What Happens If You Skip Due Diligence When Evaluating a Franchise Opportunity?

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Due diligence - what is it?

When you’re starting a franchise, doing your due diligence is essential. Before you invest any of your money, you need a detailed insight into how the franchise you’re considering investing in operates. There are so many different opportunities out there, and research is super important in ensuring you make the right choice.

Starting your own business can be a hugely time-consuming process, whether you’re building something from the ground up or looking for the right franchise to invest your money in. It might be tempting to cut corners and skip right to the good stuff, but failing to do your due diligence can have huge negative consequences. Here’s why.

What is due diligence?

The term due diligence refers to the process of fully and comprehensively appraising a business prior to investment. If you do your due diligence prior to becoming a franchisee, you’ll enter into a franchise agreement fully aware of the business’s assets and liabilities, with a true picture of your franchise unit’s potential. 

Four reasons why due diligence is important when evaluating a franchise opportunity

So, why does due diligence matter? What happens if you fail to fully investigate? In short, the answer is that it depends on the franchise. In reality, the results of poor research and improper planning can be devastating. Here are four reasons why doing your due diligence is absolutely crucial when evaluating a franchise opportunity...

1. It gives you an accurate sense of the worth of your investment 

Before you put any money into a business, you need to know it will pay off. Investing in the right franchise is absolutely worth it, but betting on the wrong franchising opportunity is a recipe for professional failure. Do your due diligence, gather all the data you need about assets, liabilities, cash flow and general financial management, and then determine whether something is the right franchise opportunity for you by:

  • Considering your skillset - What experience do you have that you can apply, and what traits and skills will help you on your way? Is there any role that you really DON’T feel suited to?

  • Reviewing your budget - How much do you have to invest without stretching yourself too thin? Can you cover other unexpected expenses if something goes wrong? If you don’t have a lot to invest, have you looked into low-cost franchise investment options?

  • Identifying sector trends - What is profitable right now in the industry you’re looking to enter? If you’re about to invest in a cleaning franchise, for example, what are the top cleaning trends of 2021? What do these trends tell you about where you should put your money?

  • Attending networking events or reaching out to relevant contacts - Do you know anyone that’s working in the sector you’re interested in? Or anyone who’s started a franchise? What networking events can you attend in order to make connections with those in a similar boat, and what can you learn from them?

If you don’t properly understand the worth of your investment, in a financial sense, before you make it, you might end up putting a lot of money into a franchising operation that’s being poorly run, and you might get stuck in a contract for years that never actually allows you to generate a return on your investment. Obviously, that’s the last thing any budding franchisee wants.

2. It provides you with important insight into the legal structure of the agreement

You’ll want to know what you’re agreeing to do before you sign a franchise agreement and commit to certain legal rules and responsibilities, including the payment of monthly operational costs, the handling of hiring and paying employees, and the policy around exiting the agreement (including potential bans from working in a similar sector for a certain amount of time after leaving). Discovering all you can about the agreement will also tell you what rights you’ll have to your territory and what training and support you’ll receive from your franchisor. 

Make sure you’re happy with any terms before signing a franchise agreement. Seek help from a legal professional, break down the jargon, and understand exactly what it is that you’re agreeing to. The more you know, the better a position you’ll be in.

3. It proves your commitment to doing business properly  

In 2018, over 710,000 people were employed in the franchising industry [British Franchise Association], and this figure is on the increase. Competition can be fierce for franchising opportunities, and when you carry out your due diligence, you don’t just help yourself. You also show potential franchisors that you’re serious about the process, and you’ll do business thoroughly as a franchisee.

Due diligence is standard business practice, and if you don’t feel it’s an important step, and you’re trying to rush into things, many franchisors won’t take you seriously, or will be wary about going into business with you.

4. It offers you a chance to gain insight from current franchisees

One really important aspect of doing your due diligence is checking out whether the promises match the reality. Check in with current franchisees, and talk to them about their experience. If you don’t, you risk missing out on some fantastic, invaluable insights. When you’re interested in a particular franchise opportunity, ask the following questions to franchisees within the company:

  • Are you satisfied with the training and support you’ve received?

  • How does the franchisor handle conflict?

  • How long did it take you to make a profit?

  • How many hours a week do you dedicate to your franchise?

  • Would you recommend this franchise to others?

  • Can I visit and shadow you for a day?

When you’re researching a franchise, don’t skip a single step

Running a franchise successfully is often about ticking the right boxes and getting everything done. If you’ve checked off all the stuff you need to do, you’ll know you’re heading in the direction of success. This is the case even before you make that investment, and hopefully, this article has shown you what can happen if you skip your due diligence and rush into the wrong agreement. To find the right opportunity for you, which you’ll then need to research thoroughly, browse available investments by sector.

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