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:
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;
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.