Franchise due diligence – What you need to know
Before you buy a franchise, you must carry out due diligence checks first. Without those checks, your franchise dream could rapidly turn into a franchise nightmare.
Your first job when choosing a franchise should be to find out how many similar businesses exist within the local area. Research this carefully. Ideally, you want to choose a franchise that meets a need that is not already fulfilled by other companies.
Breaking into an already crowded market will leave you with a mountain to climb and will make launching your new business more challenging than it needs to be.
You also need to find out what annual turnover you can expect from the franchisee and the investment you will need to get started.
Analyse the franchise opportunity
Take a close look at the franchise opportunity in full. You’ll need to consider:
- the size of the business
- the strength of the brand
- the franchisor’s experience
- the quality of training available to you and your employees
- the ongoing support that’s offered
- what makes this franchise stand out from the crowd
Once you’ve compared these factors with other competing franchise opportunities, you can be sure you are making the right decision based on the facts.
Timescales for investment recoup
You will be investing your hard-earned cash in the franchise, or taking out a loan. So, you’ll need to know how soon you are likely to make money from your investment.
To do that, you’ll need to research the following:
- franchise and royalty fees
- marketing costs
- turnover rate
- renewal terms
- territory rights
- likely time to break-even point
- does what the franchise offers justify the fees
Be sure to use all available resources to help you gain an understanding of the costs of running a franchise in your region and the local area.
Warning signs to look out for
If the franchiser is unable to answer basic questions about the franchise model or if it tries to conceal information from you, these are clear warning signs that the opportunity might not be as good as it seems.
When considering investing in a franchise business, you must carry out due diligence first. That ensures that the decision you are making is the right one. A little work researching a franchise before you sign on the dotted line could save you a lot of pain and disappointment in the future.