Franchisor Due Diligence


By the time you choose a franchise to buy you will no doubt have spent a lot of your time assessing the viability of the various options available to you. At this point you may have already met with the Franchisor and if not it should be high on your list of priorities before committing to apply as a Franchisee within the network.

The Franchisor makes an upfront fee for you starting to operate under their systems and trademarks but even more importantly to them will gain an ongoing profit from the revenue generated from your turnover. Therefore it is important to them to select the best possible candidate for the availability of sites that they have. This will include reviewing your application, meeting with you to determine if you suit their preferred franchisee profile and of course a review of your assets and liabilities to ensure that you can afford the initial and ongoing fees necessary to run the business. The Assets and Liability review is essential as it is important that you have the financial capacity to afford to run the business with your own funds in the initial stages before your customer base and revenue picks up. If you do not have access to these funds then you may not be able to run your business properly.

As well as the due diligence that the Franchisor performs on you it is of even more importance that you look at a review of your Franchisor. It is after all you that is making the considerable investment to be part of the Franchise. If it fails you will have lost all or part of your investment. What can you do to protect yourself? What should you look for in your chosen Franchisor?

Well firstly look at you are getting in business with. Find out how the business has been going and what plans for growth the Franchisor has for the business. Has the Franchisor conducted an extensive pilot program of their offering, which has operated under similar conditions of trade that your business will operate under?

Review the companies Disclosure Statement that will outline the details of those who own and operate the Franchise. Do they have the necessary experience to run a business of the size of the Franchise as it grows and expands?

Go online. There are many websites designed to assist potential Franchisees conduct their due diligence into a Franchise and its operators. In Australia look at www.asic.gov.au to search ACN numbers relating to the Franchise. A search of www.abr.gov.au will provide the results of an ABN number search. Your Franchisor being a member of www.franchise.org.au will ensure they comply with a code of conduct in relation to their treatment of you as a franchisee and www.accc.gov.au will list any problems the Franchisor may have run into setting up and operating their brand. This is a cursory list but should form the basis of your due diligence process.

Once you are comfortable with your research you would of course still engage a professional well versed in Franchises to further review the Franchisors Disclosure Statements and Agreements.

Research and choose wisely.