due diligence in franchising


Buying a successful franchise might be a very appealing and accessible option for a new company owner. When you invest in an already-established franchise, you get a company with a sales track record. You’ll reap additional rewards by doing business under a well-known label and being part of a community of franchisees.

Compared to acquiring a new franchise or starting a company from scratch, the path taken by a buyer of an established franchise is quite different.

For instance, if you’re talking to a company owner about opening a franchise, you should also meet with the franchisor/franchise recruiting manager. This article discusses why it’s crucial to do your homework before buying a company and gives examples of different resources that might help you do so.

What Is Due Diligence In Franchising?

The term “due diligence” refers to the independent research that is conducted to learn as much as possible about a company before making a final decision. The current franchisee will provide you progressively more information as the process progresses. To make an informed decision on the purchase of an existing model, you should investigate the following:

  • Commercial
  • Financial
  • Legal

Here is a detailed look at these three due diligence areas:

Commercial Due Diligence In Franchising

Your interest in purchasing an existing franchise necessitates careful consideration of the material provided by the franchisor, including the how well the franchise system is doing and what kind of help you can count on from the franchisor.

You should contact the existing franchisee or franchisor and inquire about the following:

  • Whether or not you have an exclusive territory
  • How long has the company been operating there
  • Whether or not there are other franchisees in the area
  • Which suburbs fall within your territory.
  • What continuing costs/fees are included in the franchise agreement
  • What, if any, adjustments have been made to those fees by the franchisor in the past?

Financial Due Diligence in Franchising

Greenfield franchise purchases require buyers to depend on the franchisor’s general financial disclosure documentation. These can help you estimate the company’s potential for success and profit in the region where you want to set up shop.

However, there’s a significant benefit to buying an established franchise rather than starting from scratch with a “greenfield” business. In particular, the company will surely keep a record of past financial information. When doing your research, you will find this information vital since it is tailored to the unique franchise’s region.

This implies that you should easily get the company’s financial records upon request whenever negotiations with the current franchisee reach a more advanced stage. Using the data provided in the disclosure document, you should design a business strategy and cash flow projection. You should also seek the advice of a certified franchise expert or accountant.

Legal Due Diligence in Franchising

At the outset of your interactions with the franchisor, as a potential franchisee, you should be given a document known as an information statement. Before deciding to become a franchisee, it’s essential to read the information statement, which outlines some of the typical benefits and risks of doing so.

The Concept Of Acting In Good Faith

When doing your due diligence, remember that the franchisor, in all your dealings with them, should show a desire to do business honestly and in good faith. The franchisor is obligated to be forthright with you during the whole of your negotiations to join the franchise system and before your final purchase of an existing franchise. Per the Franchising Code of Conduct, they are required to do just that. However, it’s better to request and receive franchise information in writing. Instead of relying on only oral knowledge, you will have this to go back to whenever you need it.

Make Smart Business Decisions

These due diligence steps are crucial to keeping your bases covered and essential to diving into the franchising space. Always conduct proper research and consult with franchise experts and other franchises before making any significant business investment decisions.

If you want more franchising information, contact the experts at The Franchise Institute. You can call us at 1300 855 435 or fill out this contact form, and one of our experts will contact you as soon as possible to answer all your questions.

Post A Comment

Leave a Reply

Your email address will not be published. Required fields are marked *