Buying a Franchise Series: The Importance of Due Diligence
Buying a franchise (or any business) is a big decision that requires a lot of consideration and thorough research.
Due diligence is the process of carefully analyzing the practical, financial and legal aspects of a franchise agreement before you commit to it. It’s crucial to dedicate sufficient time to this process in order to reduce the risk of facing problems down the road. * Tooltip Text
They say knowledge is power, though did you know- recent franchising research found that 49% of franchisees relied heavily on their “gut feeling” when deciding to go into franchising. 29% did not seek advice from a lawyer before purchasing their franchise, and 34% felt they should have been more diligent when gathering information before entering into the agreement. * Tooltip Text
Where to Start?
The process can seem overwhelming with so many things to do and consider. Griffith University’s Asia-Pacific Centre for Franchising Excellence has developed a free online pre-entry franchise education program, to assist prospective franchisees with conducting their due diligence effectively, and help ensure people are well-informed about franchising and what to expect as a franchisee. * Tooltip Text
So You’ve Completed Pre-Entry Education, What Next?
As part of your due diligence it’s important you speak to the franchisor, existing franchisees and ex-franchisees. Below are some questions recommended by the Asia-Pacific Centre for Franchising Excellence (detailed lists can be downloaded from their website). * Tooltip Text
Some Questions to Ask… Current Franchisees
- How long have you been a franchisee?
- What first attracted you to this franchise?
- Why did this one appeal more than others?
- How helpful was the franchisor during your research process?
- What was your biggest surprise or shock in starting your business?
Questions for… Former Franchisees
- How long has it been since you were a franchisee?
- Did you get accounting, legal or business advice before buying the franchise?
- Did the business meet your income and lifestyle expectations?
- Why are you no longer a franchisee?
- How do you feel about your exit from the franchise?
And, the Franchisor
- What financial data can the franchisor provide to assist you in putting together a detailed and relevant business plan?
- What ongoing learning and business growth opportunities are available to franchisees?
- What franchise and industry-specific training or education has the franchisor and its personnel undertaken in the last 12 months?
- What franchise and industry associations or trade bodies has the system and franchisor joined, and are the memberships current?
- What current and future potential competitive threats might affect the franchise, and what are the franchisor’s plans to combat these?
Other Areas to Investigate
- The franchise territory – is it exclusive, non-exclusive, do you get first option on additional franchises in the area?
- In addition to the initial capital investment, what other start-up or ongoing costs could you expect to pay?
- Does the franchisor, (and at what level) provide training, support, advice and marketing assistance?
Don’t Feel Rushed
Buying a franchise is possibly one of the biggest life decisions a person can make, and not forgetting- franchise agreements are legally binding documents; due-diligence is a process that should continue until you are comfortable that you are making a fully informed decision.
* The information here within is provided as a guide only and is not intended to provide, or be a substitute for legal or other professional advice. Top Snap recommends seeking independent, third-party professional advice.