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Purchasing a franchise is exciting, but it’s also serious business. It’s a huge investment in your future, so it demands a serious look under the hood to uncover any hidden issues. Due diligence means going through details and asking tough questions even if the answers could change your plans—especially if the answers change your plans.
Deciding to pursue a franchise, or any business, is more than finding the money and something you like to do or feel passionate about.
Buying a franchise also means that you have to research areas that might be hard to understand or uncomfortable to address. However, you want to know as much as you can about what lies ahead. In addition to the more obvious issues about start-up costs, fees, and territory, be sure your due diligence digs deep into the franchisor.
People and Style
When you buy a franchise, you become part of the franchisor's "family." Some families are more functional than others, though; so investigate the franchisor’s relationships with money and with others. Heavy liabilities or ongoing lawsuits can threaten a franchisor’s stability. Start with their financial numbers and audited financial statements. You will be part of the brand, and the financial stability of the franchisor is important for your long-term success.
Next, meet with the franchisor leaders. Ask about their visions and plans. The answers that leadership provides are important to your decision and future comfort with the brand. Transparency and a willingness to go over details are good signs. A forthright style of business will make your franchise experience better for them and you.
Agreement and Money Matters
You must understand every word about what you are signing.
Solicit assistance from lawyers or others if you must, but be sure you understand. The franchisor is bigger than you which means that any future disagreement or misunderstanding might not go in your favor. By thoroughly investigating the franchisor agreement, you will be completely comfortable with all requirements within it.
As part of the agreement, you should find P&Ls (profit and loss statements), working capital requirements, and fee commitments. But remember that projections are only educated guesses based on what the franchisor has seen before. Your situation may need more working capital, or the franchisor’s growth might taper off some. Whatever you discover, the circumstances presented must be taken into account as yours might vary.
Ask Around and Ask For Help
Asking for references from the franchisor isn’t enough. What franchisor would give you names they think wouldn’t be positive towards them? As a prospective franchisee, it is up to you to find the less-positive reviews. Talk to franchisees who have left the franchisor family to understand their reasons. If you find a pattern, then investigate further.
Be sure to ask the franchisor’s references for a drawback. No one has perfect relationships, and even the best reviews from franchisees will include something less than perfect. Your discoveries don’t mean that you won’t buy a franchise, but it is much better to anticipate a little nuisance than to be completely surprised. As a guide, query a dozen franchisees, and be sure to get at least one thing that they find problematic. It may not be a dealbreaker, but it will likely be something that you, too, have to abide.
Be sure to solicit help from those who know more than you do.
Franchise advisors and attorneys are valuable resources when deciding if your franchise family is the one you want to adopt as part of your entrepreneurial model.
Other business owners and financial experts will help direct your decision-making for your benefit. Use them well as part of your due diligence. These are the professionals who know what to look for under the hood, and they can provide an unbiased assessment of your franchise purchase options.
Anne Daniells is a co-owner of Enterprising Solutions, a professional services firm specializing in corporate communication and financial improvement for businesses where she shares decades of corporate and entrepreneurial experience—including franchise ownership—in her writings on business culture. She has authored hundreds of articles for publications including AllBusiness.com, TweakYourBiz.com, and MSN.com. Reach out via her website for more on where corporate culture, communication, and human architecture collide.