Franchise Due Diligence

Written on the 15 August 2011 by Bywaters Timms

FRANCHISEE DUE DILIGENCE

WHO AND WHAT TO ASK BEFORE SIGNING

INTRODUCTION

Buying any business including a franchised business is an important step. The wrong decision can affect your bank balance, your health and your marriage/relationships.

It is not something to be rushed. At Bywaters Timms we have advised hundreds of prospective franchisees on the terms of the Agreements and guided them through the process of acquiring their first or their second, third or even more franchised businesses.

We have prepared a list of some of the issues that need to be considered before entering into a Franchise Agreement.

Because of the importance of the decision don't rush. Ask the right questions and ask a lot of questions. Until you are really happy, don't sign anything.

WHAT IS A FRANCHISE

Franchising in itself is not a business. It is a system of doing business. The Franchisor has a proven system for success and has opted to duplicate that system by franchising.

It is not a guarantee for success. The franchisee must still:

work hard in the business
follow the system
not expect the franchisor to do everything
recognise your own abilities and deficiencies
and finally work hard

ARE YOU CUT OUT TO RUN A BUSINESS

Answer these questions honestly:

Do I understand franchising and what is involved/
Do I have enough capital to start a business and survive till it is established?
Can I survive the losses while I am building the business?
Will I be able to handle the staff?
Do I want to work that hard?
Do I have my family/friends support?
Am I prepared to put my assets at risk?
Can I raise the finance?
Will I resent the franchisor's authority?
Can I accept the system?

If you answer no to any of these questions don't go ahead. Think about it some more.

And also ask yourself - What do I really want out of life? Why am I considering a franchised business and why a certain system in particular. Is it job satisfaction? Is it capital gain? Is it lots of money?

WHAT FRANCHISE DO I CHOOSE

There are so many good systems to pick from it can become very confusing. Investigate the system and the franchisor. More questions to ask:

What is the franchisor's business background and experience?
How did the system develop?
How long have they been franchising?
Why did they decide to franchise?
How many franchisees are there?
How many franchises have started in the last 12 months?
How many franchises have ceased in the last 12 months and why?
What is their franchisee selection criteria?
Do they have all their systems in place?
How much training is there?
What systems are there for ongoing support?
What are the fees upfront and ongoing? What do you get for the fees?
How much cash will you need?
What is their advertising program like?
What is their reputation in the marketplace?

TALK TO PEOPLE

Get advice from your solicitor, accountant or financial advisor.

Talk to franchisees existing ones and past ones. Why are they happy? Why did they leave?

Ask the bank if they will lend you the money? Does the franchisor have a bank finance scheme available?

The more investigations you make the more comfortable you will feel.

DON'T RUSH

Buying any business is a huge commitment. Don't rush the decision. Make sure that you are happy. Make sure you can see yourself in the business each day. If you can't don't buy it. Make sure you read and understand the Franchising Code Of Conduct. Seek professional advice if you are unsure of anything.

PAPERWORK

There is a lot of paper. Introductory brochures, confidentiality agreement, disclosure documents, franchise agreements, operations manuals.

What should you do with it all? READ IT! Don't rely on someone else to tell you everything. Read everything and ask questions yourself.

WARNING This article is only meant to give you a start on the questions you should ask. It does not contain all the answers. If you want more information then talk to one of our solicitors