Franchise Due Diligence

The Franchise Due Diligence phase has one goal – for you to validate the franchise opportunity against your personal circumstances, while the franchisor validates you as a potential franchisee for them.

This stage of the Franchise Discovery Process is where things are getting a little more serious.

Due Diligence is where you deep dive into the nuts and bolts of a franchise opportunity. The purpose of it is to bring this opportunity down to the ground and see how it could potentially work in your scenario.

It involves:

  • Creating a business plan.
  • Mapping your territory.
  • Speaking with existing franchisees to validate the concept.
  • Contacting lenders to raise finance (if required).
  • Forecasting your numbers.
  • Establishing a limited company (or whatever legal structure you choose).
  • Check out office space (if required).
  • Thoroughly investigate the market and the model.
  • Assess local competition.
  • Look at and validate exit strategies.
  • And much more.

It’s putting a plan in place and gathering the necessary resources for you to be able to take this franchise and bring it to life as your own business. It’s a very exciting stage that takes at least four to six weeks to complete.

One of the first steps in the franchise Due Diligence process is to create your business plan. Very often, the franchisor will provide you with a business plan template that’s specifically for that business. It’s a business plan that’s been tailored and refined over the course of the franchise, with many franchisees who have come before you using it.

From your perspective it’s simply a ‘fill in the blank’ scenario that allows you to create a realistic business plan in a much shorter period than would normally be the case (the benefits of franchising start to creep in).

As part of the business planning process you will be provided with a financial forecast that you use to figure out your costs for running the business and your projected sales. It’s important to validate your numbers with the franchisor, who will have a good understanding on what will be realistic for your first years in business.

During this process you will sit down with the franchisor and map your territory. Your territory is the area in which you will operate and will normally be defined by postal codes. The franchisor will make sure that you have a big enough market to build support building a strong business, without giving you so much market that you can’t truly develop it. All of this information will go into your business plan.

A key part of the Due Diligence phase is speaking with existing franchisees. The franchisor will provide you with a list of names and numbers of existing franchisees who you can contact and ask questions.

Some franchisees will even invite you to attend their premises or meet up, so they can answer your questions personally. Remember, a successful franchisee will be an advocate for their brand and will want to make sure that the franchisor is taking on quality people (hint: you’re being screened the same as you’re screening them).

One of the best things about speaking with existing franchisees is that you get to hear their stories and experiences. The franchisor may say it takes six months to break even, but if three out of four existing franchisees you spoke to took nine months, then you have a great piece of feedback to validate the numbers in your financial forecast. It’s not that the franchisor is lying – they’re just being optimistic of how quickly franchisees are hitting that target (many times it comes from franchisees not following the system properly).

As a rule of thumb, you will want to speak with at least three franchisees (at the very minimum) and ideally aim for four to six conversations. You will also want to make sure that you speak with the franchisees in your local area, the ones whose territory will back onto yours. While you don’t have to best friends with neighbouring franchisees, it helps to know that they will be communicative, and cooperative should a situation arise.

Once you have created the business plan (or during the process) you will want to go through it with the franchisor so that they can give you their input and advice. Remember, they want you to be successful and one of the ways of doing that is making sure you get off to a good start with a reasonable plan in hand. They will go through the numbers, talk through your sales and marketing strategy and in general make sure that the plan is good to go.

If you are requiring finance then it’s at this stage that you will begin to speak with lenders, if you haven’t done so already. Many of the banks have specialist franchise teams within them who are actively involved in the franchise industry. They have a good measure on who the reputable franchisors are and a shortlist of franchise brands who they will loan too. You can also find specialist lenders that will deal directly with finance for franchises.   

One of the wonderful things about franchising is that it’s well regarded by banks and lenders, so much so, that they will often lend up to seventy percent of the franchise fee and the working capital you need to get started.

The reason they will do this is because they have seen the franchise work many times before with other franchisees and they will have a good measure on the credibility of the franchisor. The process can take anywhere from two weeks to six weeks and will require you to submit a formal business plan and forecast. Once approved they will release the money into your bank account within a matter of days.

As you can see there is a lot involved with franchise Due Diligence, with a lot of moving parts. One of the key processes that you will go through, alongside all of the above,  is reviewing a copy of your franchise agreement. This is a crucial step, that we will look at in more detail.

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