The Importance of Due Diligence in Franchise Selection

Jim Gormley, President, The Franchise Consulting Company Canada • June 29, 2020

What is Due Diligence?

Proper research takes time, effort, and a willingness to evaluate both the positive and negative information that you find. You want to do more than confirm your interest in the franchise. Your effort will provide you with a fair and balanced view and help you reduce the risk of making a costly mistake.

In our Choosing the Right Franchise video, we talk about a 3-step process to help you choose the franchise that is right for you!

Now we’ll explore the type of information to research and gather for Step 3: Conduct Due Diligence.

What Franchisor Information do you Research?

You can research both qualitative and quantitative information. As a franchisee, you are entering into a long-term relationship with the franchisor, so gathering both types of information is necessary.

Gathering Qualitative Information:

While financial analysis is important, qualitative analysis is also important. This information will help you to understand the type of relationship and level of support you can expect from the franchisor. This could include information such as:

Experience of the franchisor’s leadership team (including officers and directors)
Quality of training programs
Initial and ongoing support
Brand reputation and strength
Dispute resolution procedures
Allowance for second locations and qualifications (for example, some franchisors will require you to be an operator for a minimum of two years)

You can use this information to evaluate what makes one franchisor stand out from the others that you are researching.

Gathering Quantitative Information:

Some of the obvious quantitative analysis will include:

Total Investment Cost
Financial performance and projections including gross sales and net profit
Franchise fees and royalty rates

You will also want to consider:

Advertising fees
Franchisee failure rates

How Do You Gather this Research?

Your research can mean the difference between a highly successful franchisee experience and failure, so it’s important to gather as much information as possible.

1. Read the Franchise Disclosure Document (FDD):

The FDD will provide you with information like bankruptcy filings by the franchisor, legal suits involving the company and its executives, the type of training the franchisor offers its franchisees, and any hidden costs that may not seem obvious.

2. Speak to Current and Former Franchisees:

Speak to current franchisees about their experience with the franchisor; what challenges they face; what they enjoy most about the franchise; and how long it took them to become profitable.

Speak to former franchisees about why they left; what challenges they experienced; and what they would have done differently.

The more people you speak to the better, so try to speak to a minimum of 10 franchisees and from different geographic regions. By speaking to current and former franchisees, you will get a balanced view of the franchisor.

3. Visit the Franchisor’s Headquarters:

Meet with key people to see if you would be a fit with the organization and the way they do business.

4. Do Online Research:

There is a great deal of information that you can find online about franchisors. Pay attention to the type of information that you are seeing. Is it consistently positive or negative?

5. Review the Franchisor’s Financial Statements:

The financial statements are included in the franchisor’s Franchise Disclosure Document. Review the financials and seek the opinion of an accountant if you are not familiar with reading financial statements.

Conducting complete due diligence takes time and effort. If done right, you will have better outcomes, feel confident about your franchise selection decision, and pave the way to your success.

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8 Money Questions to Ask about Your Franchising Investment

By Jim Gormley, President, The Franchise Consulting Company Canada • December 17, 2020

It’s essential to know the total costs that are involved to ensure that the franchise is a good financial option for you. So, here are eight important money questions you need to ask to ensure that you make a wise financial decision.

Why Understanding Total Investment Cost is Essential

By Jim Gormley • December 16, 2020

If you’re thinking about franchising in Canada you need to really understand the costs that you will have to pay. It’s best if you know what the costs are going to be when you start to research a franchise rather than at the end. If you know what the costs are, then you can decide what you can afford and which franchises and brands you can consider. The total investment cost will vary based on the franchise segment (for example: retail; personal services; fast food; etc) and the brand that you choose within that segment. So, What is the Total Investment Cost? The total investment cost is typically shown as a range in the Franchisor’s Franchise Disclosure Document. It is the total of the Estimated Initial Investment. The range can include fees for a wide number of costs such as: Franchise Fees Real Estate or Rent Insurance Training Computer Software Furniture/Fixture/Equipment costs These are just some of the costs among many. Be sure to find out exactly what the total investment cost covers by asking the franchisor for a full breakdown of the costs. Franchisors will be able to give you an accurate picture of what you can expect to pay.

When to Engage a Franchise Lawyer

By Joseph Adler, Partner, Hoffer Adler LLP • September 23, 2020

Engaging a franchise lawyer at the right time in your franchise selection process can help you understand and work through important steps to help you make this important decision. This trusted advice and legal review can be critical to a franchisee’s long-term success.