Opening a Franchise? Due Diligence in Six Steps

Opening a Franchise? Due Diligence in Six Steps

So you have decided to invest in your future by investing in a franchise. Great choice. This is where the fun truly begins. Here are the six steps you should perform to do your due diligence before moving forward.

Step One: Ask Yourself, What Are You Passionate About?

The first step is asking yourself: what do you like? What are you passionate about? What are you good at? If you are currently working as a software engineer but are really a foodie at heart, it might make sense to get into a quick service restaurant (QSR). If you love food, a carefully chosen QSR makes complete sense and could be extremely rewarding – on both a personal and financial level. Successful franchise owners generally are motivated and passionately committed to the work and have a prior and deep-seeded passion for the type of product or industry. The financial success then seems to come naturally.

Keep in mind that there are well over 3,000 franchise concepts: some great, some good, some not so good.  That’s why it’s important to choose the one that best fits your needs, passion and interest.

Step Two: Do Your Research

Once you decide on the category that you want to be in or maybe you are comparing two very different categories, do as much homework on the category and the franchise as you can. A good jumping off point is a Google search for “Franchise Industry Trends”.  There is also a lot of information readily available on International Franchise Association, the National Restaurant Association and the Small Business Association.

Step Three: Look at the Competition

Next, look at competitors in the category. Do you see any trends in store openings or closures? Who is the best innovator? Who is doing something truly different? Who is best responding to consumer needs and trends? And, of all the brands you are researching, which one do you feel most passionate about? Your findings will make for great questions to the franchise companies that you are considering.

Do not be afraid to ask the franchise companies to provide you additional materials for your due diligence. They should know the competition as well as they know their own franchise. If they do not or are slow to provide any additional information, then you may want to take them off of the list.

Step Four: Evaluate the Franchise’s Marketing, Support & Overall Operational Systems

The next steps in the due diligence process consists of evaluating the company’s marketing, support and overall operational systems. Are the systems easy? Will it be easy to hire and run? Are there any natural barriers to entry? How comprehensive is their training program? How will they support you?  Do they invest in good tech tools to make your life easier and sales better? Remember what works in one market may not work in your market.

At this point, you should be reviewing the franchise disclosure document and territory as well. Having seen hundreds of these documents, I am always looking for pending legal issues, obligations, corporate management team experience and costs.

Step Five: Speak to Other Franchisees

It is important to speak with as many franchisees as you can. If the company does not provide any financial performance, then you will need to dig even deeper. Be respectful of franchisees’ time and keep your questions brief and to the point: are they happy with the level of support? Does it meet their financial expectations? Would they be willing to open additional locations?

Step Six: Attend a Discovery Day

Invest the time to meet the franchise’s staff face to face; this often happens at a Discovery Day hosted by the franchisor, but you should always ask for a one on one meeting. This meetings will give you a sense if the franchise is a good fit. During this visit, you can assess your rapport with the staff and management team, whether you have common goals and if your concerns are addressed without any hesitation. Last, do they have the banking connections to help you with the financing process? When all of these issues and concerns are addressed, you can confidently make a decision to join the team.