4 Due Diligence Tips for Potential Franchisees

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Table of Contents

• 1. Don’t Be Distracted by Marketing
• 2. Write It Down
• 3. Check What the Franchisor is Providing in the Long Term
• 4. Know Your Rights
• Key Takeaways

As with any business dealing, parties in the franchising sector are vulnerable to disputes. The Franchising Code of Conduct regulates the industry and aims to protect franchisees with little bargaining power. Nevertheless, franchisees should undertake necessary due diligence before purchasing a franchise.

1. Don’t Be Distracted by Marketing

A franchisor is trying to sell you the rights to operate their business. As part of the selling process, they are providing you with materials that include information about the franchise, such as details of their system and how they operate. All potential franchisees should check the information that franchisors provide to them, either by querying the franchisor as to any claims they make or confirming with other franchisees how the franchise operates in practice.

2. Write It Down

Purchasing a franchise is not a simple transaction. It involves asking lots of questions, negotiating with the franchisor and transferring information. If you have started the negotiation process, it is important that you write everything down, particularly for any promises or guarantees that the franchisor provides. For example, if the franchisor verbally commits to waive fees for the first six months, this is something you would want to include in the franchise agreement. You will want to support this by emails and communications which are in writing from the franchisor directly.

3. Check What the Franchisor is Providing in the Long Term

By purchasing a franchise, you are purchasing the right to use the intellectual property and business systems. Some franchisees, however, forget to look at the details of the franchise itself and what the franchisor will be providing in the long term, for example:

• Will the franchisor commit to undertake research in the market to stay relevant?
• Will the franchisor commit to providing you with advice on call?
• What level of training will the franchisor provide? Do you have to pay extra for ongoing training?

It will, of course, depend from franchise to franchise, but you should be aware of the level of support the franchisor is willing to provide.

4. Know Your Rights

If you are serious about purchasing a franchise, you should be aware of your rights. Ensure you read through the Code and the legal documents that you have received as part of the franchise purchase thoroughly.

Reading these documents will help you to familiarise yourself with situations where the franchisor may be falling short of their obligations. By understanding what the franchisor’s obligations are, you can better assert yourself in case there are disputes later down the line.

Key Takeaways

This is a short list of four considerations you should be making as a potential franchisee. Of course, you should not use it as a substitute for receiving professional advice from business advisors, lawyers or accountants. Rather, you should undertake this due diligence in addition to any professional advice you receive.

If you are a potential franchisee entering into a franchise system or have any questions about completing due diligence on your prospective franchisor, get in touch with our franchise lawyers today on 1300 544 755.