The Right Way To Do Franchise Due Diligence

Are you considering franchise ownership?

If so, making the right decision on a franchise to own requires careful research and analysis. And the way to that?

Franchise due diligence.

Because it’s a crucial step in evaluating the feasibility and potential risks of a franchise opportunity.

In this post, I’ll walk you through the process of franchise due diligence, providing valuable insights and real-world tips to help you make a smart choice in a franchise to buy.

As opposed to an ill-informed one.

What Is Franchise Due Diligence?

Franchise due diligence refers to the thorough investigation and evaluation of a franchise business opportunity before committing to buying it.

In this case, it involves gathering specific information, assessing financials, studying the franchise documents, and conducting market research. The goal?

To gain a complete understanding of the franchise system and its potential for success. Your success!

Benefits Of Conducting Franchise Due Diligence

Before embarking on your franchise buying journey, it’s important to understand the benefits of conducting proper due diligence. By performing thorough research, you:

1. Lower Your Risks: Franchise due diligence helps identify potential risks and red flags associated with a franchise opportunity. By uncovering these risks in advance, you can make an informed decision and avoid costly mistakes.
2. Evaluate Your Profit Potential: Through due diligence, you can assess the financial performance and profitability of the franchise. This information allows you to determine if the investment aligns with your financial goals and expectations.
3. Understand The Franchise System: Franchise due diligence provides insights into the franchisor’s business model, support systems, and overall operations. This understanding helps you assess if the franchise is a good fit for your skills, experience, and personal goals.
4. (Potentially) Negotiate Better Terms: By conducting thorough due diligence, you can identify areas for negotiation in the franchise agreement. This can include terms related to royalties, territorial rights, and renewal options, ensuring a more favorable agreement for your investment.

Key Factors To Consider

When conducting your due diligence, it is important to consider the following key factors:

1. Franchisor’s Track Record: Research the franchisor’s history, including their experience, reputation, and success in the industry. Look for indicators of a stable and reliable franchisor.
2. Franchisee Support and Training: Evaluate the level of support and training provided by the franchisor. A strong support system is essential for franchisees to succeed.
3. Financial Considerations: Analyze the franchise’s financial documents, including the initial investment, ongoing fees, and potential return on investment. Consider consulting with a financial advisor to assess the financial viability of the opportunity.
4. Market Analysis: Conduct thorough market research to understand the demand for the franchise’s products or services. Evaluate competition, market trends, and potential customer base to gauge the market’s potential for growth. Your local SBDC can help you with this.
5. Franchise Agreement: Carefully review the franchise agreement, and seek franchise legal counsel. Pay attention to terms related to fees, royalties, territory rights, renewal options, and termination clauses.

Steps for Conducting Franchise Due Diligence

1. Research Online: Start by researching the franchise opportunity online. Visit the franchisor’s website, read their franchise disclosure document (FDD), and explore online forums and review sites to gather information and insights from existing franchisees.
2. Speak with Current Franchisees: Reach out to current franchisees to gain firsthand perspectives on their experiences with the franchisor. Ask about their profitability, support received, and any challenges they have faced.
3. Attend Discovery Days: Many franchisors offer Discovery Days, where potential franchisees can visit their headquarters and meet the corporate team. Take advantage of this opportunity to ask questions, observe operations, and interact with key stakeholders.
4. Consult Professionals: Seek advice from professionals such as franchise advisors, lawyers, and accountants. Their expertise can provide valuable guidance and help you navigate complex legal and financial aspects.
5. Visit Existing Locations: Whenever possible, visit existing franchise locations to observe operations, assess customer experiences, and speak with franchisees in person. This firsthand experience can offer valuable insights into the day-to-day realities of owning a franchise.
6. Review Financial Projections: Analyze the financial projections provided by the franchisor. Consider factors such as startup costs, ongoing expenses, revenue potential, and the time it may take to achieve profitability.
7. Assess The Legalities: Ensure that the franchise complies with all legal and regulatory requirements in your region. Consult with a lawyer to review the franchise agreement and any other legal documents.

Common Mistakes to Avoid

During the franchise due diligence process, it’s important to avoid the following common mistakes:

1. Rushing the Decision: Don’t rush into a franchise investment without conducting thorough due diligence. Take the time to gather information, analyze data, and assess the opportunity carefully. Slow and steady.
2. Neglecting Financial Analysis: Failing to analyze the financial aspects of the franchise can lead to unexpected financial challenges. Carefully review the franchise’s financial documents and projections before making a decision. And make sure the opportunity is within your budget.
3. Skipping Legal Counsel: Franchise agreements can be complex, and it is essential to seek legal counsel to review the agreement and explain its terms and implications. For this, only hire a franchise attorney.
4. Overlooking Franchisee Support: The level of support provided by the franchisor is crucial to your success as a franchisee. Neglecting to evaluate the support system can lead to a lack of guidance and assistance when needed. Note: Some franchisors are great at selling franchises, but once you’re a franchisee, they are difficult to reach for help.
5. Ignoring Red Flags: Pay attention to any red flags or concerns that arise during the due diligence process. Ignoring these warning signs can result in a poor investment decision. For example, if you find that a lot of franchisees exited the system in the past couple of years.

Conclusion

Your due diligence is a vital step in the process of investing in a franchise opportunity.

By conducting thorough research and analysis, evaluating key factors, and avoiding common mistakes, you can make informed decisions and increase your chances of success as a franchisee.

Remember, a franchise investment is a significant commitment, and taking the time to perform due diligence is crucial for your long-term success.

(The Franchise King®, Joel Libava, is the author of two franchising books, and works 1:1 with aspiring franchise owners, helping them make smart, informed decisions on franchise business ownership.)