Franchising 101: The Definitive Franchise Due Diligence Checklist
Buying a franchise is a huge decision that shouldnít be taken lightly. How you approach the process will dictate whether your business succeeds or fails. Therefore, itís important not to underestimate the importance of carrying out franchise due diligence before giving the go ahead. Donít worry- weíve got you covered. Read this article to familiarise yourself with the ultimate franchise due diligence checklist.
Be careful not to rush into your new franchise adventure- make sure that you go into it prepared. Otherwise you risk falling prey to some of the biggest franchising mistakes. These include:
- Making uninformed decisions.
- Not being a good fit for the franchise, for instance, not sharing core values.
- Underestimating the ongoing investment.
- Not spending enough time with or speaking to the franchise owner or franchisees.
Thankfully, performing thorough franchise due diligence can limit the risk of nasty surprises occurring further down the road. Without it, a franchise dream can quickly become a franchise nightmare.
To make things easier for you, weíve put together the definitive franchise due diligence checklist, which you can follow to make sure youíre making an informed decision before investing.
Review the Finance Disclosure Document (FDD)
The franchise disclosure document is a great place to start your research. It will provide you with all you need to know about who the franchisor is and information about the business youíll be operating.
Why is this important?
This is a crucial document because it will give you a good insight into how the franchise is run. An inaccurate or incomplete FDD speaks volumes about the business and should be factored into your decision whether to invest or not.
Make sure you have access to the franchiseís code of ethics
Under the European Code of Ethics, franchisors are expected to offer potential franchisees a copy of their Code of Ethics, alongside complete and correct written disclosure of material information about the franchise relationship.
This must be made available within reasonable time of the franchise agreement being signed, to allow the franchisee to consider the financial and legal implications of buying the franchise.
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What can you expect your turnover to be when you become a franchisee?
The franchise disclosure document will also detail the annual turnover that you should expect as a franchisee and the investments required to get started. Some franchisors are better at providing accurate estimates than others, so the document should be reviewed alongside your own independent research and financial calculations.
Remember Performing thorough due diligence can limit the risk of any nasty surprises occurring further down the line
Analyse the franchise opportunity in full
As well as reviewing the franchise disclosure document, you should also perform full analysis of the franchise opportunity. To make sure that it is a viable franchise opportunity worth considering you should consider the:
- Size of the business
- Strength of the brand
- How much experience the franchisor has
- The quality of the training programmes available
- The on-going support thatís offered and if this suits you
- What makes this franchise opportunity stand out from others you may be considering.
By comparing the above factors for competing opportunities, you can be confident that youíre making the right decision based on the facts, rather than your feelings.
Find out how soon youíll recoup the investment
Although there are some great low cost franchise opportunities out there, youíll still be investing a significant amount of hard earned cash. Itís likely that you will also need to take a loan to make this investment. When carrying out your franchise due diligence itís important to make sure youíll be able to pay back the loan without having a loss.
Therefore, youíll need to find out the true cost of running the franchise and any continued investments you have to make, for instance for national advertising. Youííll need to research:
- Franchise and royalty fees
- Marketing costs
- The turnover rate
- The renewal terms
- Territory rights
- How long it will take you to break even
- Is what the franchise offers justified by the fees?
There are lots of resources available to help you understand the costs of running a business in your specific geographic and demographic area, and you should be using these to the best of your advantage.
Speak to the franchisor
The relationship that you have with the franchisor will play a key part in whether your business will succeed or not. Itís important to start building this relationship at the earliest opportunity and involving them in your research phase is a great time to do it.
Franchisors will be happy to answer any questions that you have. Recruiting well informed franchisees is in the franchisorís best interests, as itís more likely that youíre going to be successful if you decide to become a franchisee based on accurate information about the opportunity. You might want to start by asking the following questions:
- How long have you been franchising?
- Have there been any failures since you started?
- How do you choose your franchisees?
- Do you provide an operations manual?
- Are you a member of the bfa?
Watch out for warning signs
Bear in mind that if a franchisor is unable to answer basic questions about its franchise model or if it attempts to conceal information, it might not have the most robust or reliable systems in place. This should act as an early warning sign that this may not be the right time to invest in this franchise opportunity.
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Meet other franchisees
Although the franchisor will be able to answer all your franchise system related questions, only other franchisees from within the business will be able to tell you what itís really like to be part of the brand.
Existing franchisees from within the brand may not want to share all their trade secrets with you, so we encourage speaking with former franchisees too.
When you meet with the franchisees, you should discuss the following with them:
- Were you happy with the initial training you received?
- Are you provided with adequate support?
- When did you start to break even?
- What do you get for your ongoing royalty payments?
- What is it really like to work in this business?
- What are your biggest challenges?
- How close was your experience to the FDD?
- Would you do it again?
Beware of any secrecy
A good franchisor should support your decision to want to meet with other franchisees. If they try to block you doing so, or try to cherry pick who you speak to, then proceed with caution. What do they have to hide that theyíre worried youíll find out?
Consider seeking advice before signing on the dotted line
Even with the best due diligence in the world, entering a franchise agreement without consulting a franchise solicitor isnít a wise decision for any first-timer. Franchise documentation can be complex and difficult to understand. The franchise agreement is lengthy and full of legal jargon, which a specialist franchise solicitor can help decipher.
In the world of franchising, ignorance is definitely not bliss. When youíre investing a substantial amount of money and committing to a significant franchise term, you really need to know what youíre signing up to. Therefore, we advise seeking franchise legal advice.
Dream of success with a franchise? - donít forget your franchise due diligence
If you follow this checklist you should be able to avoid common franchising mistakes and run your very own profitable business in whichever industry you choose! You can see another one of our franchising 101 articles here. Be sure to check back to see what other helpful guidance this article series has to offer.
Becky Martin, Point Franchise ©
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LEGAL ISSUES IN FRANCHISING