How to Do Your Franchise Due Diligence

Before investing in any business opportunity, it makes sense to do your due diligence to make sure you know what you’re getting into. The world of franchising is just the same, but conducting franchise due diligence can be quite a bit different from starting or investing in a standard small business. Franchise systems will have more restrictions on possibilities but are also bound by Federal Trade Commission regulations and must provide a franchise disclosure document to all potential franchisees.

Doing thorough franchise due diligence is the difference between running a struggling business and a majorly successful one, don’t forget, tied up with its fate is your own financial future. Considering the importance, here we’ll make a franchise due diligence checklist of everything you need to review and how.

Your Franchise Due Diligence Checklist

1. Taking a Holistic Approach

When performing your franchise due diligence, it’s important to look at the business from two angles: quantitative (such as financial data and costs) and qualitative (such as talking with franchisees or reviews of the business). It can be very simple to just look purely at the numbers, but it’s necessary to blend in other forms of information to get a more complete picture before making the big decision.

2. Review the FDD

The first port of call in any due diligence process is the FDD. This document provides a wealth of information for potential franchisees about how the franchisor operates, what liabilities may be outstanding against them and what will be expected of the franchisee. It’s good to read through each of them, even if you’ve read tens of them already from different prospects.

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3. Breakdown of Costs

A key factor in deciding whether to open a franchise or not is how much the costs are going to be, both upfront and on an annual basis. These will be covered in points 5-7 of the FDD. Here the franchisor should have clear figures about the initial fees, startup costs and ongoing fees, such as royalties or renewal costs.

4. Projected Revenues

Whatever the costs are, the next step of the franchise due diligence process is working out whether the expected revenues will be enough to cover them and still provide you with a living. The franchisor can provide estimates of revenue itself in point 19 of the FDD but isn’t obligated to do so. This is where contact with other franchisees in the system or talking with people in similar businesses can help, as you’ll need to know how much you’re expecting to earn before opening the business.

5. Communicate with Existing Franchisees

The franchisor will provide you with the names and details of some current franchisees in the system. However, it’s also quite easy to find them online in any case, as you have the company name. In the franchise due diligence process, no one will be able to give you a better idea of what you’ll be facing in the business than people currently doing it. Value the current or former franchisee’s time and ask them important questions like how their actual investment aligned with the projected investment in the FDD or which parts of being in the franchise system work or don’t work for them. To do proper due diligence, aim to get in contact with at least ten current or past franchisees.

6. Liabilities

It’s important to get a good idea of your franchisor’s own state as you will be entering a long relationship together. As part of your franchise due diligence, it’s advised to check points 3, 4 and 21 of the FDD, which cover any ongoing or finished litigation the franchisor was involved in, similarly for any bankruptcies as well as audited financial statements for the previous three years charting their financial performance.

7. Check Reviews of the Franchise

While doing your franchise due diligence, it’s always good to find out what the customer thinks of the franchise. Naturally, each franchise is its own business in many ways, but there’s no harm in looking up local reviews wherever a franchise exists to see whether the product or service is a hit with consumers.

8. Be Aware of Contract Obligations

You might have wanted to be a chef all your life, so you decide to open a franchise restaurant, but then, once you start, you realize that you’re only heating the prepared food they send you rather than actually ‘cooking’. If you’d done your franchise due diligence, however, you would have known what kind of an operation it was beforehand, meaning you could have chosen to go with that or find another franchise that suits you better. Before signing any franchise agreement, a critical part of your franchise due diligence is establishing your obligations as a franchisee and what you’re committing to.

Final Thoughts on Franchise Due Diligence

Doing your franchise due diligence on your potential new investment is a key part of the preparation for making that business a success. It’s important to balance the quantitative (numbers) with the qualitative (personal insights) when carrying out this franchise due diligence, as great numbers won’t necessarily mean a happy working environment. Likewise, a glowing reference won’t necessarily put food on the table.

If you’re interested in launching your own franchise in a booming industry, why not talk to us at Screenmobile? With decades of experience in running a highly successful franchise system, we’ve seen it all and are more than happy to help new or potential franchisees navigate their way through the process of starting their own successful franchise. To find out more, you can read about it here or talk to our team.