Franchise Due Diligence: A Franchisee’s Checklist

If you want to become a business owner, but don’t want to invent a brand new business plan, then a franchise is a great option. Investing in a franchise allows you to be your own boss while already having a tried and tested business model at your disposal. Investing in a franchise, however, is not without its own set of risks. As with any investment, due diligence is required and Franchise due diligenceis no different. Franchise due diligence gives you the opportunity to analyse all the risks as well as the advantages associated with the brand.

Conducting an investigation on a franchisee brand that you want to invest in might require a bit of effort, but could save you a lot in the long run. Your final decision about whether or not you wish to invest in a particular franchise should be based on the results of franchisee due diligence.

What to look out for in Franchise Due Diligence?

1.    How soon will you recover your investment: There is a good chance that the amount you are looking to invest in a franchise is not a small figure. You have quite possibly taken a loan to make the investment. The first thing you need to be sure of with franchise due diligence is that you will not only recover your investment but also be able to pay back the loan without going into a loss.

2.    Continued investments: Every franchise has its set advertising and marketing strategies that they would like you to follow. Advertising will be a continuing investment on your part. Franchisee due diligence gets you to analyse whether the overall outcome will still be profitable.

3.    Realistic expectations: When you do franchise due diligence, you can study the past trends of the brand. Look at different outlets of the same franchise and learn about their profit margins for the past two years at least. By doing this, you will have a better idea of what you can expect from your investment and also how long it will take you to see profits.

4.    About the franchisor: While the brand you are investing in might look great, franchisee due diligence also investigates the franchisor. Does the franchisor have any other brands? How have those brands performed in their respective niches? Is the franchisor legally sound? By investigating these areas, you get a better idea of where the franchise could be headed in the future.

5.    Performance of other outlets: If you want to invest in a café, franchise due diligence demands that you check to see if other outlets of that café are performing well. To the contrary, you might find that that brand’s cafes are shutting down all over the country, which could help you decide to avoid making that investment.

6.    The franchise disclosure document: Every franchisor is required to provide potential investors with a franchise disclosure document. The document contains information about performance, compliance, litigation if any, history of the company and so on. Franchise due diligence will need a qualified lawyer to go through the document carefully and explain the legalities to you. You can also request disclosure documents from several years in the past to understand how the company has performed long term.

Owning a franchise could be the best business decision you have ever made, but you need to be sure that you are going about it the right way. With the initial excitement of starting off on your own, you might overlook certain criteria. Have a checklist in place for franchise due diligence and be sure to ask for help. Involve a lawyer, accountant and someone who can guide you in making business decisions, to ensure you are investing wisely.