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How Do You Do Due Diligence on a Franchise?

Performing due diligence on a franchise opportunity includes looking over the Franchise Disclosure Document, talking to advisors, meeting the leadership team, seeking franchisee validation and more.

Before signing on the dotted line with a franchise, it is imperative to do the proper due diligence, which means conducting the research required to get a full understanding of the brand and the franchise requirements.

The first step should be carefully reading the franchise agreement in its entirety to ensure you know what you would be getting into. Assessing the initial investment and financial obligations and comparing those to your personal financial liability and resources is also an integral part of the due diligence process. 

In terms of reading the FDD, it’s important to review and understand the unit economics of the franchise — Item 19. Also, make sure to really dig into the costs that will be associated with joining the brand — Item 7. Check out data relating to franchise growth in Item 20 to gauge the scalability of the business, and ask questions if there is any litigation listed in Item 3 of the FDD.

Next, speak to at least 10 established franchisees for validation — franchisors might have a list of recommended franchisees to speak to, but break out of the habit of only contacting these individuals to ensure you get the real scoop.

If possible, meet the leadership team and learn about the company’s vision and business philosophy. Whether it is during a discovery day or separate phone call, try to find out where the brand and industry are going and how they plan on staying relevant. You also want to look for a brand that has the capital to continue supporting the franchise system, and reading the footnotes of the company’s audited financial statement is where you will get that insight.

Throughout all of these steps, especially when it comes to reviewing complex documents like the FDD and franchise agreement, make sure to seek out the help of a qualified franchise broker or franchise attorney. When contemplating buying into a franchise system, franchise professionals can be an essential resource as they are experts in the industry and know the ins and outs of evaluating a franchise.