Due Diligence: Are You Asking the Right Questions?

02/09/2018 10:00 | Start a business

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All franchisees need to carry out due diligence before they sign any franchise agreement. If they don’t, they expose themselves to huge financial risk. Here, we take a look at eight questions you need to be asking as part of the due diligence process.

1. What is the total cost of a start-up?

You may think you've got all the information pertaining to start-up costs that you require, but it's worth making sure. Some franchises are very good at hiding the true cost of franchising behind vague terminology. You may have heard franchisors refer to the ‘minimum initial investment,' the ‘initial investment,' and the ‘franchise fee.' All of these are different figures and none of them represents the true total cost of start-up. In order to ensure your due diligence calculations are correct, it's vital that you receive an accurate figure for the total cost.

2. What time frames are we looking at?

It’s all well and good knowing how much you can expect to earn, but it’s important to know how long it’s going to take you to earn it, too. The most important question to ask is how much time will pass between signing the franchise agreement and opening day. Some businesses require just a few weeks prep. Others can take a year or more to get off the ground. This can have a big impact on what you plan to do with your time before the opening and how much working capital you have at your disposal when you open.

3. What are your plans for the future of the business?

If you're serious about building a career out of your franchise unit, you need to know that your franchisor is serious, too. Knowing what the future is for the business can have an impact on your plans in a number of different ways. For instance, you may be presented with a business opportunity that appeals to you even more than the current opportunity. You may be disappointed by the franchisor's lack of ambition and decide not to invest. You may decide that you want to invest in a different territory than the one you had intended. Finding out what the plans are for the future ensures that there are no nasty surprises just around the corner, too.

4. What is the average amount of time it takes for a franchise to break even?

Most franchises take months to start turning a profit. Others take years. This means that it can be a considerable time before you break even. However, franchisors should be able to give you a rough approximation of how long it takes franchisees to break even on average. They should also be able to put you in touch with existing franchisees who can talk you through their Return On Investment (ROI) and provide greater insight into how long it will take to make a profit, than simply breaking even.

5. Who is on your management team?

The franchisor and franchisee always work closely together. When you’re first starting out in franchising, it’s tempting to think of the franchisor as a single person – the head of the original franchised business. In reality, you’ll be dealing with a large team of people, all of whom have a background in franchising or management. This means that your support system isn't managed by one individual, it's managed by many. It's a good idea to know who they are, and that they know who you are too.

Not only will this tell you whether the franchisor actually has sufficient experience to make this venture work, it will also give you the opportunity to check employment records and backgrounds. This is important due to the way it allows you to ensure the management team hasn’t been involved in business disasters in the past and that they are who they say they are.

6. How long do franchisees tend to stay with you?

Franchisee loyalty offers a better indication of franchisee satisfaction than any award or rating. If franchisors are selling up and moving on after a relatively short period, there’s a good chance that they’re not fulfilling their commitments to franchisees. The best franchises to invest in are those that care about their franchisees, want to maintain a strong working relationship with them, and understand that experienced franchisees are more profitable for everyone.

7. Why should I go with you and not a competitor?

Sometimes it’s good to put the franchisor in the hot seat and ask them a few difficult questions. Asking why their franchise package is better than a direct competitor’s is a good way of asking the franchisor to explain what sets them apart. If the franchisor can’t, it’s a very bad sign. However, most franchisors will have no problem fielding this question and their answers can be very revealing. When a franchisor describes why they’re the best choice they’ll naturally focus on those things they personally prioritise. They might mention profits, support, potential, flexibility, or freedom. If their answer aligns with your priorities, you know you’re on to a winner.

8. What field support do you provide?

Finally, franchisees need to ask about what field support they’re likely to receive and when they can expect to receive it. The support offered by an experienced franchisor is often one of the biggest draws of the franchise system. It gives individuals who don’t feel as though they can go it alone the confidence to do so. Consequently, franchisors often use extensive support systems to appeal to prospective franchisees. However, you need to know the details before you sign anything. What support can you expect? Who provides it? How often is it provided? By what means is it provided?

Conclusion

Due diligence is all about ensuring that a franchise is a financially viable investment. To do this, you need to ask the right questions. The eight questions listed above should form the core of your dialogue with your franchisor. Don’t be afraid to ask testing or trying questions. You’re making one of the most important decisions of your career. You’re entitled to ask searching questions

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