Today, a potential franchisee has a choice selection from an estimated 1,080 franchises. However, whilst one particular franchise could be perfect for one person, it could be inappropriate for another. A lot of research must be done prior to getting into a franchised business.
Although many people would view franchising as a quick and easy way to start their own business with a qualified guarantee of success, a purchase of a franchise can prove to be the second largest investment by an individual (after the home).
Therefore, proper due diligence is vital. Due diligence is the process of obtaining and analysing all the information available about the franchised business to be purchased, which should minimise the risk ,of the potential franchisee's investment. During this process, the potential franchisee should consider the following, amongst other things:
- Information contained in the disclosure document and the pro-forma franchise agreement, including all fees payable
- Other financial information, such as financialreports and tax returns (if available or provided)
- Demographic analysis of the site (if available and/or applicable)
- The bistory of the business, including any terminations of previous franchisees, any possible contingent liabilities such as employee claims and environmental claims
- Projections of how the business should perform, if available
- The performance of similar franchises or other similar businesses in the same area
- Information in relation to the franchisor and its relationship with the franchisees
- The territory granted, its exclusivity, size and the amount of competitors in the same area
- How long, on average, it takes to obtain return on investment
- The recognition of the franchise brand among consumers; and
- Information on how to operate the franchised business on a day to day basis
The above and other information can be obtained from the franchisor, its current franchisees, internet, and other sources.
It is often underestimated how valuable the existing franchisees are as a source of due diligence information to a prospective franchisee.
Most of these franchisees will be more than willing to share information including sales and profitability.
It really is crucial to undertake extensive research before settling on the type of franchise. A potential franchisee must also consider the hours he or she is willing to work, how much money has to be spent on the franchise, the type of work to be performed and whether he or she has the right skills to run that kind of business.
Finally, once all the due diligence is undertaken and all the advice is obtained, the potential franchisee must make an informed decision of whether to become a franchisee. Try and make that decision on the facts not on emotion!
This article was written by Tony Garrisson, a Principal in the Commercial division of Mason Sier Turnbull with assistance of Jane Garber, a lawyer in the Commercial division of Mason Sier Turnbull.
Mason Sier Turnbull is one of Australia's leading franchising law firms with offices in Melbourne and Sydney and affiliations in New Zealand. Our franchise team is headed by Philip Colman, John Sier and Tony Garrisson and supported by a further 10 franchise lawyers and 6 support staff.
This article appears courtesy of Franchising magazine.
11-Jun-2008