Search results for: franchise due diligence

Franchisee lawyer Richard Solomon has a passion for spreading the word about conducting pre-investment due diligence.  His latest post on the BlueMauMau site outlines many of the pitfalls experienced by franchisees in various industries.  It also discusses the fact that a mere review of the franchise disclosure document and franchise agreement is not enough.  On that subject he says,

Every failed franchisee hired some cheap lawyer to “read the contract”.  When you add up what you are risking, you will appreciate that a few hundred dollars for an incompetent review of documents by someone who doesn’t know where else to look for what needs to be considered is really stupid. You can’t afford that approach. But it’s your money and your decision.  

I agree with Richard that due diligence is critically important.  I also agree that prospective franchisees must do more than just read the contract (i.e. Franchise Agreement and Disclosure Document).  Real due diligence will require a multi-disciplined approach.  The prospective franchisee should get a lawyer, accountant, banker, and even a marketing professional into the decision-making process.  If a specific location is key (such as retail or restaurants) you will want a commericial real estate agent also involved.

But above all, the franchisee must become engaged in the process.  Don’t rely on the professionals to do the hard work for you.  You must roll up your sleeves and investigate.  In the next post we will discuss more of the details about how conduct franchise due diligence.    

One of my franchisee clients offered a very simple question that every prospective franchisee should ask of other franchisees when conducting due diligence:

What doesn’t the franchisor do well?

He says this evoked the best responses from franchisees when he conducted his due diligence.  If you are considering a franchise be sure to talk to as many franchisees as possible.  Speaking to only a handful is not enough. 

For more information be sure to read this article on franchise due diligence resources.

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.

Are you interested in a business franchise opportunity?  It seems as though more and more Iowans are choosing franchises as an option rather than starting businesses on their own.  It is extremely to important to conduct due diligence and check out franchisors thoroughly. 

Inc.com has an excellent Guide on Buying a Franchise.  Topics covered include:

and much more.

You should also check out my podcast with Joe Cooney of Frannet which covers some basics of buying a franchise.  Joe also has a list of questions to ask franchisors.  But remember, when conducting franchise due diligence there is no substitute for digging in and working hard.  Above all, always interview as many franchisees as possible to get a better sense of how the franchisees themselves are performing.   

* I originally wrote this post for IowaBiz.com.

If you are looking at a franchise opportunity you should read this article from Barry Kurtz on Digging into Franchises:  The Due Diligence Minefield.  His proposed Legal Due Diligence Checklist within the article is a must read. 

The due diligence process is important when buying a franchise (or any business).  Kurtz’s article deals more with buying the entire franchise company but the article is helpful even if you are buying a single franchise.  I also have multiple articles addressing due diligence issues when buying a franchise including:

Joe Cooney and I have a podcast on Buying a Franchise Basics which also has some helpful hints on franchise due diligence.  Joe has some great insight so I recommend a listen. 

Business Franchise Street Sign
Business Franchise Street Sign

You’re convinced that owning a business is your true calling in life, and you decide to invest in a franchise. But before putting pen to paper, you should do your due diligence and understand all the risks and rewards that come with that decision. One essential step is to review the Franchise Disclosure Document (FDD) that outlines all the necessary information you need to know before taking the plunge. However, reviewing this document can be overwhelming, especially for first-timers, which is why it is best to have a franchise attorney help you navigate through the FDD. In this blog post, we will discuss six major benefits of having a franchise attorney review the Franchise Disclosure Document before signing on the dotted line.

Protection from Fraud
A lawyer who specializes in franchising can assist in identifying the red flags in the FDD. The lawyer can help point out inconsistencies between the FDD and what is being said or promised elsewhere in marketing materials. Having an attorney scrutinize the language of the FDD also ensures that the franchise agreement covers all the necessary clauses, and there is no room for misinterpretation of agreement provisions that could lead to fraudulent activity.

Understanding the Franchise Legal Jargon
The franchise agreement is a legal document that is full of complex legal jargon. It can be confusing to understand what each clause means, and it is easy to miss important parts of the agreement. An attorney who is skilled in franchise law can help explain the terms and conditions in simple language. The attorney can also help ensure that you understand the implications of each clause before committing to the agreement.

Negotiating Terms on Your Behalf
The FDD will often contain non-negotiable terms and conditions. However, some franchisors may allow for certain clauses to be negotiated. With the assistance of an attorney, you may be able to negotiate on clauses such as payment terms, renewal options, and territories. This could potentially save you substantial amounts of money in the long run, or secure a better territory for your franchise.

Guidance on Compliance
Federal and state laws regulate the franchising industry. Failing to comply with these laws can have catastrophic consequences on your investment. An experienced franchise attorney can assist in ensuring compliance with the regulations. The attorney can review the FDD and offer advice on mitigating risks of legal violations.

Avoiding Ambiguity
There can be instances where the FDD is ambiguous, and what is stated in the document can be interpreted in many ways,. An attorney can help clarify the ambiguities and ensure that what is being promised in the FDD or franchise agreement is clear, ensuring there is no room for misinterpretation.

Ensure Disclosure is Complete
The FDD contains essential information that you need to know before committing to a franchise. In some instances, franchisors may withhold crucial information. Occasionally you might see a FDD that does not have the required financials or other disclosures. A franchise attorney will be able to check that all the necessary disclosures have been made in the FDD so that you are well-informed about your important decision.

Conclusion

The FDD is your key to making an informed decision before committing to a franchise. Taking the time to have a franchise attorney review the FDD will make sure you are well-informed about the terms and conditions of what is often a lengthy and complex document for most people to understand. It is a small price to pay compared to the potentially significant losses that you could incur without the professional guidance of a franchise attorney. You owe that to yourself before you invest your life savings.

Notetaking
David Travis, Unsplash

Thinking about buying a franchise?

Franchises can be a great way to start your own business. They offer the benefits of being your own boss with the support and resources of a larger organization. But there are some things you need to think about before making the decision to buy a franchise including the financial stability of the franchisor, training and support, brand recognition, and location.

Financial Stability

Financial stability of the franchisor is essential when considering a franchise purchase. Before you sign a franchise agreement, it is important to understand the franchisor’s underlying financial health in order to determine the sustainability of the business model. Knowing whether a franchisor has adequate resources to confront issues and grow over time, as well as their experience in working with franchisees is key. Financial due diligence is invaluable during the selection process and must take into account profitability, cash flow, debt load, liquidity amongst other financial metrics. Purchasing a franchise with an unstable franchisor can lead to difficulties and ultimately negative consequences for your business. Financial stability should remain high on your list of criteria when you are examining prospective franchises to buy.

Training and Support

Training and support from the franchisor is essential in enabling you to succeed as a franchisee. All franchises are not created equal in this regard. You need to find a franchisor who will provide detailed training materials, guidance and resources which allow for an easy transition into running a successful brand. This training does not end after the initial purchase; it often continues with refresher training and other materials for improvement over time. Ultimately, training and support from a franchisor must provide essential advice and direction to ensure that purchasing a franchise is rewarding both financially and professionally.

Brand Recognition

A brand that is recognizable is a key to a successful franchise. Purchasing a brand that has recognition and strength in its marketplace will give you a head start compared to other businesses in the same industry. Consumers are more likely to recognize and purchase from a brand they are familiar with, generating repeat sales and brand loyalty. This is why brand recognition when purchasing a franchise is essential to ensuring your ability to succeed long-term. By investing in franchises with brand recognition, you have a better chance to provide your customers with an experience they already know and love, making it much easier for you to hit your growth targets.

Location

Another key to franchise success is location–not only location within your area, but location within specific regions of the country as well. When selecting a franchise, it is important that research is done in order to determine whether it will be successful in a given area. Understanding the nuances of buying franchises in different regions of the country can make all the difference when it comes to reaping maximum benefits from your investment. A franchise that’s popular in the southern part of the country may not make it in Iowa. Does the franchise have a track record of success in your region or similar markets? And in your local area, your location needs to be visible and accessible to potential customers, taking into account local population trends as well as competition from similar businesses.

Conclusion

You can increase your chances of success by taking the time to thoroughly research a franchisor’s financial stability, training and support, brand recognition and location. A good and well-planned franchise that aligns with these four considerations can be a wise decision for any would-be franchisee. As I always say, every franchise is not built the same. Choose wisely!

I am blogging a series of posts on the Secret Sauce of Franchise Investing based upon an excellent article I read some time ago on what private equity likes to see before investing in a franchise. In this post I am highlighting the seventh ingredient which is whether the franchise has successful franchisees.

Good franchisors want franchisees to be successful and happy. But let me tell you from experience in practicing franchising law for over 20 years, not all franchisors are created equal. There are numerous franchisors with unhappy and struggling franchisees. Do not make the mistake in investing in such a franchise. Do your due diligence and interview franchisees before you invest your hard earned savings. If franchisees tell you the franchisor does not support them, or if franchisees wouldn’t do it all over again, rule out that franchisor. Because things are not likely to be different for you.

Franchisors need to do everything they can to make sure franchisees are successful. Much like having raving customers, franchisors need raving franchisees. Often it is a good sign when a franchise has many multi-unit franchisees. This suggests that franchisees were happy and impressed enough with their investment that they wanted to open additional locations. A franchise system with successful and happy franchisees is much more likely to be primed for growth and an ability to attract other franchisees to the system.

Always check online to see if you find numerous complaints about a franchise online in Google searches or on websites such as Unhappy Franchisee. If you see lots of complaints or indications of frequent litigation, you should strongly consider investing your savings in a different option.

I recently posted on the Secret Sauce for Franchise Investing. The post features an article outlining what private equity investors like about franchises. Today, I want to touch on the first “ingredient” which is whether the franchise’s product is straight-forward and consistently replicated.

This is much harder than you may think for franchise operations to attain but it is often the difference between a successful or unsuccessful franchise. Think about McDonald’s for a second. I would argue that McDonald’s success isn’t because their burgers and fries aren’t the best tasting. In fact, I’d argue that many other places have better burgers and fries. However, the key to McDonald’s success has been that their business is straight-forward AND consistently replicated. Each and every time you walk into a McDonald’s you pretty much know what you are going to get in terms of the experience. The food tastes virtually the same, the service is virtually the same, the locations look and feel virtually the same and the price is virtually the same. There usually isn’t much difference among the various locations.

On the other hand, I am familiar with a different restaurant franchise (mostly regional) that has struggled. One of the major reasons this franchise has struggled is because it has been unable to consistently replicate its customer experience system-wide. In fact, some locations even have different recipes for the food and you are never certain how the food will taste from location to location. This causes issues not only for customers but also among the franchisees. Some franchisees are unwilling to give up their recipes for a more systematic approach because they only consider their location rather than the franchise system itself. In the end this franchise will likely never reach its true potential unless the franchisees buy into a common approach and deliver a consistent experience. There is just too much uncertainty from location to location.

The allure of franchising is that the franchisor has a proven system which will help you be successful. But know that all franchise systems are not created equal. Learn about the system and conduct your due diligence on whether the franchise system you are considering consistently replicates its offerings. It could be the difference between success and failure.

One of the things I hear over and over from distressed franchisees is that they purchased a franchise because it was a “proven business model.” Now, I don’t blame most franchisees for this thought process as they head into their franchise business purchase.  The franchise industry has done a remarkable job of marketing itself where people are preconceived to believe franchises are proven business models. Second, some franchises have been in business for a long time which naturally leads someone to believe it is a proven business model. After all, a franchise would not be in business for a long time if it were not proven, right?

Continue Reading Buying a Franchise: Is it Really a Proven Business Model?