Due Diligence - Yes or No?

There continues to be a myth surrounding the need, or otherwise, for due diligence when acquiring a franchise. The assumption being that the franchisor has done all the required due diligence regarding site, product, service etc. and, as such, all that a potential franchisee needs to do is to walk into the franchise and commence operations. The second assumption that often goes with that, is that acquiring a franchise is a guaranteed passport to a successful and profitable business.

While the latter is certainly true in the majority of cases, there are always instances where it does not work according to plan. When a franchise does not work according to plan, then invariably the background will show that probably the franchisee was not suited to the business.

This all points to a definite need for thorough due diligence prior to pursuing a franchise opportunity, and that due diligence should not be confined to the franchise alone. A much more important aspect for a potential franchisee is to conduct due diligence on themselves. Franchising has a long and extraordinarily successful history and, as such, many potential franchisees think that they are automatically suited to become a franchisee, and the owner of a successful business.

Again, while this may be true in the majority of cases, there will always be instances where a potential franchisee’s background and outlook are not well-suited to the franchise in question. Potential franchisees need to ask themselves if they have the personal traits that will work well in a franchise environment – can they follow a system? Can they work within the disciplines that the franchise will require? Are they looking to acquire the franchise for the right reasons – for example, they are not looking to turn a hobby into a business.

Individuals that consider themselves to be extremely entrepreneurial quite often do not make the best franchisees - as an entrepreneur by their very nature tends to be a creative individual that is often seeking to ‘reinvent the wheel’ perhaps more than once. A franchise does not lend itself well to individuals that wish to reinvent and reengineer the franchise model that has probably been in existence and operating quite successfully for many years. Individuals, therefore, must understand clearly that there are a set of guidelines that they will be required to follow and, as such, this should be the starting point for their due diligence.

Once a potential franchisee has satisfied themselves that they are well-suited to a franchise environment, then it is time to commence due diligence on their chosen brand.

At the outset we asked the question, ‘Due diligence – yes or no?’.  It is appropriate to point out at this time that due diligence is not an option but a necessity, notwithstanding that a franchise is a well-proven and established business model.

Franchisors provide potential franchisees with an extraordinary amount of information regarding the business, some of which may be prescribed by local legal requirements, while other material may be designed for promotional purposes. It is important for individuals to acquire as much information and background as possible concerning the business that they are pursuing in order to move forward with a confident understanding of what is involved and what their commitment will involve.

There are numerous aspects to due diligence but, in this article, we plan to focus on two specific and important areas, namely planning and location.

Planning

Because franchisors are well-established and have a substantial track record, they are often able to provide potential franchisees with a business and marketing plan that will guide them through the start-up and establishment of their franchise. While this is a valuable document, potential franchisees should not accept it as ‘the plan’, but rather as a template for creating their own business and marketing plan. Every potential franchisee’s personal circumstances will vary and, as such, a ‘one-size-fits-all’ plan will not necessarily reflect their abilities and needs. It is, therefore, crucial that a business plan be created on an independent basis to cover the start-up phase, with particular emphasis on capital requirements. It is always important to factor into any plan a contingency for unforeseen circumstances. We certainly live in a time where unforeseen circumstances are beginning to be the norm.

From a marketing plan perspective, the best input for this will not necessarily come from the franchisor, but from existing franchisees and, as such, every effort should be made to communicate with them to acquire first-hand information and feedback as to how other individuals worked through the initial franchise start-up phase. By communicating and, where possible, even visiting with existing franchisees, it becomes possible to build a comprehensive picture of how a potential franchisee’s business would evolve. In undertaking this aspect of due diligence, it is always important to listen to the ‘negatives’ and to satisfy oneself that those concerns are isolated situations.

Location

Many franchises have a very specific territory requirement, and it is crucial to ensure that there is territory in the area where a potential franchisee wishes to operate. If this is not the case, then it is not uncommon for a franchisor to offer another territory that may not be in the immediate vicinity and, as such, the potential franchisee needs to conduct extra due diligence to ascertain if it makes economic sense to relocate to a new area to establish the franchise. That relocation could naturally have repercussions that extend well beyond just the financial aspects.

It is also not unusual that a specific territory is not immediately available and, as such, the potential franchisee is faced with a prolonged waiting period and the financial burden that that may also bring. When looking at territory it is important to understand that not all territories will yield a similar income level, notwithstanding that it is a franchise model and again fully understanding the location is crucial to the ongoing success of that business.

 

Due diligence is an absolute requirement and not an option when it comes to acquiring a franchise - potential franchisees should realize that it is not something that can be completed in a day or two.  Therefore, they should plan an appropriate time period to conduct their due diligence, as the end result is the execution of a franchise agreement that will normally extend for many, many years. Because due diligence is crucial to the start-up and ongoing success of business, a potential franchisee should also seek appropriate professional help and guidance to ensure that they fully understand the commitments that they are making and the business model that they are acquiring.

 

David Banfield has spent several decades engaged in the franchise industry, most recently as President of a multi-national brand. Currently he is working with emerging brands, providing marketing and growth guidance.

dtbanfield@gmail.com