Franchisee Due Diligence

Just as you wouldn’t buy a house without a building report, you shouldn’t enter a franchise agreement without due diligence. Like with a house, you want a brand with a solid foundation, proper support, and no hidden problems after you sign the contract. Conducting thorough due diligence is crucial. It uncovers potential risks and ensures you understand the business model and the terms of the franchise agreement. By checking the franchise network’s financial health, success, and franchisee satisfaction, you can make informed decisions. By gaining a deep understanding of the franchise agreement, you enter into the transaction informed and protected. Due diligence protects your investment and sets up long-term success. Here are some practical steps to take.

Talk to Existing Franchisees

The disclosure document lists all current franchisees. Use this to your advantage. Call as many franchisees as possible, not just the ones recommended by the franchisor. Have a list of questions ready. Ask if they are financially successful, if they feel supported by the franchisor, and if they would recommend the network to friends and family.

Talk to Former Franchisees

The disclosure document also lists former franchisees, including those who were terminated or didn’t renew. Contact them too. Find out why they left and if they have any warnings about the franchise network.

Run the Numbers

Do thorough cash flow forecasting and modelling using financial information from the franchisor, including item 14 of the disclosure document. Ensure the franchise model is financially viable. Test different scenarios, including increase in cost base, slower than expected customer acquisition, and increased staffing costs to ensure the business will be able to survive in a range of circumstances. A specialist franchise accountant can help with this.

Talk to the People in Charge

The success of a franchise depends on the experience of those in charge. Talk to them. Investigate their business background. Ask them, have they run a franchise network before? Have they grown the brand steadily? Are they committed to this network with no plans to move on? Do they invest in their leadership team? Clarify who will be available to answer your questions and support you during the early stages.  The people in charge should be ready, willing and able to answer all of these questions. 

Evaluate Brand Presence and Goodwill

Of course, you want a brand that is well-liked and in demand. Check reviews online. Look at sales data for the network. Ask friends and family what they think of the brand. Importantly, make sure this is a brand you believe in, and would want to be a customer of. 

Be Informed and Advised

Get specialist legal, business, and accounting advice. Understand your legal obligations, rights, and potential risks. Professional advice ensures you enter the franchise informed and aware. A franchise lawyer, for example, will undertake a franchise review to identify any terms that are not market standard, illegal, or ambiguous. Often, franchisees enter into franchise agreement unaware of their legal obligations, their legal rights (including those in the franchising code), and even their potential personal liability. Professional advice in the form a franchise review undertaken by a franchise lawyer will address all of these matters. Importantly,  before you engage professional advisors, read the documents and have a list of questions ready. 

Key Takeaways:

  1. Talk to Existing and Former Franchisees – Get insights on financial success, support from the franchisor, and reasons for leaving the network.
  2. Run the Numbers – Conduct thorough cash flow forecasting and modelling using financial information from the franchisor, and consult a specialist franchise accountant.
  3. Assess the Leadership – Investigate the business experience and track record of the people running the franchise to ensure they have successfully operated and grown franchise networks.
  4. Evaluate Brand Presence and Goodwill – Research the brand’s public perception, reviews, and sales data to ensure it is well-liked and in demand.
  5. Obtain Professional Advice – Seek specialist legal, business, and accounting advice to fully understand your legal obligations, rights, and potential risks before committing to the franchise.


Disclaimer: This article contains general information only and does not constitute legal advice. Magnolia Legal disclaims any liability arising from reliance on this article. Our terms of use apply