When considering a franchise opportunity, it is critical to conduct your due diligence. Buying a franchise is a substantial, long-term investment, and your success or failure will hinge in large part on the actions, omissions and obligations of your franchisor.
Franchise due diligence is an involved process that takes time, effort and a commitment to finding real answers instead of simply trying to validate your interest in the franchise. The following is a list of 10 examples of steps prospective franchisees can take to learn more about their potential franchise opportunities:
Franchise Due Diligence: 10 Steps
1. Talk to Current Franchisees.
How are their businesses doing? How long did it take them to become profitable? How supportive is the franchisor? Current franchisees can provide invaluable information to help you decide whether to pursue a particular franchise opportunity.
2. Talk to Former Franchisees.
Former franchisees are a key source of information as well. Why did they leave the system? Would they do it again if they had the chance? What is their opinion of the franchisor?
3. Visit the Franchisor’s Headquarters or Company-Owned Location.
The in-person visit is an important step in the due diligence process. You will want to meet the franchisor’s key personnel in person, and see if you think you will be a good fit for the way they do business. You should also try to visit several franchised locations.
4. Review the Franchisor’s Franchise Agreement and FDD.
While you should hire an attorney to review the franchisor’s franchise agreement and Franchise Disclosure Document (FDD), it is important that you review them as well. Formulate your own questions, and make sure you understand key terms like the royalty rate, territorial rights, initial term and conditions for renewal.
5. Compare the Franchise Agreement and FDD to Others.
If you are considering multiple franchise opportunities, compare the franchisors’ documents against one another. Which offers the most favorable terms? If you only have one franchisor’s documents, your attorney may be able to obtain documents from other systems to perform a comparison.
6. Ask Questions.
Ask lots of questions. The franchisor’s representatives should be more than happy to give you the information you need. If they are not, this could be a bad sign.
7. Research Online.
Online you can often find reviews, forums and other resources where you can learn additional information about your chosen franchise opportunity. You may need to take some of this information with a grain of salt, but consistently good (or bad) reviews may also help inform your decision.
8. Review the Franchisor’s Financial Statements.
The franchisor’s financial statements should be included as an exhibit to the FDD. You should review the franchisor’s financials; or, if you are not familiar with reading financial statements, ask your accountant for his or her opinion.
9. Complete Your Pro Forma.
Regardless of what other franchisees or the franchisor tells you, when do you expect to turn a profit? How much will you need in reserves and monthly cash flow to build a sustainable business?
10. Consider Other Opportunities.
Finally, even if you have your heart set on a particular franchise, it is important to consider other opportunities. You may find another opportunity that you like even better; or, you may find out that the benefits your chosen franchisor offers are not nearly as comprehensive as those available with other franchises.
Flat-Fee Franchise Opportunity Reviews | Goldstein Law Firm
If you would like assistance reviewing a franchise agreement or FDD, or if you would like additional information about performing franchise due diligence, contact the Goldstein Law Firm for a free consultation. To speak with attorney Jeffrey M. Goldstein in confidence, please call (202) 293-3947 or send us a message online today.