When you invest in a franchise, you’re not just investing your money – you’re also investing your time, passion, and hard work. With the amount of resources, financial and otherwise, that you will devote to your franchise venture, you’ll want to have a full picture of the franchise opportunity before you sign on the dotted line. This is where due diligence comes in.
What is franchise due diligence?
“Proper due diligence occurs when a prospective franchisee investigates and evaluates a franchise opportunity, looking at everything from the total cost to the training programs offered to how well he or she fits with the corporate culture of the company,” says Lorraine McLachlan, President and CEO of the Canadian Franchise Association (CFA). “It’s essential that prospective franchisees ensure that the franchise is a good fit for them before making a commitment. A comprehensive investigation and evaluation is an important first step towards franchise success and fulfilment.”
What does a proper due diligence process include?
A thorough due diligence process should begin with the prospective franchisee taking a look inward at themselves. Consider the franchise business model: consistency is key, so you’ll have to follow the system to the letter. Would you thrive in that kind of environment? Think about your lifestyle, family, work preferences, financial situation, skills, experience, and passions. Defining your own requirements in this way will help as you explore the multitude of franchise opportunities available to you. Once you have done these preliminary investigations and identified a franchise system that seems like a good fit for your skills, experience, interests, financial capacity, and lifestyle, it’s time to go even more in-depth.
From here, the franchise due diligence process may include:
- Exploring the opportunities available to you
- Researching the franchise system thoroughly (request information from franchise opportunities and review them carefully)
- Submitting a completed franchisee application form to the system in which you are interested
- Initial meetings/interviews with franchise system representatives
- Receiving and reviewing a franchise disclosure document
- Consulting with professionals with expertise in franchising, such as a lawyer, accountant and banker
It is in the best interest of the potential franchisee to conduct research, ask questions, and seek explanation and clarification at every stage of the franchise investment process. The franchisor will likely be interviewing you and will want to see that you have been making your own enquiries and are being proactive about finding out as much as you can from a range of sources. Outside of the franchisor, there are many valuable sources of information available to franchisees during the due diligence process, including franchise accountants, consultants, and lawyers.
Examining the franchise opportunity from every angle during a proper due diligence process, including reviewing documentation, conducting meetings and interviews, and participating in hands-on learning, will help prospective franchisees go into their franchise business with as much essential information as possible. Becoming a successful franchisee starts with the upfront work of due diligence. You owe it to yourself and your future to make that part of your investment.