10 Tips for Performing Franchise Due Diligence

Franchise Disclosure Documents, market analysis, franchisee interviews and legal interpretations are just a few ways that a prospective franchisee can familiarize themselves with a prospective brand to invest in. A comprehensive understanding is a necessity when it comes to investing a lot of money, and a defined strategy can help get a franchise unit up and running successfully.

Here are 10 tips from 1851 on how to perform this essential due diligence — and ensure that a franchise is operating to its fullest potential upon opening.

Define Your Target Audience

It is a burdensome task to enter into franchising without tailoring franchise goals to a specific market. A target audience can be a wide range of people or a specified demographic, but finding a way to curate a product or service to this specified range of people can ensure that all business operations follow a similar end goal. Marketing strategy, product development and employee training can all be guided by having a set perception of the consumer in mind — saving precious time in the early stages of a franchise.

Follow an Adaptive Model

COVID-19 showed the entire world a lesson in learning how to adapt. It’s in the best interest of franchises everywhere to have certain plans in place for issues that arise, and while a backup plan isn’t an ideal scenario for a franchise startup, it’s perhaps more essential than ever. After so many business interruptions, it’s best to have at least some degree of a contingency plan in place.

Analyze the Market

A comprehensive market analysis is a necessity when it comes to a franchise performing its due diligence. Defining a target audience is perhaps just as important as knowing the markets in which a brand can be successful in, and it’s no easy task to pick up an entire franchise and move after it’s already been established. This is big news for franchises that are in a developmental stage, but even more established brands can look to gear their services toward the kind of people who see it the most.

Find the Actual Investment Costs

Initial investment figures for any brand are laid out in a Franchise Disclosure Document for all to see — and while it can be challenging to sort through page after page of disclosures, this information can be the most essential in formulating a business plan and keeping it running. Legal documentation is far more binding than simple word-of-mouth, and a thorough analysis of an FDD can ensure a franchisee and franchisor know their financial obligations.

Know What You Own

While a franchisee can look at their unit as an individualized investment, a franchisor might often look at that same unit as an extension of its corporate outreach. This is also mapped out in the FDD, and franchise owners should be readily aware of the royalties and associated fees from being related to a franchised entity (and what it means to navigate them). Some brands will allow their franchises an ability to operate on a far more individual basis than others, and the support and associated royalties for a franchise unit can be a good place to recognize these details.

Check Out the Fine Print

Analyzing every single facet of a FDD can be extremely mundane and difficult to interpret, but knowing the essential details in the document can be paramount in getting a franchise up and running. There are countless items, sections, investment figures and support strategies that exist within an FDD, and even just a committed 30 minutes can give a prospective franchisee all sorts of insights on how to operate a successful, independent business.

Envision the Future

Expansion isn’t always on the minds of all franchise brands, but continued growth is something that can ensure a brand has a continued, sustained operation. Looking ahead to where a brand can go is a huge component toward the due diligence process, as it’s important to understand how a brand is regarded and how it can continue to progress over time.

Learn About a Reputation

Potential issues about a franchise brand, like units closing, are clearly marked in an FDD. This analysis can lead a prospective investor away from a certain brand and in favor of others, and finding this information does not require tracking down some potentially hard-to-find leads. It’s best to work with brands that have a formidable explanation for these details, and acknowledging any potential non-disclosure or non-compete details up front is just the first step toward getting familiar with a reputable or not-so-reputable brand.

Look at Any Lawsuits

In the event that any serious legal action takes place, there are legal reports available to track down where a franchise brand may have encountered some troubles. An ideal brand to invest in is one with a clean legal reputation, but a worthy consideration is at least taking a look to ensure the wheels haven’t fallen completely off for a previous franchise owner. If a lawsuit is big, it will likely be publicized heavily, and it shouldn’t be hard to avoid through some online analysis.

Work With the Support You Receive

All franchisors will provide support in some manner to the franchises they oversee. The extent of support will also be covered in a FDD, but the thorough nature of this support can be best reflected through a team of existing franchise owners that work with it every day. It’s best for a franchise owner to take advantage of as much available support as possible, and while a franchise unit mission can often be to become self-sufficient, it’s important to be familiar with a team in place that is geared to keep business moving.