Every dollar you have saved to start your own franchise business is the result of hard work and avoiding temptations to spend. You want to make sure that your franchise is a success story. Risk is invariably a part of any investment decision, but you must also know how to balance the risk. That is why, before investing your valuable savings in a franchise, you need to conduct due diligence.
We have prepared a checklist to highlight the critical issues that help to turn your investment into a success.
You must have a volley of questions for the franchisor and business vendor and seek answers to them. Because you are the buyer, your decision to invest in that business rests on the recent performance rather than its unknown future potential. Well established franchisors have their financial data ready for the investor to judge their business performance. The data you should look at relates to the cost of doing business, which includes the cost of goods and expenses such as staff salaries, utility bills, rent, and miscellaneous expenses.
It is useful to compare the data from the last three years to understand how stable the business is and whether it’s headed in the right direction. If there is fluctuation in revenue, get clarification about the ups and downs.
Some businesses are highly seasonal. So, look at the month to month sales and revenue to know the nature of the business. This step will minimise surprises when you start your venture. For example, if you start at the beginning of a busy season, you need to scale up on every front and develop the capacity to cope with the pressures it entails. On the other hand, a lean business period means more working capital. You need to get assurance from the franchisor that support will be available during the non-peak season.
The composition of your customer base is as essential as a large customer base. Your profitability depends on it. You should ask for a list of top 10 customers that contribute to the revenue and find out how much they contribute.
Just as every customer is a support, they are a risk too. When you lose a customer, who contributes 15% to your revenue, it harms your business. A diversified customer base is always an advantage because it means less risk of loss when you lose some customers (something that is unavoidable in any business). A broader customer base provides better opportunities for business growth.
Making a business decision requires access to the information you need. A franchisor who follows a transparent business policy will always share the information you need to make a business decision. It is also the basis of a healthy and long-lasting relationship with a franchisor.
Buying a franchise and selecting a franchisee is a two-way exercise, where the process of mutual assessment continues till the end. A franchisor is interested in getting franchisees and will share information about the business and what they offer. But that may not provide you real insights into the business.
You require nuggets of advice from other avenues as well. It’s essential to find a more reliable source to talk to, such as other franchisees in the network. They have the experience of dealing with the franchisor, running their business, its profitability, and the culture of the organisation inside out.
If you want to know more, feel free to get in touch with us at The Franchise Institute. You can call us on 1300 855 435 or fill in this contact us form, and we’ll reply as soon as we can.
Thanks for reading,
The Franchise Institute Team
1300 855 435