Before you buy a franchise, it’s important to conduct a thorough due diligence and gather enough information to make an informed decision as to whether you wish to proceed with the purchase of the franchise.
As part of our review process, we suggest to prospective franchisees of any business that the best way to gauge the success of a franchise network is to speak to the existing franchisees in the network.
The details of existing franchisees must be provided to all prospective franchisees by the franchisor in the disclosure statement provided under the Franchise Code of Conduct. It is crucial you make contact with a number of these parties (if not more). The following are a list of questions you should put to as many franchisees as you can as part of your due diligence process when considering whether to buy a franchise:
What is your relationship with the franchisor like?
The answer to this will be a good indicator as to the way the franchise network runs. Most franchise agreements run for at least 5 or 10 years and the answer to this question will help you assess whether the franchise is a good fit for you.
Have you ever had a conflict with the franchisor? If so, how was it resolved?
This is an important question. Conflicts arise in any relationship and you need to make sure the franchisor has the necessary skills to resolve conflicts amicably.
Is your business profitable?
Whilst it is unlikely a franchisee will disclose financial specifics to you, you can hopefully ascertain whether they are at least making a profit. This will help determine whether the franchise is financially viable.
Have you recouped your initial financial outlay?
Ask the franchisees whether they have recovered (or will soon recover) their initial investment in the franchise. If the answer is no, this may be an alarm bell for you.
Were there any hidden set up or ongoing costs?
Ask the franchisee if any unexpected or hidden costs cropped up during their set up and since they have been operating in the network.
For example, have they had to refurbish premises or update equipment regularly in the form of unexpected capital expenditure. Also ask whether there have been unexpected training or compliance costs.
Are you happy with the training the franchisor provides?
Ask the franchisee about the initial training and support and the ongoing support provided by the franchisor? Are they happy with the level of support? Do they think the franchisor offers them enough support?
The answers to these questions will assist you in determining whether you are going to get “value for your money” in terms of the franchisor’s assistance.
Do you get value from the marketing fund contribution?
Ask how well the franchisor markets the franchise and if the franchisee thinks they are getting value for money from the marketing fund contribution (if any).
Ask the franchisees how much extra money is needed for local area marketing or advertising not covered by the marketing fund contribution.
Does the franchisor operate online? Can you?
If the franchisor has an online store, ask existing franchisees if this has had an impact on their sales, for example the franchisor’s website can sometimes operate in the franchise territory and you cannot argue with this, as it is conducted by the franchisor.
Ask the franchisee what the franchisor’s attitude has been to them participating in online sales or setting up a website. Some franchise agreements have restrictions on a franchisee being able to do this, and if the franchisor effectively encroaches on the franchise territory using online sales, the value of the business may decrease.
For past franchisees – ask, why are you no longer a franchisee?
Ask former franchisees why they left the system.
There are a range of reasons why a franchisee might exit – the franchisor may have decided not to renew their agreement, or the franchisee may have chosen not to renew the agreement because it was time to retire or due to ill health.
If a franchisee was terminated, ask who terminated it and why. Ask for both the franchisor and franchisee sides to the story to make an objective assessment about whether the franchise is a viable business opportunity.
Similarly, if a lot of franchises have recently been terminated or ended, it might be an indication that there is a problem with the franchise network.
Finally, do you have any regrets and would you do it all again?
This is perhaps the most important question you will ask any former or existing franchisee.
Ask all franchisees whether they have any regrets in relation to buying into the franchise and, if they had their time over, would they buy the franchise again?
The answer to this question will give you a clear indication of the franchisee’s overall satisfaction with the franchise. If they say no, ask them to explain why.
Asking these questions is critical if you want to make a truly informed decision when you buy a franchise. After you have made these enquiries the next step is to have a franchising lawyer look over the franchise agreement and highlight any important provisions.
Call us on 1300 544 755 to have one of our franchise lawyers look over your franchise agreement with fixed-fee certainty.