vertical, vs other capital uses)
8. **Risk register** (top 5 risks specific to this franchise + your situation)
9. **Recommendation** (proceed / proceed-with-modifications / walk away)
10. **If proceeding: specific deal-protection asks** (territory clarification, encroachment language, fee caps, etc., to negotiate before signing)

Most franchise prospects sign within 60-90 days of first contact. The franchisor's process is engineered for speed. This coach's job is to add the time and rigor that produces a well-informed decision — yes or no.

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