Buying a Franchise Series: How Strong Is the Business Model
So HOW do you evaluate the “strength” of a business model? A question I pondered for some time staring at a blank page wondering where to start… Like most information for starting a franchise – it all comes back to your due diligence.
You will have access to all sorts of information, including systems and operations and training manuals. Is there anything missing or left uncovered, i.e. from a client’s initial enquiry/order, right up to the delivery of the final product or service? Are there procedures in place for all sorts of things from dealing with disgruntled clients to troubleshooting systems?
It’s crucial to bring up any concerns with the franchisor/trainer, can they answer your questions and provide solutions? Or are they skipped over and left unanswered?
Identifying gaps in systems and processes doesn’t entirely measure the strength or success of the model on its own, though it can give you an indication and provide insight as to where you could run into problems during the day-to-day operation of your business.
Is There Really a Way to Evaluate the “Strength” of the Model?
So you’ve identified gaps or lack thereof? While this gives you an insight into the business, it doesn’t exactly measure the ‘strength’ of the model. Franchises can have great business models, though some chains have come under criticism for onerous conditions that make it hard for franchisees to make a profit, so what looks great on paper, doesn’t always translate to the balance sheet.
Analyse the FDD
The Franchise Code of Conduct requires franchisors to maintain a Franchise Disclosure Document (FDD), and they have to provide this to any person proposing to enter into, renew or extend a franchise agreement.
The purpose of the FDD is to provide prospective franchisees key information about the system and network, including:
- Any legal proceedings against the franchisor or its directors
- The history of its directors
- How many outlets have closed/ceased to trade, how many have been sold, and how many have been bought back by the franchisor
- Contact details of former and current franchisees
- List any franchisor and franchisee responsibilities and restrictions
- Clauses, e.g. refurbishment and non-performance clauses
Pick up the Phone and See a Professional
The latest research found that 43% of franchise business owners did not speak to other franchisees as part of their due diligence, nor did a majority consult a lawyer (36%) or accountant (46%) before purchasing their franchise.
Asking questions about the business and seeking advice regarding information listed in the franchise disclosure document is crucial in evaluating whether you would deem a particular franchise model successful, whether the conditions or restrictions are worth the brands offering, and adds (or detracts) to your overall confidence about moving forward with the purchase of the franchise.