There have been a lot of discussions lately regarding the importance of doing due diligence, but as a first-time franchisee, you may be asking yourself, What does it really mean?
Aside from buying a home, starting a business often proves to be the most expensive investment any Australian can make, and franchise opportunities are no different.
Recent submissions to the legislature in the Franchising Code of Conduct investigation have put the proper skills or understanding of key contracts under the microscope.
Regardless of how successful the franchise is, how many stores they have, or your personal connection to the brand, potential franchisees should know what they are doing before they decide to enter into a franchise agreement.
Inside the due diligence on a franchise business has put together this quick guide to ensure first-time franchisees are asking the right questions and looking for the right answers.
In the early stages of the franchise journey, it is important to take stock of your goals, experience, and expectations.
Review your reasons for wanting to own a business, lifestyle, and financial considerations for owning and operating a business as well as your understanding of the relationship between franchisor and franchisee.
Not-for-profit organizations like franchiseed were founded to help Franchisees gain independent knowledge and research about franchise best practices, including a range of training programs to help with implementation.
While there is a policy required to be published under the Franchising Code of Conduct, franchisors are not required to ensure that Franchisees actually perform due diligence, so it is important that franchisees take responsibility.
The regulatory body, the Australian Competition and Consumer Commission (ACCC) has also funded an online pre-entry franchise education program led by Griffith University, providing potential franchisees with a detailed assessment of whether franchising is right for them.
The most important source of information on any franchise system is the existing franchisees.
People in the system currently live the life of a franchisee and can help explain to potential franchisees the day-to-day operations and reality of the opportunity.
When considering a franchise business, take the time to visit and talk to several current franchisees and ask them about their experiences in dealing with the franchisor and any unexpected operational issues.
Some important points to discuss with current franchisees include;
- Effectiveness of franchisor’s ongoing support services,
- How did the franchisor assist with initial installation, construction and design, site selection and financing?
- Franchise programs are real marketing. (In general, this is an area of many likes and dislikes, so be sure to analyze the complaints carefully, especially if there are similarities across all areas),
- Purchasing power, does the franchisor use the combined purchasing power of the entire system to obtain discounts on supplies and inventory beyond what an independent operator can obtain? Ask for specific examples, both good and bad,
- Investment. Use existing franchisee discussions to narrow down a reasonable and conservative estimate of how much money the franchise will need.
- While talking in detail about the salaries and investment costs that may seem overwhelming at first, it is important to remember that all existing franchisees were potential franchisees at one point or another.
Assess Network Growth
The report will provide an insight into the number of users each year, however, be sure to ask the franchisor to provide some historical information.
The franchise network shows a steady growth that offers a good opportunity, although one important indicator of the business may be the rate of termination.
A high rate of termination may be an indication that while the franchise has a strong acquisition strategy and plan, the business may not be sustainable.
Visit Franchise Lawyer
Often, the convenience test finds potential franchisees seeking advice from a local attorney, however, it is important that when doing business, Franchisees consult a franchise attorney.
This provides an understanding of the legal obligations, as well as any risks or power imbalances identified from the documents governing the franchise relationship.
For example, a franchise due diligence can determine any compensation and security offered, in addition to existing risks, even after the original franchise relationship has ended.
Prepare a Business Plan
Check the release document and check the franchise fee and the franchisor’s contribution, both fixed and ongoing.
Make sure to run the numbers thoroughly through accountancy software or submit the information to a franchise accountant to see if the opportunity is profitable going forward.
Take your time
Just like buying a home, there is no expiration date on a business opportunity. Throughout the due diligence process, continue to ask questions, search online, consult advisors and connect with the brand.
One of the best ways to understand a franchise business is through the eyes of a customer, so visit a number of stores in multiple locations and learn how the business works and systems.
Remember that franchise relationship are long-term contracts, which usually range from five to ten years.
Although it may seem daunting, by doing the proper due diligence before buying a franchise, potential franchisees can save themselves a fortune in time and money when things go sour.