How to Choose the Right Franchise: A Guide to Smart Due Diligence

A new year often brings new resolutions. For many, the goal is to finally become their own boss. That’s why the start of the year is a boom time for franchise enquiries and acquisitions. If you’re considering a franchise, it’s crucial to carefully evaluate the opportunity. This isn’t just about checking boxes; it’s about ensuring that the partnership is a good fit for both parties.

Due diligence is a two-way street. Both the franchisor and franchisee should feel comfortable with the arrangement, align well, and communicate openly. But how can a prospective franchisee conduct thorough due diligence on a franchisor?

Here are our top tips.

1. Run the Numbers

Start by diving into the financials. Item 14 of the Disclosure Document contains extensive details about expenses and fees. Use this section to understand the ongoing costs associated with the franchise.

Financial forecasts are another key component. Prospective franchisees should engage an accountant to analyze these figures. The goal? Ensure the franchise has a realistic chance of breaking even within a reasonable timeframe. Beyond that, confirm that the business has the potential for long-term profitability and growth. If the numbers don’t add up, it’s time to reconsider.

2. Talk to Existing Franchisees

No one knows a franchisor better than the people already in the system. Current franchisees rely on the franchisor for their business’s success. Reach out to them and ask the hard questions.

Luckily, the Disclosure Document lists their contact information. Use it to your advantage. Ask about their experiences, challenges, and opinions on the franchisor’s support. These conversations are invaluable. For guidance, check out our earlier article on must-ask questions for franchisees.

3. Understand the Franchisor’s Future Plans

The franchisor’s vision for the future matters. Are they focused on the quality of their network or just adding more locations at any cost? A franchisor with no clear plan for improving the franchise system could be a red flag.

Ask about plans for marketing, training, and system-wide updates. A franchisor invested in continuous improvement signals a better long-term opportunity.

4. Check Termination and Closure Rates

High termination or closure rates within the franchise network are concerning. They might indicate poor franchisor support, unrealistic expectations, or market challenges.

Thankfully, these statistics are available in the Disclosure Document. Pay close attention to them. If the numbers seem unusually high, dig deeper to find out why.

5. Ask Questions

Don’t hesitate to engage directly with the franchisor. Talk to the people in charge. Ask about their values, goals, and approach to franchisee support.

Assess their responsiveness and willingness to answer questions. Poor communication during the due diligence stage may foreshadow issues later. A franchisor who is approachable and transparent is far more likely to provide good support once you’re in the system.

6. Look Into Market Perception

A brand’s reputation can make or break your business. If the franchise has consistently poor reviews or a tarnished public image, it could spell disaster for your investment.

Similarly, check for recent negative publicity. While no business is perfect, persistent bad press or unresolved issues may be a sign of trouble. Take the time to research the brand’s standing in the market.

7. Understand the Legalities

Franchise agreements are lengthy and complex for a reason. They govern everything about your relationship with the franchisor. This makes legal advice non-negotiable.

A franchise lawyer can identify any pitfalls or overly restrictive clauses in the agreement. They’ll help you understand your rights, obligations, and potential risks. Spending money on legal advice upfront can save you from costly mistakes later.

Final Thoughts

Buying into a franchise is a significant decision. It’s not just about finding a business you like—it’s about entering a partnership that sets you up for success.

Run the numbers. Talk to people in the system. Understand the franchisor’s plans and reputation. Ask the hard questions. Finally, lean on professional advice, especially when it comes to the legal aspects.

With thorough due diligence, you can enter the franchise system confidently, knowing you’ve done everything possible to choose the right opportunity.

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