How to Perform Due Diligence on a Brand that Doesn’t have Franchisees

Like any employer-employee relationship, the one between franchisee and franchisor should involve compromise, communication and transparency. But before sealing the deal with a franchisor, it’s important that franchisees conduct due diligence on a brand. While chatting with existing franchisees is the gateway to genuine, authentic opinions, that luxury is not always available. Here are some tips on performing due diligence on a brand that doesn’t have franchisees.

Take stock in your liability. Many franchisees do not realize that they are subject to what’s called “vicarious liability,” which is taken on by a franchisor due to the acts of a franchisee. Reviewing the circumstances and frequency against your franchisor will provide you with a crucial impression of what’s to come in this business relationship. Assessing your personal financial liability and resources is also an integral part of the due diligence process.

Assess yourself. Honestly ask yourself if you’re ready to take the plunge into franchising. Do you have the transferrable skills that will make you an asset to the company? Are you willing to pick up new skills? Being a franchisee takes time and dedication; no matter how great the brand is, your unit will fail without these traits.

Ask the franchisor. If you have no pool of franchisees to source opinions from, then contacting the franchisor is integral in the due diligence process. Asking about plans for the future, growth potential for the brand’s concept and franchisee recruitment plans are all pieces of information that you are entitled to. Remember, becoming a franchisee is as much of a financial investment for you as it is an ideological investment for the franchisor—make sure that you’re both ready to commit.

Read the FDD more than once—and ACTUALLY read it. The Franchise Disclosure Document will explain many of the tiny moving parts that make a franchise run. From learning about the financial commitment to outlines about the brand’s expenditures, these are important things to know. One section of the FDD—the Item 19—is particularly crucial.

“Review the Item 19 particularly closely,” Steve Beagleman of SMB Franchise Advisors* said. “That section provides critical details on earnings, costs and other factors that could affect your future financial performance and your earnings potential.”

Consult experts. Another crucial lifeline for prospective franchisees is franchise industry experts, from CEOs to attorneys to franchisees in similar industries. Allowing an industry professional to review your documentation and research will afford a much-needed perspective and will hopefully yield some insight. Encourage experts to play devil’s advocate and help you examine the franchise from every objective vantage point.