Due Diligence Tips For Future Franchisees

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• Due Diligence

• Tips For Future Franchisees

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Introduction

• Before signing a franchise agreement, it is
  critical that you fully understand the commitment
  you are making.
• This entails thoroughly researching your decision
  (also known as conducting due diligence) to
  ensure you make an informed decision.
• It is critical to seek professional advice as
  part of this process, and the Franchising Code of
  Conduct (the Code) encourages this by
  recommending that you seek accounting, legal, and
  business advice.

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• The Code also requires a minimum 14-day period
  from the time the franchisor provides you with a
  disclosure document before you can legally sign a
  franchise agreement, giving you time to seek
  legal counsel from franchise agreement lawyers.
• If you feel you are still not ready after 14 days
  and need more time to seek advice and conduct
  additional research on the franchise offer, dont
  be afraid to tell the franchisor or broker.
• Any attempt to rush you into signing a franchise
  agreement before you are ready should be avoided.
• Similarly, if you decide during the disclosure
  time that the franchise youve been investigating
  isnt right for you, you should gracefully exit
  the process before incurring any additional
  expenditures.
• Here are five pointers to help you with your
  research

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Identify Your Target Market

• Entering into franchising without adapting
  franchise aims to a specific market is a
  difficult task. A target audience can be a broad
  group of individuals or a specific demographic,
  but finding a way to curate a product or service
  for this group can ensure that all business
  operations are directed toward the same end goal.
  With a set consumer perception in mind, marketing
  strategy, product development, and employee
  training can all be guided, saving time in the
  early stages of a franchise.

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Previous Compliance Disclosure Requirements

• This is where reading through several years
  worth of disclosure forms might help. Potential
  franchisees should keep notice of key changes
  over time, as well as things like the
  franchisors growth rate and franchisee turnover.
  A high turnover rate may signal a problem with
  the franchise system that potential franchisees
  should be aware of.

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Determine Your Liability

• A franchisors culpability for a franchisees
  actions is known as vicarious liability.
  Potential franchisees should always review the
  circumstances and frequency of claims against
  franchisors based on such claims. Franchisees are
  frequently required to carry liability insurance
  with the franchisor named as an additional
  insured under strong franchise agreements. Before
  finalising a purchase agreement, franchisees
  should always verify compliance with these
  standards with the franchisor.

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Know Your Assets

• While a franchisee may view their unit as a
  unique investment, a franchisor may view the same
  unit as an extension of its corporate outreach.
  This is also outlined in the FDD, and franchisees
  should be aware of the royalties and costs of
  being connected with a franchised organisation
  (and what it means to navigate them). Some
  franchisees will be able to run on a much more
  individual basis than others, and the support and
  associated royalties for a franchise unit might
  be an excellent spot to notice these
  characteristics.

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Examine Your Expansion Options

• How much can I make? is an easy question to
  ask. First, however, the question must be phrased
  correctly. Before going to the money question,
  inquire about how existing franchisees deal with
  their competitors, how long it took them to break
  even, and how they conducted their due diligence.
  If you ask too soon in the conversation or with
  the incorrect tone, you risk hurting the
  franchiseeand losing your chance for vital brand
  insight.

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Make A Strategy

• Your franchise purchasing strategy should contain
  contingencies that you may not have anticipated.
  What if the territory you want isnt available?
  What if youre having trouble finding the correct
  financing? Inquire with franchisors about
  available assistance and possible mutually
  beneficial compromises.

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Get to Know Your Reputation

• Any potential concerns with a franchise brand,
  such as units closing. This study can direct a
  potential investor away from one brand and toward
  another, and it does not necessitate digging down
  some potentially difficult-to-find leads. Working
  with brands that have a solid explanation for
  these characteristics is preferable, and
  acknowledging any potential non-disclosure or
  non-compete details up front is only the first
  step toward becoming acquainted with a reputable
  or less-than-reputable brand.

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Examine Any Lawsuits

• Legal reports are available to trace down where a
  franchise brand may have met some difficulties in
  case any major legal action is taken. A good
  brand to buy in is one with a good legal
  reputation, but its also worth checking to see
  if the wheels havent entirely come off for a
  previous franchise owner. If a lawsuit is
  significant, it will almost certainly be well
  publicised, and it should be easy to avoid with
  minimal online research.

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Other Options to Consider

• Finally, even if you have your heart set on a
  specific franchise, you should think about other
  options. You may discover that another
  opportunity appeals to you more, or that the
  perks offered by your chosen franchisor are not
  quite as extensive as those offered by other
  franchisees.

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Consult With Professionals

• Remember that there are no shortcuts the more
  thorough your due research, the fewer surprises
  youll encounter later.
• If youre not satisfied with what you learn
  during the due diligence process, you can either
  spend additional time researching the franchise
  or just not acquire it.
• Contact the franchising lawyers for a
  consultation if you have any questions regarding
  doing franchise due diligence.