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. 

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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.

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.

Wendy's in Sasazuka: Showcasing the recognizable Wendy's sign at their outlet in Sasazuka, located to the west of Shinjuku, Tokyo.
taro ohtani, Unsplash

Entering into a franchise agreement can be an exciting and lucrative venture for many aspiring business owners. However, the path to successful franchise ownership is fraught with potential pitfalls. – just like opening your own independent business. As a franchise lawyer, I’ve observed several common mistakes that franchisees make, which can lead to significant financial and operational challenges. Here are five of the biggest mistakes franchisees make and how to avoid them.

1. Inadequate Due Diligence

One of the most critical steps in the franchise process is conducting thorough due diligence. Many franchisees fail to investigate the franchise thoroughly, leading to uninformed decisions. Due diligence should include:

  • Researching the Franchisor: Investigate the franchisor’s business history, financial health, and reputation. Review the Franchise Disclosure Document (FDD) meticulously.
  • Speaking with Current and Former Franchisees: Gain insights into the day-to-day operations, profitability, and challenges from those who have experienced it firsthand. Be sure to talk with those franchisees in territories similar to yours.
  • Understanding the Market: Analyze the market demand, competition, and location specifics to ensure your franchise can thrive.

2. Underestimating Financial Requirements

Franchisees often misjudge the financial commitments required to start and sustain a franchise. Beyond the initial franchise fee, there are other significant expenses, such as:

  • Initial Investment: This includes costs for equipment, inventory, and leasehold improvements.
  • Ongoing Fees: Royalty fees, marketing fees, and other ongoing costs set forth in the franchise agreement.
  • Working Capital: Adequate funds to cover operating expenses until the franchise becomes profitable. This is incredibly important. You need more capital that just the initial franchise fee and investment. You need to be able to weather the start-up and down times.

Failing to account for these costs can lead to cash flow issues and potential business failure.

3. Neglecting the Franchise Agreement

The franchise agreement is a legally binding document that outlines the rights and obligations of both the franchisor and the franchisee. Unfortunately, many franchisees do not fully understand the terms before signing. Key areas to focus on include:

  • Territorial Rights: Understand the exclusivity of your territory and the franchisor’s rights to open other units nearby. Set yourself up with a territory that helps decrease potential competition from other franchisees moving forward.
  • Term and Renewal Conditions: Know the length of the franchise term and conditions for renewal.
  • Termination Clauses: Be aware of the circumstances under which the agreement can be terminated by either party.

Consulting with a franchise lawyer to review and explain the agreement is essential to avoid unfavorable terms.

4. Inadequate Training and Support Utilization

Franchisors typically offer training and ongoing support to help franchisees succeed. However, some franchisees do not fully utilize these resources, and let’s be honest, some franchisors don’t have comprehensive training programs. This can result in operational inefficiencies and missed growth opportunities. To maximize the benefits:

  • Attend Training Sessions: Ensure you and your key staff participate in all available training programs.
  • Leverage Support Services: Take advantage of marketing, operations, and technology support provided by the franchisor.
  • Seek Continuous Improvement: Regularly communicate with the franchisor and other franchisees to share best practices and stay updated on new developments.

5. Ignoring Local Marketing Efforts

While franchisors often manage national marketing campaigns, local marketing is often the franchisee’s responsibility. Neglecting local marketing efforts can hinder the growth and visibility of your franchise. To build a strong local presence:

  • Engage with the Community: Participate in local events, sponsor community activities, and build relationships with local businesses.
  • Utilize Social Media: Leverage social media platforms to connect with local customers and promote your franchise. It’s critical to work with a franchisor that will support these efforts.
  • Implement Local Promotions: Offer special deals and promotions to attract and retain customers in your area.

Conclusion

Avoiding these 5 common mistakes can significantly enhance the chances of success for franchisees. By conducting thorough due diligence, understanding financial requirements, meticulously reviewing the franchise agreement, utilizing training and support, and focusing on local marketing, franchisees can build a strong foundation for their business. As a franchise lawyer, I encourage prospective franchisees to seek professional legal advice to navigate these complexities and make informed decisions.

When considering buying a franchise, one factor stands out as particularly critical to your success: franchisor support. Franchisor support can make or break your franchise journey, providing the necessary guidance, resources, and assistance to help you thrive. Here’s how to effectively assess the level and quality of support offered by a franchisor.

1. Review the Franchise Disclosure Document (FDD)

Franchise Disclosure Document (FDD): This document provides detailed information about the franchise system, including the support services offered by the franchisor. Pay special attention to:

  • Item 11: This section outlines the franchisor’s obligations regarding initial and ongoing support, including training programs, advertising, computer systems, and other operational assistance.

2. Evaluate Training Programs

Initial Training:

  • Scope and Duration: Assess the completeness of the initial training program. It should cover all essential aspects of running the franchise, such as operations, marketing, customer service, and management.
  • Location and Format: Determine where the training takes place and whether it includes both classroom instruction and hands-on experience. Does the franchisor come to your location for the grand opening and for a portion of your start up period?

Ongoing Training:

  • Continued Education: Look for opportunities for ongoing training, such as webinars, workshops, conferences, and additional courses that keep you updated on industry trends and new practices.
  • Support Materials: Check if the franchisor provides updated manuals, guides, and other materials to assist with ongoing operations.

3. Investigate Marketing and Advertising Support

Marketing Plan:

  • National and Local Strategies: Review the franchisor’s marketing plan to understand the types of marketing and advertising support provided. This could include national advertising campaigns, local marketing strategies, and online/social media marketing assistance.
  • Advertising Fund: Determine if there is a national or regional advertising fund, and understand how your contributions are utilized to benefit your franchise. Understand the costs involved.

4. Analyze Operational Support

Field Support:

  • Regional Managers: Find out if the franchisor provides field support through regional managers or consultants who visit your location regularly to offer guidance and assistance.
  • On-Site Visits: Assess the frequency and quality of on-site visits to help address operational challenges and improve business performance.

Help Desk:

  • 24/7 Assistance: Check if there is a dedicated help desk or support hotline available for franchisees to get immediate assistance with operational issues.
  • Response Time: Inquire about the average response time and effectiveness of the support team in resolving issues. Does the franchisor respond to emails and phone calls?

5. Talk to Current and Former Franchisees

Current Franchisees:

  • Firsthand Insights: Reach out to current franchisees to gather insights into their experiences with franchisor support. Ask specific questions about the quality and timeliness of training, marketing, and operational assistance. Make sure especially to talk with franchisees in your region as experiences can vary across the country in different regions. Ask them: would they do it again?
  • Challenges and Successes: Learn about any challenges they faced and how the franchisor helped them overcome these obstacles.

Former Franchisees:

  • Reasons for Leaving: If possible, speak with former franchisees to understand why they left the system and their views on the support they received. This can provide valuable context about potential issues within the franchise system.

6. Visit Franchise Locations

Observation:

  • Operational Standards: Visit several franchise locations to observe operations firsthand. This can give you a sense of how well the franchise system operates and the level of support provided by the franchisor.
  • Discussions: Use these visits as an opportunity to discuss with franchisees their experiences and the quality of support they receive. Don’t just drop in though. Schedule a time to visit so you respect their time.

7. Assess Technology and Systems Support

POS and Management Systems:

  • Technology Integration: Evaluate the technology and systems provided by the franchisor, such as point-of-sale (POS) systems, inventory management, and customer relationship management (CRM) systems.
  • Technical Support: Ensure that there is adequate technical support available to help you manage and troubleshoot these systems.

8. Evaluate the Franchisor’s Commitment to Innovation

Product and Service Development:

  • Continuous Improvement: Assess the franchisor’s commitment to continuous improvement and innovation in their products or services. This shows their dedication to staying competitive in the market.
  • Adaptability: Determine how the franchisor responds to market changes and supports franchisees in implementing new practices or products.

9. Review Financial Performance Representations

Item 19: If the franchisor includes financial performance representations in Item 19 of the FDD, analyze these representations to understand the potential profitability and revenue expectations. This can give you an idea of the financial support and potential you can expect. Talk with an accountant regarding these financial representations.

10. Seek Legal and Professional Advice

Legal Review:

  • Franchise Attorney: Have a franchise attorney review the FDD and franchise agreement to ensure you fully understand the support obligations of the franchisor and your rights as a franchisee. Work to fully understand what it actually means to be a franchisee.

Professional Consultation:

  • Accountants and Consultants: Consult with accountants or franchise consultants who can provide an objective assessment of the franchisor’s support system. Their expertise can help you make a more informed decision.

Assessing franchisor support is a crucial step in choosing the right franchise. By thoroughly evaluating training programs, marketing assistance, operational support, and speaking with current and former franchisees, you can gain a clear understanding of the support you will receive. This due diligence will help you make an informed decision and set you up for success in your franchise journey.