5 Tricks for Due Diligence on a Franchise

August 26, 2015

If you’ve been exploring the waters in the world of franchising, you’ve come across the term “due diligence.” This marks the final phases of committing to purchase a franchise. 

By this point you’ve:

  • Chosen a franchise model;
  • Determined regional appeal;
  • Completed market research and analysis.

You’re convinced that this franchise is a business you want to pursue. Now you need to dig into the nitty-gritty details of this franchise to unearth any and all skeletons in the closet. No matter how passionate you are about a specific franchise, you need to ensure the investment makes sense for you and your area. 

1) Interview Current Franchisees

The parent organization or business broker will put the franchise’s best foot forward when selling you on the model. You need someone from the inside to give you the true story.

Talk to current franchisees. Not just one, but multiple. Interview franchisees in various areas to see how this chain performs in different markets. See who is struggling. Find those excelling. Speaking to franchisees with boots on the ground will give you the best real picture possible of the franchise.

Here are several questions to ask:

  • Would you buy this franchise again?
  • How accurate were the initial investment projections?
  • What type of initial support or training did the franchisor provide?
  • What type of ongoing support do you receive?

2) Interview Former Franchisees

After you talk to current operators, seek out former franchisees. This can be just as, if not more, insightful as talking to current operators. Find someone who failed. Identify factors that lead to the decline. See how the parent organization helped throughout the process.

Find those who transferred to see if they strategically exited, or if it was their only stopgap from circling down the drain. Find out if they ran into opposition during the transfer. 

Things to ask them:

  • Why did they leave?
  • What do they think led to the downfall of the organization?
  • What support did the parent organization offer prior to closing?
  • What did they wish they knew prior to opening?

This process is two-fold. First, you’re gaining a more accurate picture of those who struggled. Secondly, you’re identifying similarities in their story to your situation. 

  • How does your region/market compare?
  • Do you have more or less experience than they did?

3) Spend a Day in the Business 

If you’re still committed after talking to a dozen current and former operators, the next step is to roll up your sleeves and get your hands dirty for a day in the business. While running the show will be different, this is as close as you can get to the real thing before sinking your investment into the franchise. 

Shadow a current operator to see how they navigate their day. Does this match how you want to spend your days? Do their daily tasks match what you expected? Can you imagine yourself doing this 5-7 days a week for the next several years? 

If you’re answer is yes, then you’re set to continue in the process. If it’s anything but a resounding yes, then now is the time to evaluate any hesitancies. 

4) Double Check the Initial Investment

A franchise will give you estimates on the expected hard costs needed to open shop. Double-check them. See what the real numbers are in your area. Scout out properties. Have a realtor pull numbers for you.

Purchasing a franchise is a substantial investment. You want to ensure you have the accurate numbers when making your decision.

5) Expert Evaluation

One of the last steps to closing the deal is receiving and reviewing the Franchise Disclosure Document (FDD). This comprehensive, and oftentimes intimidating, document outlines the full picture of the franchise. From the financials to the background of the franchisors to current operators and more, it covers everything about the organization. 

This isn’t an easy document to digest. It will be written in legalese. What’s more, the information will be dense.

You need an experienced franchise attorney to walk through this document with you. They’ll be able to detect any discrepancies or red flags. Personally, I always spend extra time going through franchise #20, which is the “List of Franchise Outlets to evaluate franchise health.

This gives tremendous insight into:

  • Overall financial health;
  • Highlights any indication of decline;
  • Rate of expansion;
  • Struggling franchisees. 

The FDD marks the final stages of due diligence. After reviewing it with your franchise lawyer, getting their assurance that everything is in order, the next step is signing on the dotted line. 

If you are looking for an experienced franchise lawyer to review the FDD, contact me today. As a part owner of a franchise, I bring an in-depth understanding of the franchise world to ensure you are making the best investment possible.