It is relatively straight forward to analyse a franchise and the time to do it is before you commit to buy it. It is easier to not proceed with a franchise if you are not sure of its viability than to proceed with it and repent as its shortcomings are revealed. Needless to say before you spend money on professional reviewing the franchise documents you would meet with the franchise owner and field consultants. Meet the people that will work with you and provide the support you require as a new franchisee to help establish and build your business. You do not want to start business only to discover you cannot work with one or more of the people assigned to these tasks.
The Franchise Disclosure Document, that is mandatory to be provided to you by the Franchisor, offers a starting point for your due diligence as it outlines all the costs and charges on an initial and ongoing basis that you will incur in buying the franchise. Read through these documents but do not worry too much about the legal jargon that you may not understand as you are going to have them reviewed by a Franchise lawyer. Read them to understand your obligations as a franchisee and what the franchisor offers as its obligations in exchange for the valuable investment your are making into the business. Make notes on anything that you don’t understand to either ask the Franchisor about or your lawyer. Check the date of the disclosure document, as it is impossible to conduct research with outdated information.
Once you have an idea of the costs of running the franchise determine if you can afford it. Make sure that in addition to the setup costs that you also have enough working capital set aside for personal expenses until the business becomes profitable. In the initial stages of the business you may need to inject your own funds into the business to provide its cash flow. One of the most common causes of business failure is not having enough money for unexpected business set up expenses. You may need to seek professional advice from an accountant well versed with franchising and business start up to ensure that you have this covered before proceeding any further.
Check that each and every one of your rights and obligations that will be in the franchise agreement attached to the disclosure document include all of the oral promises or representations that were offered to you by the Franchisor or its broker. If they aren’t ask for them to be included in the agreement, as oral representations that can be denied in the event of a dispute later do nothing to protect you. Assume that if it’s not in the franchise agreement that you aren’t getting it.
The franchise disclosure document will detail franchisee details, how many have commenced operations and how many have left or been terminated. Contact some of these, as they will give you the details of the franchise business from the perspective of a franchisee, which matters to you. A pertinent question to ask in addition to any others that you may have is if they had a chance over again would they buy the same franchise. Ensure that the answers to your questions reflect that the Franchisor is known for fair and honorable dealings and that they provide the support and products necessary for you to generate an income and a return on your investment. If there are any problems uncovered at this stage ask the Franchisor to comment and make your own decisions.
Once you have a grasp of what your agreement offers it is time for a professional review of all the documents. Take all your notes and any unanswered questions to your franchise lawyer. Have your lawyer correspond in writing with the franchisor any concerns that you have and ensure that the documents are changed to reflect the outcome of those discussions. If the Franchisor is reluctant to make changes to the documents that are required to protect you it may be prudent that you remove that franchise offering from your short list.
It may take time but it is essential that you tick the box on each of these steps before proceeding to the next. Once you have proceeded through all the steps and you are satisfied with your research you are much better placed to proceed knowing that you have analysed the franchise offering.
By Sanam Ali