Do a Due Diligence Before Buying a Franchise
Let us first understand what is meant by due diligence – the Merriam-Webster Online dictionary explains “Due Diligence” as “the care that a reasonable person exercises under the circumstances to avoid harm to other persons or their property.”
Through due diligence, a prospective buyer of a franchise gathers detailed information about the business potential and profitability, financing requirements, operational risks and other factors that must be discovered and analyzed before proceeding with the deal. In turn, due diligence also enables the seller or franchisor to evaluate the terms of the sale, the creditworthiness of the buyer, tax consequences etc.
Following are the 5 most important things you will need to do as a prospective buyer before you take the final step of signing up.
1. Understand your market: Once you have made up your mind on what type of franchise you want and can afford, investigate the demand for that particular product or service in your area. Just because the idea might have worked out perfectly for someone located elsewhere, does not mean it will work in the place where you want to open your franchise. Some issues you need to consider include the level of competition in your target market and whether the concept has only seasonal marketability.
2. Compare opportunities: Even if your heart is set on one franchise brand, it never hurts to look at other opportunities to make sure you are signing on with the best option that matches your skills and interests. Attend a franchise trade show and/or use a franchise consultant who will enter your criteria into a database and then present companies that match your parameters. There are also numerous websites that allow you to see a snapshot of several concepts at once.
3. Scrutinize the offering: Do not sign any contract or make any payment until you have had the opportunity to investigate the franchisor’s offering. The FTC requires all franchisors to disclose important information about the franchise system including their past earnings, franchise agreement terminations, number of operational outlets etc. You might do well to take the help of a franchise attorney and review the UFOC and franchise agreement, as well as have an accountant review the franchisor’s earnings claims.
4. Find out what training and support the franchisor provides: Before taking on a franchise, make sure that the franchisor provides intensive training on how to run the business and also offers some kind of ongoing support. This is very important because without it you will have no way of making a success of that business.
5. Talk to existing franchisees: The most important step you can take before signing the final contract is talk to other franchisees. They can give you honest feedback and validate what the franchisor tells you. Ask them about their experiences, and if they have any advice for you. Their input could be very valuable indeed.
Conducting due diligence is an important information gathering process that will enable you as a prospective purchaser to assess the strengths and weaknesses of the target business, rectify and renegotiate any new terms of agreement, minimize post purchase “surprises” and determine whether or not to proceed with the deal. Make sure you do it well.
About the Author
Hi, I’m Akhil Shahani, a serial entrepreneur who wants to help you succeed. If you like to work smart, check out http://www.SmartEntrepreneur.net . It’s full of articles and resources to help you start and grow your business successfully. Please visit us & download our special “Freebie of The Month” at
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