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. 

1721588395-2794-5126-lxb_photoP1Iz3unD6Polxb_photo-
Johannes Plenio, Unsplash

Thinking of diving into the world of franchising? Hold your horses! Before you jump in, it’s essential to do your homework. Here are seven must-do steps every savvy franchisee should follow to ensure they’re making a well-informed decision.

1. Review the Franchise Disclosure Document (FDD)

The FDD is your franchising bible. It’s packed with vital information about the franchise, including the business model, financial performance, and legal obligations. Take your time to read and understand every section. Trust me, it’s a long document but you need to understand it fully.

2. Consult with a Franchise Lawyer

Navigating the legal landscape of franchising can be tricky. That’s where a franchise lawyer comes in. They’ll help you decipher the legalese in the FDD and the franchise agreement, ensuring you’re fully aware of your rights and obligations. This step is important if you want to avoid nasty surprises down the road. And please, don’t go to your divorce lawyer (or even your typical business lawyer) to review the FDD. There are many details in franchising that are much different than ordinary business transactions. A franchise lawyer will understand these differences and be able to explain what you need to know.

3. Talk to Current Franchisees

Who better to give you the lowdown on the franchise than those who are already in the trenches? Reach out to current franchisees and ask them about their experiences—the good, the bad, and the ugly. Their insights can provide invaluable information about the day-to-day realities of running the franchise.

4. Engage in In-Depth Discussions with Franchisor Executives

Getting to know the people behind the franchise is crucial. Arrange meetings with the franchisor’s executives to discuss their vision, support systems, and future plans for the brand. This will give you a sense of their commitment to the franchise’s success and their willingness to support franchisees.

5. Develop a Solid Business Plan

A well-thought-out business plan is essential for any franchisee. Outline your goals, strategies, and financial projections. This plan will not only guide you but also demonstrate to the franchisor that you’re serious and prepared for the challenge ahead.

6. Analyze the Market and Competition

Conduct a thorough market analysis to understand your target audience and the competitive landscape. Knowing your market will help you tailor your business strategies and position your franchise for success. Remember to carefully consider the geographic area. What works in one area of the country may not necessarily work in another part of the country.

7. Evaluate Your Financial Position

Franchising requires a significant investment, so it’s crucial to assess your ability to invest. Determine how much capital you have, how much you can borrow, and what your return on investment might look like. Being financially prepared will help you weather the initial startup phase and set you up for long-term success.

Embarking on a franchise journey is exciting, but it’s also a big commitment. By taking these seven steps, you’ll be well on your way to making an informed decision and setting yourself up for a thriving franchising career.

Black and red flags against a blue sky
Christer Ehrling, Unsplash

Not all franchise opportunities are worth the risk.

Franchising has become a popular path to financial independence, promising a proven business model and support from an established brand. With over 15,000 new franchise units expected to open annually, it is easy to get swept up in the excitement of becoming your own boss. However, not all franchises deliver on their promises, and the consequences of a bad investment can be devastating.

For many, buying a franchise is one of the largest financial commitments of their lives, often involving life savings or a significant loan. The stakes are high, which is why it is critical to go beyond the glossy marketing materials and dig deeper into the franchise opportunity. The success—or failure—of your investment hinges on your ability to spot red flags early and make an informed decision.

So, how do you separate the winners from the losers? It starts with understanding the red flags that could derail your franchise journey.

Why Red Flags Matter

Franchising offers undeniable benefits if done right: a recognized brand, a proven system, and ongoing support. But these advantages vary widely from one franchisor to another. While some brands prioritize franchisee success with robust systems and transparent operations, others operate with little regard for the people investing in their business.

A solid franchise system includes detailed training programs, ongoing operational and marketing support, and a collaborative relationship between franchisor and franchisee. When these elements are missing, it is a sign the franchisor may not have your best interests in mind.

Unfortunately, the shiny promise of owning a franchise often blinds buyers to the potential pitfalls. This is why it is crucial to approach every franchise opportunity with skepticism and a commitment to thorough due diligence.

Spotting the Red Flags

The Franchise Disclosure Document (FDD) is your first line of defense. This document, required by law, contains critical information about the franchisor’s business practices, financial health, and obligations to franchisees. However, the FDD can also reveal glaring red flags that are easy to miss if you do not know where to look. Franchise Wire had a good article with an expert panel that discussed these red flags and provided some helpful advice.

Jamie Davis of ApplePie Capital advises starting with FDD Item 3, which outlines the franchisor’s litigation history. Multiple lawsuits involving franchisees could signal a toxic culture or poor relationships between the franchisor and its partners. Next, focus on Item 20, which provides data on franchise openings, closures, and projected growth. A high closure rate could indicate trouble.

Another critical step is speaking with current and former franchisees. Justin Waltz of The Junkluggers highlights the importance of transparency: “Legitimate franchisors should be able to provide clear, detailed financial information to demonstrate how they generate revenue and reinvest in the business to enhance the franchise owner experience.” If a franchisor refuses to provide such information, consider it a red flag.

Other warning signs include:

  • High turnover rates: If franchisees are leaving the system in large numbers, there is likely a deeper issue with the business model or support system.
  • Unrealistic financial projections: Be wary of franchisors that promise outsized returns without providing evidence to back up their claims.
  • Insufficient training and support: Aaron Harper of Rolling Suds warns against franchisors that scale irresponsibly without the infrastructure to support new franchisees.

A successful franchise relationship is built on trust and mutual success. Jake Feury of Stretch Recovery Lounge emphasizes that the best franchisors care about your success more than their own profits. If you sense that the franchisor prioritizes their own gain over helping franchisees succeed, walk away.

The Resolution: Do Your Homework

So, how do you avoid these pitfalls and find the right franchise opportunity? It all comes down to preparation. Here are the steps you should take:

  1. Scrutinize the FDD: Pay special attention to Items 3 and 20 as mentioned above, but do not stop there. Review the entire document, or better yet, work with a franchise lawyer to ensure nothing is overlooked.
  2. Validate with Franchisees: Speak to at least five current and former franchisees. Ask about their experiences with the franchisor, the level of support they received, and whether they would make the same investment again.
  3. Trust Your Instincts: Harvard Business Review suggests that combining gut feelings with analytical thinking leads to better decisions. If something feels off, investigate further.
  4. Evaluate Support Systems: Stacey Heald of Pvolve underscores the importance of robust support, including training, marketing, and operational guidance. Ensure the franchisor has a team dedicated to helping franchisees succeed.
  5. Look for Transparency: A good franchisor will have nothing to hide. If they are unwilling to share detailed financial information or avoid answering your questions, consider it a dealbreaker.

Closing Thoughts: Protect Your Investment

As a franchise lawyer, I have seen both the successes and the failures in franchising. The difference often comes down to preparation and asking the right questions. Franchising can change your life—but only if you invest with your eyes wide open.

Do not rush the process. Take your time, do your homework, and trust your gut. It is far better to walk away from a bad deal than to get stuck in a partnership that does not support your success.

Franchising offers incredible potential, but only if you choose wisely. The power is in your hands.

Businessman opening a paper
Adeolu Eletu, Unsplash

Franchising is booming.

Private equity firms are snapping up franchisors faster than ever. Recently, we have seen Jersey Mike’s secure a massive $8 billion private equity deal and Freddy’s Frozen Custard and Steakburgers now reportedly exploring a sale. The stakes are high, the money is flowing, and the pace of change is staggering.

But here is the catch: your Franchise Disclosure Document (FDD) due diligence and franchise agreement review have never been more critical.

The Allure of Franchising

Franchising has always been a unique path to entrepreneurship. For aspiring business owners, it offers the ability to plug into a proven system, leverage brand recognition, and access the support of an established organization. That is why savvy investors and budding entrepreneurs alike flock to franchises, hoping to stake their claim in a growing market.

This appeal is amplified in the current landscape. Private equity sees opportunity, and for good reason. These firms excel at scaling businesses, refining operations, and driving returns. When private equity enters the picture, growth often accelerates—but so do risks for franchisees.

It is a high-stakes game.

The Problem Nobody Talks About

Here is one rule to live by: never rely on oral promises from a franchisor.

Why? The franchisor you shake hands with today might be sold to private equity tomorrow. And let me be clear—private equity has zero obligation to honor any handshake deals.

Imagine this: You meet with your franchisor’s representative, and they promise you exclusive territory rights or flexible payment terms. It feels great. You trust them. But that promise does not make it into the franchise agreement. Six years later, private equity steps in, restructures operations, and invalidates any unwritten assurances.

Legally, they can do that. And ethically? That is up for debate.

In fact, even before such a sale, most franchisors’ lawyers will flat out say: “If it isn’t in the agreement, it doesn’t exist.”

Let that sink in.

The Solution is in the Details

This is why your FDD and franchise agreement are tools for protecting yourself.

The FDD is your roadmap. It details the franchisor’s financial health, legal history, obligations to franchisees, and—most importantly—your rights as a franchise owner. Yet many franchisees skim it or, worse, rely on a franchisor’s verbal reassurances.

Do not make that mistake.

Scrutinize the franchise agreement, too. This document is the final word on your relationship with the franchisor. Every promise, every protection, every potential risk must be spelled out in black and white. If it is not, you are exposed.

And let us be real: in this booming M&A environment, your diligence is not just about understanding the deal you are signing—it is about anticipating the deal the franchisor might sign tomorrow. Private equity firms are not in the business of protecting legacy relationships; they are in the business of maximizing returns.

That means everything from royalties to operational requirements could change once they are in charge. If your agreements are vague or reliant on good faith, you are the one left holding the bag.

Protect Yourself

Here is the bottom line: in franchising, what is written in ink is what stands. Everything else? It is just noise.

The private equity boom is not slowing down, and neither is the pace of franchising M&A activity. As an entrepreneur, you must rise to the occasion. Read the FDD. Scrutinize the franchise agreement. Seek expert guidance such a franchise lawyer and accountants.

Because in this high-stakes world, your due diligence is not just a box to check—it is the shield that protects your investment.

Franchising is booming.

Are you ready?

White neon wallpaper
Austin Chan, Unsplash

A client recently asked for my thoughts on a new franchise they are considering.

When it comes to franchising, there is a unique allure to being one of the first. You imagine the chance to “get in on the ground floor,” to ride the wave of a promising new concept. But investing in a new franchise also comes with risks—a lack of history, unproven systems, and uncertainty about long-term potential.

Before diving in, you need to evaluate the opportunity through a clear, strategic lens. Here are five key factors I recommend focusing on.

1. Market Demand

The first question is the most critical: Is there a real, unmet demand for the product or service, or will you need to build the market from scratch?

Established franchises often succeed because they tap into a proven demand. A new franchise, however, can be a gamble. Ask yourself: Does the franchise solve a problem people already have? Are customers searching for this type of offering, or is it so novel that you will need to educate them first?

For example, a niche fitness concept might thrive in certain demographics but struggle in others. Research your local market. Talk to potential customers. Analyze whether the product or service fills a void in your community—or if it risks becoming a “solution looking for a problem.”

If the demand exists, you are halfway there. If it does not, prepare for an uphill battle.

2. Profitability

A franchise’s potential profitability is another vital consideration. This is where many new franchisees fall into the trap of optimism.

Even for new franchises, the franchisor should have piloted their concept with multiple successful locations. Are they profitable? If so, how long did it take to break even?

Do not just take the franchisor’s word for it—dig deeper. Review the Franchise Disclosure Document (FDD) to see if it includes an Item 19 Financial Performance Representation. If the franchisor has chosen not to provide financial projections, proceed with caution.

A new franchise may promise profitability, but without proof, it is just speculation.

3. Support and Training

Even the best franchise concept can fail without proper support and training.

A strong franchisor knows the importance of equipping their franchisees with the tools for success. For new franchises, the system may not yet be as polished as that of an established brand. Your job is to assess whether the existing training and support are sufficient—or if you will be left to figure things out on your own.

Here are some questions to ask:

  • What does the initial training program include?
  • Is there ongoing support, such as field visits or regular check-ins?
  • Are there clear processes for marketing, operations, and customer service?

The franchisor’s willingness to invest in your success is often the best indicator of their long-term commitment. If they seem disorganized or dismissive, that is a red flag.

4. The Franchise Disclosure Document (FDD)

The FDD is your roadmap to understanding the franchise opportunity. A thorough, transparent FDD signals a franchisor that values trust and clarity.

Review it carefully, focusing on key sections such as:

  • Initial fees and ongoing royalties
  • Obligations of both the franchisor and franchisee
  • Restrictions on suppliers or operations
  • Termination and renewal terms

Are the terms fair and reasonable? Is there room for negotiation?

Hire a franchise attorney. The FDD is long and complicated, but missing a critical detail could cost you in the future.

5. Franchisee Experience

Even if the franchise is new, there should be a few early adopters. Their experiences can offer invaluable insight.

Request a list of current franchisees from the franchisor, and make it a priority to reach out to them. Ask about their experience with:

  • The onboarding process
  • Day-to-day operations
  • Profitability and timeline to break even
  • The quality of franchisor support

Sometimes these conversations reveal what the marketing materials do not. Pay attention to their tone and willingness to share details—if they seem reluctant or dissatisfied, it may be a warning sign.

Final Thoughts

Investing in a new franchise can be a rewarding journey, but it is not for the faint of heart. The lack of an established track record means you are relying on your due diligence to uncover potential risks and rewards.

Take your time. Ask tough questions. And remember, you have more power than you think. Franchisors need early adopters, and this gives you leverage to negotiate terms that protect your investment.

The best franchise decisions are not made on excitement alone—they are made with strategy, foresight, and a willingness to walk away if the fit is not right.

Do your homework.

And when the right opportunity comes along, you will know.

Franchising isn’t for everyone.

But if you’re serious about it, there are some things you need to know. For purposes of this blog post, eleven to be exact. These aren’t just suggestions; they are essential truths that can make or break your success as a franchisee.

1. Strong Brand or Great System—Preferably Both

A franchise is only as strong as its brand or its system. Ideally, you want both. If you are considering a brand no one has heard of, it better have a system that blows you away because you will be building it from the ground up like an independent business. Without a well-known brand or a proven system, ask yourself: what are you really buying?

2. Be Ready to Walk Away

The best deals are made by those who are willing to walk. When you’re prepared to step back, you hold the cards. Franchisors know this, and they are more likely to offer concessions—lower fees, better territorial protections, more favorable terms. It’s like negotiating for a car; if they think you’re about to leave, they’ll stop you with a better offer. Without a doubt, the clients I have represented who were willing to walk away consistently secured the best deals. Every time.

3. Get It in Writing

I wrote an entire blog post on this topic but verbal promises mean nothing. If the franchisor tells you something, make sure it’s either already in the franchise agreement, or written in an addendum prior to you signing. If it’s not in writing, it’s not happening. Period. You can take that to the bank.

4. Trademark Indemnification Is Non-Negotiable

Why would you invest your life savings into a brand that won’t even defend its own trademark? A franchisor should be legally required to stand by their brand, including defending you if someone sues over the use of their trademark. It seems like this goes without saying, but unfortunately many franchisors will not agree to this. If it’s not addressed in the franchise agreement, be cautious.

5. Know Yourself

Franchising isn’t for the rebellious or really even the independent type. If you are someone who likes to chart your own course, a franchise may not be the right fit. Franchising requires following a set system. If that doesn’t sound like you, don’t force it.

6. Talk to Current and Former Franchisees

Don’t skip this step. Interview as many current and former franchisees as you can. Their insights are invaluable and could save you from making a costly mistake. If you don’t do your homework, you’ve only got yourself to blame if things go south.

7. Protect Your Spouse

Personal guarantees are common, but there’s no reason your spouse should be on the hook too if they aren’t involved in the business. Keep your family’s financial exposure as limited as possible. Insist on excluding your spouse from any personal guarantees. (See #2 above if a franchisor is unreasonable about it).

8. Bargain with New Franchisors

Getting in on the ground floor of a new franchise can be enticing, but it’s also risky. New franchisors need franchisees to grow, which means you have leverage. Use it. Negotiate for better terms, lower fees, or additional support. Don’t be shy about asking for more.

9. Franchise Agreements Are Negotiable

No matter what a franchisor says, franchise agreements are negotiable. If they are not willing to budge, consider whether its the right franchise for you. A good franchisor will respect your need to protect your investment. It’s just business, after all.

10. Multi-Unit Franchising: High Risk, High Reward

Owning multiple units is where the real potential lies. The most successful franchisees I’ve seen are all multi-unit owners. But it’s not for the faint of heart or the undercapitalized—it requires significant capital and commitment. Do not consider immediately it unless you’re ready to scale and have the resources to do it.

11. Franchises Fail Too

Franchises are not a sure thing. In fact, they fail at roughly the same rate as independent businesses. Don’t fall for the myth that a franchise is a guaranteed success. It’s not. Do your due diligence, and do not trust your investment to luck.

Final Thoughts

Franchising can be a powerful way to build wealth and grow a business, but it’s not without its challenges. If you are considering a franchise, keep these 11 truths in mind. They are not just tips—they are the keys to making a smart, informed decision that sets you up for success.