Franchising Due Diligence

What due diligence do you need to consider when you buy a franchise?

Start with Franchise due diligence on yourself!  

A franchisor has a business system that works. But you shouldn’t just assume that it will work for you. Because all great franchise systems only work in the right hands. So the first thing to do is to take a self assessment of you!  Be sure that you have the right personal attributes to be successful, and that will depend on exactly which franchise you go for.

You will be trained, advised, and supported to a greater or lesser degree. You’ll have the physical inventory, stock and assets needed. But is your personality a match for this? Is it really?

The effort required in franchising.

Like every business hard work is essential. It is not going to be easy and there’s no guarantees. The more hours you put in the more success you are likely to have. If you are doing due diligence on a franchise that the founder is still active in, then ask them how they got it going and what hours they put in to get it established. What shortcut or hard earned lessons does the franchise give you as a result? Be sure that you are able to make the same effort as they did by finding out what is involved effort wise before you commit.

Resilience matters as much as faith that it’ll all be alright. A franchise is a proven business, your role is to replicate it. So concentrate on replicating it. You’re not there to reinvent the wheel! It wont be plain sailing. Some days you’ll need to ride the punches. Pick yourself up and go again. Make sure that you follow the franchisors blueprint exactly – and I mean exactly. Without resilience you’re unlikely to succeed in any form of self employment so when you’re deflated, dust yourself down for the next day and go again with renewed optimism. I write this from personal experience, self employment is no bed of roses.

A quitter never wins, a winner never quits. Your franchisor is evidence of this. 

Health

Effort takes good health, most of the time anyway. But if you have a bad back is a franchise that involves a lot of lifting or driving a good choice? Not meaning to state the obvious but be brutally honest with yourself. 

Work / life balance 

Are you looking to work part time? Does the business need full time? Can it be started part time? Find out how the franchise can fit in with your own personal life and commitments. If the franchise can be set up part time then accept that you won’t grow as quickly as the next franchisee who works full time. This much should be obvious to you shouldn’t it?

Why do you want a franchise anyway?

Dissatisfaction with your current role is not the best reason to buy a franchise. As a result Franchisors want to see that you actually want to be in business for yourself with the help of a franchisor.

Generally speaking Franchisors want to detect that you really want to work for yourself rather than take another job. Go on then, be brave and ask yourself – is this just escapism or do you really want to be self employed. In franchising or not.

The grass isn’t always greener, do remember that.

Due diligence on the demand for your franchise.

In the region you will be working in it is important that you take some time to ensure that there is enough demand for whatever service or product you are selling. If you are a boat polishing franchise 500 miles away from the sea you won’t have the same demand as a franchisee living in a marina will you? This should not be rocket science to you! Is your retail outlet a good match for the resident population? In short – will you have customers in the area you’re going to work in? 

Knowing & Doing

Franchisors can teach anyone the operational system with relative ease. But there is a huge difference between knowing something and doing something. Keep this in mind as you do your franchise due diligence. Are you absolutely certain that you have the ability to be successful? Assuming you are happy to work hard what actual abilities will you also need? 

As part of your due diligence on a franchise find out if there is a specific skill or experience required? For example, if it is a sales role do you possess an outgoing personality? A shrinking violet will never make a good salesperson. Experience wise, do you need to be proficient in IT? Or would you need to have financial qualifications for that accountancy franchise? Do you need care qualifications for that care franchise? Does your criminal record matter … if you have one! 

Ask the questions as part of your franchise due diligence. If you dont you’re just increasing the chances of making a mistake. Don’t assume the franchisor isn’t assuming you already know this! It’s your job to do your own due diligence and to make sure it is the right franchise for you. Make sure you’ve considered other franchise options before committing.

Financial due diligence on a franchise?

Let’s say the franchise fee is £20k plus vat, and that this particular franchise needs a van with tools in it. Be sure to understand what is included within the franchise and what you need to buy yourself as part of the franchise. Vehicles are generally your own expense, so is that on a lease with a deposit? Find out! You may well get the vat back on the franchise fee, but that may take 4 months. So is your cash flow allowing for this?

Now let’s assume that you have got a precise figure on how much it all costs to launch. You’re half way there. Now what will the first 6 months of operation cost? Will your profit cover those costs? Probably not, that’s rare in any business. Will you burn through profits whilst growing it? Maybe yes, most businesses do. Can you draw a salary at the outset? Unlikely. Have a direct conversation with your franchisor or better still speak to existing franchisees. So find out how much working capital you might need. 

Find out what the gross profit is and what the net profit is, and ask whatever number of questions you are happy with until you understand those numbers. 

If like most you need a bank loan then remember that you will need to allow for that when you are doing your sums. 

Taking references from existing franchisees.

There is no better due diligence on a franchise than speaking with existing franchisees. These people have trod the path you’re thinking of so take the time to speak to a selection of them. All good franchisors or their representatives will probably ask you to do this anyway. This is your due diligence, no one else’s so if you want to you could speak to all of them? Don’t waste your time on an idle chat though, get to the nub of it. Has it been easy? What was the hardest part? What has it really cost? Would they do it all again?

It’s most valuable to speak to the top performing franchisees. I’ll be happy to bet that they are the ones most closely following the franchisors system and working the hardest. Speak to them and get an idea of their work rate and what it is that is behind their success? Can you do what they do, and to the same standard. So do yourself a favour, and take your lessons from those who are following the system the closest. As a result you can better gauge what is required of you to do well too.

Similarly accept the fact that most franchisors have underperforming or failed franchisees. This is human nature. This doesn’t mean you’re going to fail but if you come across any people that the franchise hasn’t worked for establish where it went wrong. You’ll likely get a franchisees version and a franchisors version of events. Mostly in our experience it’s the franchisee who hasn’t followed the system closely enough or hasn’t worked hard enough. But it’s for you to satisfy yourself of why. 

In summary

Franchising is a business just like any other. It needs dedication, it needs funding, it needs skill. Your franchisor can pass on to you the know how and the value of the lessons learned. When you break it all down though, it’s down to you to check that this is a party you can contribute to.

No-ones going to do your franchise due diligence for you.