Some would-be franchisees are so caught up in the romance of joining a particular brand that they skimp on their homework, or due diligence. 

“That could mean they go into the business with a naive or unrealistic expectation of what life will be like as a franchisee,” says Greg Nathan, founder of the Franchise Relationships Institute.

Is franchising right for you?

The first question to ask is whether franchising is right for you. If you’re bored with your job or fancy being your own boss, a franchise can sound like a great idea. It doesn’t work for everyone. Start with finding out everything there is to know about franchising, how it works and what it means to be a franchisee. The Franchise Code of Conduct is essential reading – it explains all of the general obligations that govern you and your franchisor. 

Researching the brand

When you’re ready to think about the kind of franchise you’d like to buy, due diligence will become more targeted. These are key things to consider.

• Culture, values and style of working Are they aligned with your own? Will you be proud to be part of this brand?
• Demand However successful the franchise, you need to confirm there’s strong demand for the product in your specific location. 
• Support Will you receive adequate training and ongoing support?
• Sales and trading Unless you’re purchasing a greenfield franchise you should have access to reports detailing things like customer footfall, income and costs.
• Brand details This includes business systems, how the business model operates and use of intellectual property.
• Leasing arrangements Who holds the lease now and who will hold it when you take over? How much time is remaining on the lease and does this match the term of the franchise agreement?
• Reputation A Google search will uncover customer reviews and media reports. Remember, though, that dissatisfied people tend to be more vocal. 

David Lindsay, chief executive officer at BDC Partners, believes due diligence begins with the recruitment process itself.

“Ask yourself whether the franchisor is working hard to identify franchisees who are a good fit and have what it takes to make success of the business,” he says. “If they’re looking for little more than a heartbeat and a cheque book, go elsewhere.”

Where to find information

The ACCC is the national regulator of consumer and competition laws, including the Franchising Code of Conduct. The Franchise Council of Australia (FCA) is the peak business organisation representing a compliant, sustainable and profitable franchise sector. Both provide a wealth of information designed to help potential franchisees make good decisions about a future business venture.

You will need to discuss financials with a specialist franchise accountant and, as the final step in your due diligence, have a franchise lawyer review your franchise agreement and disclosure document.  

“It can also be very useful to get advice from an experienced business adviser or coach,” Nathan says. “They can help you work through the numbers and show you how you can reach break-even as quickly as possible.” 

RED FLAG MOMENT

Don’t rely on information provided by your franchisor. Skimping on your own thorough and independent research could be an expensive mistake.