An Insider's Guide to Franchise Due Diligence
As a professional franchise consultant, I've started down the path of exploring franchise ownership myself. I consider myself very fortunate in that I am privileged to have an insider's view into the world of franchising. I would like to share with you the steps that I am taking as I research some franchise opportunities and perform the necessary due diligence.
The first step is deciding which franchise, as there are well over 3,000 concepts: some great, some good, some not so good. I am interested and convinced that I should be looking at an industry and business model that I understand, one that plays to my strengths and is well-positioned for growth. I have a strong marketing, sales, development and management background so I am looking at a franchise model that I will enjoy.
Many candidates look past what they actually like doing and focus on how much money they can or will make. Successful franchise owners generally are motivated and passionately committed to the work. The income seems to follow when the "why" is in place.
I have narrowed down my choices to a snack food concept called Doc Popcorn and a children's education concept called Young Rembrandts. Two very different business models and industries. Doc Popcorn offers the flexibility of three separate business models in "non-traditional" retail locations.
I have personally placed five candidates throughout the United States with Doc Popcorn, all of whom are doing exceptionally well. They are implementing the proven system and working very hard to build their businesses. Young Rembrandts is a company with a 20-year history and a nationally accredited art enrichment after-school program. This is a low investment of approximately 50,000 and offers some significant lifestyle advantages.
Steps in the franchise due diligence process
My due diligence consists of the following:
1. Research the industry, trends, and important companies in the space
I want to know what they do, how they do it and why. I went online to my local library (most are free resources) and looked at Reference USA, SBA, Barron's, NAIC Codes and the Thomas Registry. I am sure there are more and with the guidance of your librarian you can get an overview on the industry you're interested in.
2. Research the competition
I look at competitors as I want to understand and then ask very specific questions to the franchise development team about what makes them different. I may even begin a dialogue with them as an interested party.
3. Consult your franchise development team
I then go back to the development team to share what I have found and ask them to provide me with additional resources for my due diligence. Remember, the franchise development team is there to guide you. Showing them that you are fully engaged carries a lot of weight when they evaluate your overall candidacy. It also demonstrates their commitment to you as a potential strategic partner! If you find they are reluctant now, that's probably a "red flag."
4. Evaluate the programs the company has in place
The next steps in the due diligence process consists of evaluating the company's marketing efforts, marketing channels, where is has had success or failure? I want to look at what these programs will cost me and I want specifics. Remember what works in one market may not work in your market.
5. Review relevant paperwork
At this point, we're reviewing the franchise disclosure document and territory as well. Having seen hundreds of these documents, I am looking for pending legal issues, obligations, corporate management team experience and costs.
6. Talk to actual franchise owners
Next, I will speak directly with the franchise owners. I am interested in revenue but as importantly I am interested in their journey to franchise ownership. Respect their time and be very professional because they could be your strategic partners one day. Never ask them how much money they make, rather ask them if they are satisfied with their revenue and is it as projected?
7. Visit the corporate franchise office
There will always be some "assumptions" but if I sense all of my questions and fact-finding are lining up, I will schedule a visit to the franchise's corporate office, commonly known as a "meet the team" or discovery day. This is not a check signing day but rather where everyone is still deciding on whether this will be a good fit.
8. Lay out a roadmap
At this point, I am ready to make a decision and will tie up any and all loose ends, including my finances and taking a hard look at building my roadmap to a successful launch.
