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Franchisee Due Diligence Checklist

 

Buying a Franchise Business involves a certain amount of risk and, in our experience, often involves more complexity than prospective franchisees realise.


Before signing a Franchise Agreement, it is best practice to obtain professional advice from an accountant and legal advisors experienced in franchise law, such as Greyson Legal | Franchising.

Below we have outlined various factors you may wish to consider:

  • Have you checked the Franchisor's background?

  • Is the Franchisor's brand well known?

  • Is the franchise system proven?

  • What are the costs involved in becoming a franchisee?

  • Are you required to enter into a premises lease/sub-lease and/or Occupancy Licence?

  • Is the Territory being granted to you exclusive?

  • Can the Franchisor compete with you online?

  • Are you restricted to buying goods or services only from Franchisor approved suppliers?

  • Will you have an option to renew once the initial Term expires?

  • Are there any restrictions on you later selling the Franchised Business?

  • What restraint of trade restrictions apply?  

  • Do you have the skills and capabilities to match the requirements needed to operate a Franchised Business?

  • Have you spoken with former or existing franchisees to get feedback on the Franchisor and franchise system?

  • Make sure you obtain obtain appropriate legal, financial and business advice

  • Do you have a business plan?

  • Have you considered what structure to use to operate your business?Typical structures include:

    • Sole proprietor

    • Partnership

    • Company

    • Trust

There are different taxation and liability advantages and disadvantages to each structure and appropriate professional advice should be obtained prior to establishing the structure.

  • Have you verified what licenses and permits you are required to obtain from government authorities in connection with the operation of the Franchise Business?

  • What checks have you made into the types and styles of marketing material (brochures, catalogues, flyers, etc) the Franchisor will provide you on start –up?

  • What are your on-going obligations to purchase marketing material from the Franchisor or can you purchase the material from third party providers?  

  • Did you check what pricing strategy will be adopted by the Franchisor in relation to the products or services

  • Are you able to set your own prices or will there be recommended prices imposed by the Franchisor?

  • Have you verified if the Franchisor requires you to purchase specific computer hardware or software as part of the business systems?

The above are just a few issues that you may need to take into account. ​Like any investment, purchasing a franchise is not a guarantee of success. Franchisees do fail for a variety of reasons, such as:

  • inadequate research of the Franchised Business, Franchisor or brand;

  • undercapitalisation at the start;

  • underestimating ongoing operating costs;

  • not understanding their rights and obligations under the Franchise Agreement;

  • mis-match between a franchisee's skillset and that needed for the franchise;

  • poor people management;

  • poor business management;

  • reluctance to follow the Franchisor's procedures;

  • mis-trust between the Franchisor and Franchisee;

  • lack of training & support by the Franchisor;

  • etc. 


Obtaining appropriate legal advice can help you to be fully informed of your legal rights and obligations and minimise the risk of making a poor investment decision.