Entering into a franchise relationship is a big deal, for both parties. It then makes commercial sense for both parties to undertake due diligence before signing on the dotted line as contractual terms usually range from 5 to 10 years and the funds exchanged can exceed thousands of dollars. We set out below what due diligence any prospective franchisee should look to complete to understand better the company or person they are entering into a long-term business relationship with.
1. Talk to the Network
The best way to scope out the success of the franchise business and level of support to the franchisor provides is to speak to the people who are actually in business with them. The Franchising Code prescribes that the disclosure document lists the contact details of existing franchisees for a very good reason. As a bare minimum, try and talk to at least three existing franchises, some who have been in operation for a while, and approach the discussion with a set list of questions.
2. Analyse the Growth of the Franchise Network
Here, the disclosure document will provide some insight into the number of franchisees year to year, and the franchisor should be able to supply more historical data. A franchise network showing steady growth is a good sign, but also, look for terminations. A high termination rate could indicate while the franchise can get people in, the business may not be sustainable.
3. Look at the Financial Statements and Request Financial Data
In particular, it is important to ascertain the franchise has sufficient financial backing to operate on an ongoing basis. A franchise running on the smell of an oily rag poses a threat of insolvency, which would, in most circumstances, leave your business in the lurch.
4. Get Advice
No, we are not just saying that because we franchise advisors! Obtaining specialist legal and business/accounting advice will allow you to get an understanding of your precise legal obligations and any risks or imbalance of power evident from the documentation governing the franchise relationship. A franchise lawyer, for example, can identify any indemnities and security offered and ongoing risk, even after the franchise relationship has concluded.
5. Get Online and Search, Search, Search!
Consumers are a savvy bunch. The Internet provides a vast range of review websites, whereby anybody can provide their feedback on a service or the product. Have a read and see what the public is saying about your prospective franchise.
6. Be Your Own Mystery Shopper
It sounds so simple, but the best way to understand the franchise business is to experience it first-hand. Thinking of becoming a Subway franchisee? Go into Subway. Order a sandwich. Look at the systems. Taste the finished product. And then ask yourself, ‘is this a brand I believe in?’
7. Consider Market Trends
If you bought into a Cronut franchise, chances are your turnover isn’t as high as it was 12 months ago, when cronuts were the dessert de rigueur of the in-the-know crowd. Consider market trends and whether this business is sustainable, or merely a fad?
8. Prepare a Business Plan and Cash-Flow Analysis
Here, the disclosure document will be invaluable. Look at the franchise fees and expenses you will have to pay, both upfront and ongoing, and ensure this still leaves a nice cut for you. There is a great deal of planning and forecasting software available, and your accountant should be able to assist with this analysis too.
If you are a prospective franchisee and have any questions about undertaking your due diligence, get in touch with our franchise lawyers on 1300 544 755.