Franchising 101: The Definitive Franchise Due Diligence Checklist

Becky Martin, writer

Published at 24/11/2017, Updated on 04/05/2022 , Reading time: 6 min

Franchising 101: The Definitive Franchise Due Diligence Checklist — Photo © franchise-due-diligence.jpg

Buying a franchise is a huge decision that shouldn’t be taken lightly. How you approach the process will dictate whether your business succeeds or fails. Therefore, it’s important not to underestimate the importance of carrying out franchise due diligence before giving the go ahead. Don’t worry- we’ve got you covered. Read this article to familiarise yourself with the ultimate franchise due diligence checklist.

Be careful not to rush into your new franchise adventure- make sure that you go into it prepared. Otherwise you risk falling prey to some of the biggest franchising mistakes. These include:

Making uninformed decisions.
Not being a good fit for the franchise, for instance, not sharing core values.
Underestimating the ongoing investment.
Not spending enough time with or speaking to the franchise owner or franchisees.

Thankfully, performing thorough franchise due diligence can limit the risk of nasty surprises occurring further down the road. Without it, a franchise dream can quickly become a franchise nightmare.

To make things easier for you, we’ve put together the definitive franchise due diligence checklist, which you can follow to make sure you’re making an informed decision before investing.

Review the Finance Disclosure Document (FDD)

The franchise disclosure document is a great place to start your research. It will provide you with all you need to know about who the franchisor is and information about the business you’ll be operating.

Why is this important?

This is a crucial document because it will give you a good insight into how the franchise is run. An inaccurate or incomplete FDD speaks volumes about the business and should be factored into your decision whether to invest or not.

Make sure you have access to the franchise’s code of ethics

Under the European Code of Ethics, franchisors are expected to offer potential franchisees a copy of their Code of Ethics, alongside complete and correct written disclosure of material information about the franchise relationship.

This must be made available within reasonable time of the franchise agreement being signed, to allow the franchisee to consider the financial and legal implications of buying the franchise.

>> Read more:

What can you expect your turnover to be when you become a franchisee?

The franchise disclosure document will also detail the annual turnover that you should expect as a franchisee and the investments required to get started. Some franchisors are better at providing accurate estimates than others, so the document should be reviewed alongside your own independent research and financial calculations.

Remember Performing thorough due diligence can limit the risk of any nasty surprises occurring further down the line

Analyse the franchise opportunity in full

As well as reviewing the franchise disclosure document, you should also perform full analysis of the franchise opportunity. To make sure that it is a viable franchise opportunity worth considering you should consider the:

Size of the business
Strength of the brand
How much experience the franchisor has
The quality of the training programmes available
The on-going support that’s offered and if this suits you
What makes this franchise opportunity stand out from others you may be considering.

By comparing the above factors for competing opportunities, you can be confident that you’re making the right decision based on the facts, rather than your feelings.

Find out how soon you’ll recoup the investment

Although there are some great low cost franchise opportunities out there, you’ll still be investing a significant amount of hard earned cash. It’s likely that you will also need to take a loan to make this investment. When carrying out your franchise due diligence it’s important to make sure you’ll be able to pay back the loan without having a loss.

Therefore, you’ll need to find out the true cost of running the franchise and any continued investments you have to make, for instance for national advertising. You’’ll need to research:

Franchise and royalty fees
Marketing costs
The turnover rate
The renewal terms
Territory rights
How long it will take you to break even
Is what the franchise offers justified by the fees?

There are lots of resources available to help you understand the costs of running a business in your specific geographic and demographic area, and you should be using these to the best of your advantage.

Speak to the franchisor

The relationship that you have with the franchisor will play a key part in whether your business will succeed or not. It’s important to start building this relationship at the earliest opportunity and involving them in your research phase is a great time to do it.

Franchisors will be happy to answer any questions that you have. Recruiting well informed franchisees is in the franchisor’s best interests, as it’s more likely that you’re going to be successful if you decide to become a franchisee based on accurate information about the opportunity. You might want to start by asking the following questions:

How long have you been franchising?
Have there been any failures since you started?
How do you choose your franchisees?
Do you provide an operations manual?
Are you a member of the bfa?

For even more helpful questions, take a look at the bfa website or check out another one of our articles.

Watch out for warning signs

Bear in mind that if a franchisor is unable to answer basic questions about its franchise model or if it attempts to conceal information, it might not have the most robust or reliable systems in place. This should act as an early warning sign that this may not be the right time to invest in this franchise opportunity.

>> Read more:

Meet other franchisees

Although the franchisor will be able to answer all your franchise system related questions, only other franchisees from within the business will be able to tell you what it’s really like to be part of the brand.

Existing franchisees from within the brand may not want to share all their trade secrets with you, so we encourage speaking with former franchisees too.

When you meet with the franchisees, you should discuss the following with them:

Were you happy with the initial training you received?
Are you provided with adequate support?
When did you start to break even?
What do you get for your ongoing royalty payments?
What is it really like to work in this business?
What are your biggest challenges?
How close was your experience to the FDD?
Would you do it again?

Beware of any secrecy

A good franchisor should support your decision to want to meet with other franchisees. If they try to block you doing so, or try to cherry pick who you speak to, then proceed with caution. What do they have to hide that they’re worried you’ll find out?

Consider seeking advice before signing on the dotted line

Even with the best due diligence in the world, entering a franchise agreement without consulting a franchise solicitor isn’t a wise decision for any first-timer. Franchise documentation can be complex and difficult to understand. The franchise agreement is lengthy and full of legal jargon, which a specialist franchise solicitor can help decipher.

In the world of franchising, ignorance is definitely not bliss. When you’re investing a substantial amount of money and committing to a significant franchise term, you really need to know what you’re signing up to. Therefore, we advise seeking franchise legal advice.

Dream of success with a franchise? - don’t forget your franchise due diligence

If you follow this checklist you should be able to avoid common franchising mistakes and run your very own profitable business in whichever industry you choose! Our 'franchising 101' series answers any questions you may have about franchising, so be sure to check back to see what other helpful guidance this article series has to offer.