You’ve set your franchise selection criteria. You’ve narrowed down your choices. You’ve started talking to the franchises that look like a fit.
At this stage, you're looking to confirm that your top choice franchise is truly the right match for you. Or, you’re gathering more information so you can decide on one franchise out of a few finalists you have in mind.
This article describes the 6 essential steps to conduct your due diligence on prospective franchises.
For many candidates, a franchise’s “discovery day” is the gateway to learn all the nitty gritty details of the franchise, to meet the franchise’s representatives, and to get connected with experienced franchisees.
During a typical discovery day, you’ll meet with representatives from the franchise, including the franchise's development team, operations team, and current franchisees. You’ll attend presentations and workshops, where you’ll get an overview of the franchise and its business model, as well as information on how to start and operate a franchise location.
You’ll have a chance to ask questions and get answers from the franchise's representatives and other franchisees. In many cases, you’ll also get to tour a franchise location and see firsthand what it's like to operate a franchise.
Just as you’re scoping out the franchise, a franchise will be sizing you up as well. To put your best foot forward, I suggest you prepare answers to these typical questions:
Additionally, at least prepare a few questions to ask the franchise. As you'll remember from your earliest interviews, this is the best way to show that you’re engaged and serious.
You can save yourself a lot of time doing further research if you can manage to disqualify a franchise early on. So, feel free to ask some probing questions to gauge the business opportunity.
Be aware, franchises can be skeptical of candidates who are interested in making a lot of changes to their business model. At the same time, it’s important for you to feel confident that the business model will work for you, or that you can adapt the business model to work at the location(s) you have in mind. Be aware of this dynamic as you ask questions pertaining to any potential adaptations to the business model.
Talk to at least four franchisees. If you can, I recommend speaking with even more. It’s especially useful to seek out people who have started franchises in locations that have similar characteristics as the location you’re considering.
This will allow you to get a diverse range of perspectives and experiences from different franchisees who have operated the franchise in different locations and under different circumstances.
Here are some questions you can ask current franchisees to get a handle on what it’s like to be in their shoes.
If they’re not profitable yet, ask why. In most cases, this is a serious red flag.
Many franchisees are happy to talk about their experiences and they can provide a wealth of insights.
Before agreeing to start a new franchise location, it's important to meet with several representatives from the franchise. These may include:
After your meetings, it’s worth pausing to ask yourself: Do you feel you can work well with the people you’ve just met? Are they people you want to spend time working with?
While you won’t spend much time at franchise headquarters, you will want to have good working relationships with the people you’ve just interacted with.
Draw up a cash flow projection to see how many locations it will take to meet your financial objectives.
To prepare a cash flow projection for a franchise you're considering starting, follow these steps:
Cash flow projections are just estimates. They may not accurately reflect your actual financial performance. Don’t view them as a guarantee of future results. Instead, look at them as a tool to help you plan and make decisions.
More and more franchisors are including financial and statistical data in their disclosure documents. This has been a boon to prospective franchisees, as it’s now easier to make more accurate projections for local markets. However, not all franchisors provide this information, so you’ll sometimes need to gather data on your own.
Working with professional advisors with knowledge of franchising can definitely make this process easier and help you come up with a more accurate picture of a franchise opportunity.
Once you’ve built a cash flow model, take a moment to reflect: How does the model compare to the cash flow of your ideal business? Does it look like this business will meet your financial goals?
If yes, then proceed on to the next step.
If you’ve completed all the steps so far, then it’s time to crack open the franchise disclosure document (FDD) and start reading the fine print. This document explains the franchisor’s responsibilities to you and vice versa.
Franchises that operate in the US are required to furnish candidates with a FDD at least 14 days before they ask a candidate to sign the document or pay any money. This time gives you the opportunity to peruse the document and have a franchise attorney look over it as well.
As you read through the FDD, I recommend that you highlight or underline details related to the following key information.
I know you want to wrap up, make your move, and get going.
But a franchise agreement is a significant commitment.
Even if you don’t think it’s necessary, I strongly recommend you hire an experienced franchise attorney for a few consultations.
When hiring a franchise attorney, you should look for someone who has experience and expertise in franchise law. This includes experience with franchise disclosure documents, franchise agreements, and franchise regulations. It's also a good idea to look for an attorney who has experience worrying with franchisees in the specific type of franchise you're interested in.
I suggest asking your attorney these questions about the FDD:
The purpose of these discussions is to ensure that you understand the terms of the franchise agreement and that you’re aware of any potential risks.
Meeting with your own franchise attorney is critical to protecting your rights as a franchisee and avoiding costly mistakes. There’s a reason that franchises are required to allow at least 14 days for you to review the franchise agreement. So please, don’t ever allow your excitement or confidence in a franchise to cause you to neglect this process.
The steps we’ve discussed constitute your due diligence on a franchise.
Now that you’ve met with your attorney, how do you feel about the franchise you have in mind?
Are you feeling 90% good about it, or 100%?
If you’re not feeling quite confident, I recommend you continue looking at other options. As your franchise consultant, I’m always happy to meet with you and give personalized, free, no-obligation advice.
If you feel quite good about the franchise, and you want to move forward, then do a final check with yourself.
If the answers are yes, yes, and yes, then seize the opportunity!
You’ve found a fit. You’ve done your due diligence.
Nothing should hold you back now. It’s time to square away financing and make your investment.
This franchise is the one for you.