The key things you should find out before a franchise purchase
Whilst due diligence might not seem to be the most exciting part of investing in a franchise, it is a necessary function to avoid a potentially very expensive mistake! I’ve laid out a few key areas you should explore below.
Ask the franchisees
I regularly speak to prospective franchisees about what to look for when investing in a franchise, and perhaps the most important piece of due diligence work that you can do is to talk to existing franchisees. There’s nothing like hearing the experiences of someone who is in a similar situation to the one you may be about to put yourself into. They’ll have been in the same position once, and should be able to give you a realistic, clear picture of what you’re taking on and answer any queries you may have.
Any franchisor worth their salt should provide you with a full list of franchisees to contact. Make sure the list isn’t just of the happy ones, either! It’s worth asking the franchisor to see if there are any franchisees that they would particularly recommend that you speak to, as there may be franchisees who have similar experience levels as you, or are operating under similar conditions.
Be sure to ask the franchisees that you speak to whether they are happy with the network, what’s good and not so good, and – the big one - ask them if they would recommend that you join the network. Explore their answers with them, then weigh this up against yourself and your own expectations.
Ask the franchisor
You should also ask questions and do your research into the franchisor. Find out how long they’ve been in business, how long it has been a franchise, and how the franchise operates. How do they monitor franchisees? What’s their franchisee churn? Do they require any other monthly contribution obligations such as a central marketing fund on top of the management service fee? Are they a member of the British Franchise Association? If not, why not?
Support offered is another key area to explore – ask how they provide the operations manual, and whether it has been prepared by them or a professional. Is there training available, and is there a fee for this? How often should you expect contact from head office or managers? Many franchises have a conference or regional forums – find out how often these happen, if at all, and whether there is a cost involved.
Ask them about any existing relationships or preferential treatment, such as compulsory requirements to use specific suppliers or arrangements with banks. It’s also important to be upfront in your questioning about other franchisees and their successes or failures – understand why these happened, and corroborate this when you talk to current franchisees.
Any franchisor worth your investment should be clear that their franchise proposition is of value to you, and is structured with an appropriate financial and operational structure to ensure a true win-win partnership. While they should be open to discussion, be aware of too many negotiations. Offering to reduce your initial investment, or perhaps waiving whatever clauses you want within the franchise agreement might seem like a victory on your part in the short term, but beware that it could actually point towards a weak franchisor and/or a weak franchise system.
Also make sure you look towards the future, and enquire about growing the franchise further down the line, perhaps with the purchase of additional territories. What if you want to sell the franchise – are there any restrictions?
Ask the others
See if you can speak to people who have experience with the franchise both inside and outside the franchise industry. You probably won’t get any specifics, but even a general feel can be very useful. Desk research is also highly valuable – though remember that most reviews posted online are either negative or fake! It’s rare that the happy purchasers of any service or product proactively take to reviewing their experience online. This contrasts to those with problems (or competitors), who are more than happy to share their experiences, real or fake.