Why You Should Do Your Due Diligence Before Buying a Franchise

due diligence

Why You Should Do Your Due Diligence Before Buying a Franchise

If you are purchasing a franchise, it’s imperative that you conduct a sufficient amount of research and understand how a particular network functions.

It’s important that you get a better idea about what your responsibilities are as part of that network and the kind of support and backup you can expect from the franchisor. In addition to all these things, it is also crucial that you undertake due diligence investigations before purchasing a franchise.

Unfortunately, many people that purchase franchises or small businesses don’t really focus on this aspect. In fact, many don’t even understand what the term due diligence means. Let’s take a look at what is involved in due diligence and why it is important before buying a franchise.

Due Diligence – Aspects That Matter

#1 Review the agreement

While starting due diligence investigation on any franchise, it is recommended that you conduct a detailed review of the disclosure document and the franchise agreement. It’s important for the franchisee to have a very clear idea of:

  • How the payment and fee structures work
  • Their obligations under the franchise system
  • The restraint of trade & exit obligations they might be subject to in the event that the franchise expires/is sold/terminated.

 

There needs to be a proper exit strategy in case the franchise comes to an end.

#2 Engage the Services of a Franchise Lawyer

Franchisees often overlook this aspect which can create very real issues for them in the future. Lawyers will peruse the franchise agreement on behalf of the franchisee. They will take a close look at every clause and interpret particular issues. It is also their responsibility to ensure that they provide detailed explanations to the purchaser.

There are times when a franchise agreement might have some less evident issues that a regular lawyer may not pick up. This makes it very important to hire the services of an experienced franchise lawyer.

#3 Financial Aspects To Take Into Account

There could also be certain aspects that aren’t covered in a franchise agreement. Often, the omission of certain vital terms can be far more important than understanding the ones that are included. From a financial angle, it’s extremely beneficial to include a lawyer in the due diligence process. Make sure that this professional has an understanding of how franchise systems work. They would be able to more easily grasp all the implications of various matters such as:

  • Marketing contributions
  • Ongoing royalty payments
  • Transfer fees
  • Other payments

 

All these need to be factored into the profitability analysis and cash flow projections. In most instances, potential franchisees approach their current lawyers or accountants rather than seeking out professionals that have a good understanding of franchising systems. Since franchising has very specific peculiarities, failing to consult specialists in the field can prove to be detrimental to your business venture.

#4 Connect With Existing Franchisees

Part of the due diligence process is about making contact with other franchisees that are already within that network. These individuals will have been through the process that you are currently embarking on and would be able to provide their inputs and valuable advice on how the system works.

They would also be able to give you a better idea about whether it is profitable for you to be part of that system. You can discuss other aspects of the business model with them and understand whether the franchisor provides good support to the franchisees. Last but not the least, it is also crucial for the franchisee to conduct a critical analysis of his or her own suitability to run a franchise.

All these aspects are very important components of the due diligence process. If you want to know more about franchising, 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

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