Ultimate Franchise Due Diligence
In my last post on franchising I discussed some available franchise due diligence resources for prospective franchisees. And while I know due diligence is critical before buying a franchise, I cannot help but remember an email I received from a non-client franchisee in response to a different franchise due diligence post I wrote after the Franchise 500 issue of Entrepreneur hit the news stands:
The most difficult information to obtain and verify is franchisee profitability. The profitability of the franchisor and the franchisees is not always related. Sometimes those selling franchises make money while the franchisees do not. And it is not always due to lack of due diligence on the part of the franchisee. It may be because of inaccurate information supplied by the seller or franchise support that was promised but never delivered.
The reality is that franchisors are required to make only limited disclosures about profitability and many will make no earnings claims of any type. The number one reason listed to not buy a franchise according to Nolo is questionable profitability. So what is a prospective franchisee to do?
Franchise lawyer Richard Solomon of Houston, Texas says you should consider conducting the ulitimate due diligence by going to work for someone in that franchise business for a year. In buying your franchise you may be asked to make a substantial investment of $150,000 to $1 million. Solomon believes that even if you made minimum wage for a year you will be much better off than risking your liquidity on an investment you know a lot less about because you were in a hurry.
Risk is inherent in any business venture. You are taking a chance and a leap of faith. But actually working in a franchise business before you buy would allow you to find out whether you want to stake your life savings on the opportunity. Taking a chance with maximum information is not random chance but a calculated risk - and that could make all the difference.
*I originally wrote this post forthe Iowa business law section of IowaBiz.com.
