Due Diligence When Buying A Franchise Business

If you contemplate indulging yourself in a franchise business, you will come across the term “due diligence”.

Very few franchisees understand what due diligence entails.

When starting up a franchise business, the initial focus would be to learn as much as you can about the franchise system. This is what referred to as due diligence.

This guide will discuss the critical components of the requirement in your due diligence process to better position you for success in your franchising business.

Due Diligence When Acquiring Franchise

Due diligence is a term applied when making a voluntary analysis to determine what costs you will use, the benefits and the risks associated with the business you are ready to start. You have to exercise reasonable care before entering into a franchise business. For successful franchising, you need to see the process in two aspects:

  1. Primary due diligence: Here, you assess what risks may be associated with the franchise business.
  2. Ongoing due diligence: You periodically evaluate your relationship with the franchisor

Before you get into a franchise business, you can consider the below significant components:

  • Check the business finance:Your concern will be whether the franchisor operates the business with any financial hiccups. One major question to ask is whether they have secured their funds.

Here, you can look for their financial income statement for the last 3-5 years. These may include balance sheets, profit and loss statements, cash flow statements, sales tax etc. You also need to check whether the franchisor is in debt. It’s more likely that if they are unable to pay their debt obligations, their secured assets may be seized in the long run.

  • Speak with former or current franchisees: This is long term advice. There is great value when you speak to former or existing franchisees. These have already plunged into the business and have what it takes.

One of the biggest mistakes you can make is to ask for information from the franchisor’s sales representative; you may not get the clinical facts.

  • Cost of your initial investment:The cost will vary depending on the type of franchise industry you choose. Knowing how much you need for your investment helps you have a realistic goal on what franchise brand you want to consider. If you don’t have enough funds, you may choose to communicate with your prospective franchisor. Most franchisors offer tailored financial options explicitly designed for franchisees.  Also, you can use other financing options such as SBA loans, bank loans, etc.
  • Conduct internal inquiries on conflicts:You can conduct conflict checks with anyone you know working with the franchisor. While performing due diligence will assure you that you are destined for success, you cannot forget that disagreement may arise. In this case, you can consider having an attorney for franchise dispute handle such issues.
  • Review and verify intangible assets:You can get full access to the franchisors goodwill, patents, franchise rights, royalties, trademarks etc. To know the value of such assets, you can consider hiring an expert.
  • Negotiate the franchise agreement:With a franchise lawyer, it’s possible to engage in realistic negotiations. This way, you will protect your interest and reduce any risk exposure. These may include waivers or even negotiation of extensions.  Again, it may include royalty or fees considerations and issues of termination.

It’s worth considering that a franchise business is a long term opportunity. But how long you can do business with the franchisor will be based on the contract term. If a franchisee complies with the franchiser’s specifications or standards, the franchisor may renew such contact, but they are not obligated to do so.

Understanding franchise business is a vital task for anyone who wants to start up a franchise business. You may be concerned with the cost of due diligence. Such cost will be determined by the scope and length of the process. However, these costs should not be an overly concern, keeping in mind the risks associated with failure to perform due diligence.

Is Franchising Your Best Approach?

A franchise business is a controlled industry. You will need to deal with legal issues for the initial and any ongoing process. Experienced franchise attorneys are better suited to help franchisees with practical legal aspects.

When you perform due diligence, you will know exactly what type of franchise to buy and from who. The process helps you get a future outlook.

You will understand whether the franchise business model is in line with your plans and goals.

It’s advisable to have a franchise lawyer help you conduct a final analysis.

Even if you think you have performed due diligence correctly, you need someone who has broader experience in the business. Franchise business comes with its own intricacies that need to be sorted out by an experienced attorney.

Getting the correct information will help you make the proper steps and successes in your franchise business.


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