If you are buying into a franchised system, it will be important to ensure two things:
1. That the Franchisor is performing well;
2. That the Franchisee’s existing business (if any) is performing well, within the franchise system.
Franchisor Performance
These investigations are part of your due diligence. There is more to due diligence than having your lawyer check the contracts and your accountant check the figures. Obviously these things need to be done and it would be foolish to consider a purchase without these checks however, you, also have a role to pay.
Every Franchisor is obliged to keep a current disclosure document. That disclosure document is a very useful source of information for you. It should, if properly written tell you if the Franchisor has been terminating franchises and if franchises have been failing or disputes have been brewing. It will tell you the experience level of the Franchisor and much more. If you do not understand the disclosure document then you should get assistance. If the disclosure document is not well written this should be a warning to you.
The disclosure document should also provide you with contact details for past and present franchisees. The purpose of this is to allow you the opportunity to make contact with franchisees so that you can make enquiries in relation to how well the system works and what the Franchisor and its representatives are like. Try to read between the lines. Franchisees do not like to openly criticize the Franchisor as they sometimes fear that this may impact on their business.
You should consider the age of the franchise system, the age of the underlying business and the number of Franchisees within the system and their history. A young franchise system may have additional risk as it will not have a track record and the experience of the Franchisor will then be of particular importance. This experience should be tested rather than accepted on face value. A new franchise system may be more flexible with the arrangements that they are prepared to offer, so perhaps you can twist an arm, to get an advantage but, beware of a Franchisor who is too flexible and is prepared to make a lot of changes. This may be a sign of inexperience at best and at worst, is desperation to make a sale.
Take note of the recruitment process and how professionally it functions. A Franchisor who is prepared to take on anyone who is prepared to hand over some cash may be putting the whole system at risk and your business along with it.
Get details in relation to how the training process will work. The training process will be used by the Franchisor to assess you.
Do not underestimate the importance of personalities. You will have to work with the franchisee and its representatives. Find out who will be your direct contact within the franchise system. A franchisee who likes the Franchisor and their representatives is far more likely to succeed. So it is important to make sure that you believe that you can relate to both individuals and the culture in the Franchisor organization.
Actively ask yourself “what is the Franchisor promising to do for me”. The Franchisors obligations should go beyond renting a name. In a well run system the benefits of the system to the franchisee should be obvious – the list is not exhaustive but may include: group advertising and websites, referral of work, a respected brand, training, buying power, centralized phone number and a manual that sets out a unique systems that gives the brand its character.
In a well run system there should be annual events and opportunities for Franchisees to meet with the Franchisor and other Franchisees.
Franchisee Business Performance
Your accountant will obviously deal with issues related to business performance.
You should however also consider some additional matters. Where does the performance of the franchised business sit within the system. In any existing business the Franchisor should be able to provide this information. Does the business perform better or worse than the average franchise within the system? What can be done to improve performance? What risks are there to the continuing performance of the business? You might also ask your accountant to let you know what the benchmarks are within the industry as a whole. Does a franchisee with an average performance within the system outperform the industry average?
Ask these questions of your Franchisor and you will get a feeling for how well the Franchisor knows the industry and how well they understand their own franchise system.
