8 Ways for Franchisors to Undertake Due Diligence

“Give me six hours to cut down a tree and I will spend the first four sharpening the axe”.

As in all spheres of the business world, in franchising, it pays to be prepared. Whether you’re a prospective franchisee looking to join a franchise network, or a franchisor seeking to issue a new grant, there are some simple steps you should first complete. Below, we set out what due diligence franchisors should first undertake.

1. Get Resumes and References

Just like with any job, a prospective franchisee will be a representation of your brand, so it’s important to ensure they have the required skills, experience and references as any employee.

2. Undertake a Financial Analysis

Here, you should request details of other sources of income, assets and liabilities. Going into business with a franchisee who is in financial trouble isn’t just risky, it could also leave you carrying some of that debt. You should undertake this analysis for all franchisee entities and their associated companies, and any individual guarantors.

3. Ensure the Franchisee Offers Proper Security 

The Personal Property Securities Act provides a mechanism to secure your interest against personal property, including the business’ assets. You should also seek personal guarantees. When that’s complete, it’s prudent to undertake, as a minimum, a PPSR search, property and ASIC searches and a bankruptcy search of all relevant parties. Your franchise lawyer can assist you with this.

4. Get Online and Search, Search, Search!

The Internet contains a seemingly endless amount of information. Simply Googling someone can be pretty eye-opening, and one would have to question if you want to go into business with a person with a string of failed businesses behind them, or who is subject to less than favorable press.

5. Interview the Prospective Franchisee

Although interviewing your prospective franchisee sounds so simple, it’s important! Make sure this is a person who understands the business, will present the business well, and who has in place a proper framework for implementing the business successfully.

6. Require the Franchisee to Submit a Business and Marketing Plan

This enables you to confirm that the franchisee understands what they are signing up for. The marketing plan, for example, should list prospective clients/customers, the intended launch and local area marketing, and any existing networks the franchisee can leverage to the benefit of the franchise business. It also, on a higher level, allows you to analyse the franchisee’s business skill and acumen and understand the market in which the franchise business operates.

7. Get Professional Advice

If you’re not quite sure how to interpret the financial material provided, or just how to register that PPSR interest, professional advisors can be invaluable in ensuring you are adequately informed and protected. 

8. Look at Their Work

You shouldn’t overlook a franchisee’s prior work. We know this sounds simple, but if you run a franchise in the fitness industry, for example, have the prospective franchisee provide you with an example of their work – from exercise and nutrition plans to videos of them training in action. As these people will be representing your brand, it is vital they are the right fit.

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Following these tips provides a practical way of investigating the transaction and the other party before forming a legal relationship. If you have any questions or require any assistance with completing your due diligence process, let our franchise lawyers know on 1300 544 755.