Due diligence is defined as an investigation of a company to determine operational or financial information. This process is designed to provide information to make decisions about the potential franchise and determine if it is a good “fit” in a market.
If the potential franchise buyer is a group of investors, these investors must be kept informed regarding all aspects of the transaction and marketing potential needs to be investigated to ensure that stockholders do not lose money on their investment.
Most franchises have business models that have been developed and tested from the parent company. Yet, there are many details that still need attention. You do need to make sure you have done your research of the franchise organization, the product or service, what the market area is, and understand the contract and franchisor support.
- When you have determined what franchise you want to purchase, research the track records of the company. Make sure the principles have industry expertise and will answer questions readily. Read and study accounting breakdowns to make sure your franchise is valued by the target market and actually makes money.
- You also need to know that you have exclusive rights to the territory you are considering. Check out similar franchises and determine why they are successful. Make sure no other similar franchise is located in the area.
- The contract needs to include fees and royalties. There should also be renewal, termination and transfer charges if you decide to liquidate or “give” back the franchise. The parent company should be able to give store layout and lease negotiation support. Make sure the promotional fee is geared toward marketing and based on a percentage of profits or sales.
- Check out the business relationship of the parent company and other franchises. Determine how the company treats vendors, partners and suppliers. This is a good indication of how investors will be treated.
- Determine reputation. A good company reputation will generally insure a good franchise reputation. If there are too many complaints about a parent company, leasing or purchasing a franchise from them might not be a sound investment opportunity.
In addition to finances, reputation, contract, market and relationships, you will also need to consider communications. It is due diligence to ensure that there are open lines of communication in regards to policies, changes, supply and demand. If you are unable to communicate fears, negative happenings as well as celebratory events with the parent company, you may want to reconsider your franchise purchase.
Seek legal counsel as well. You want to do your own due diligence by hiring a professional to look over all franchise documentation, rules, regulations and so on to make sure the opportunity is a good and legal “fit” for you as a business model, too.