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Franchisees typically make a substantial financial investment when they join a franchise. It is vital that you conduct due diligence and thoroughly research the opportunity before signing a franchise agreement. By doing so, you can make a well-informed decision and feel confident about your investment. Thorough research and only taking opportunities that are right for you will help to increase your chances of success as a franchisee. This article will explain six due diligence tips for prospective franchisees.
1. Read the Documents Thoroughly
The franchisor will supply you with the franchise agreement to read over before they give you the option to sign it. The franchise agreement is the legally binding contract that forms your relationship with the franchisor. Ensure that you read this thoroughly and critically. Understand what the terms mean for you and your potential business.
The franchisor may also give you a franchise operations manual detailing more information about the brand, how your franchise should operate, and quality standards.
Also, consider seeking expert legal advice about the agreements and other documents the franchisor has given you. A lawyer can also conduct due diligence, advise you on the opportunity, and negotiate terms with the franchisor on your behalf.
When reading the documents, consider factors such as:
- the size of the franchise network;
- the training package and provisions for ongoing support that will be available;
- franchise fees;
- territory rights;
- renewal terms; and
- termination terms.
2. Conduct Independent Research
Searching online is an excellent place to start when conducting your research. Information available online can be highly beneficial. For example, if the franchisor runs a limited company, you can look at their accounts on Companies House.
Information you should try to find out when conducting research includes:
- market competition;
- legal disputes the franchisor or franchise is (or has previously been) involved in;
- customer feedback;
- financial information;
- the history and reputation of the franchised brand; and
- the franchisor.
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3. Talk to Other Franchisees
If franchisees are already operating in the same network, talk to them. You should not solely rely on their opinion, but they can bring a valuable perspective. There are plenty of aspects to consider during your conversations:
- whether they think your potential business will be viable;
- the strength of their working relationship with the franchisor; and
- the success of their business.
4. Ask the Franchisor for Clarification
If there is anything you are unsure about, ask the franchisor for clarification. During this period of research, conversations, and negotiations, ensure that you are writing details down and documenting what is said.
5. Seek Professional Advice
Professional advice can benefit you in many ways. You can seek advice from business advisors, accountants, or lawyers. They can advise you on the viability of the opportunity, bring independent knowledge, and identify any potential risks. Professional advice will add a robust layer to your due diligence, allowing you to confidently begin or avoid the possible venture. Although such advice can be costly, it can be a valuable investment that mitigates the risk of future problems.
6. Think About Yourself
If you accept the opportunity, this franchise would be your business, so you want it to be an excellent fit for you. Hundreds of franchise opportunities are available at any time, and each one is different.
Consider the following factors:
- whether you a good fit for this particular opportunity;
- whether you foresee a strong working relationship with the franchisor; and
- if you are a good fit, whether you can commit your time, money, and energy to the new role.
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Key Takeaways
Reviewing a new franchise opportunity can be exciting. This potential business could be your new career. However, it is crucial that you avoid letting the excitement cloud reality. You need to ensure that you have the best chance of success. Due diligence means conducting research and taking steps to thoroughly understand the opportunity that is on offer. If you have doubts or if advisors warn against accepting the opportunity, you should take this seriously.
Several essential due diligence tips for prospective franchisees include:
- reading the documents that the franchisor gives to you with a critical eye;
- conducting your own research online;
- talking to current franchisees in the franchise network;
- asking the franchisor for clarification on details you are unsure about;
- seeking independent professional advice; and
- thinking about yourself and whether you are a good fit for this opportunity.
If you need help conducting due diligence on a franchise opportunity, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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