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.