Due Diligence Checklist

Due diligence is a key part of your research when buying a franchise. Refer to our due diligence checklist to help inform your decision.

Why is due diligence so important?

It allows potential franchisees to thoroughly assess the investment and understand the risks and benefits associated with the opportunity. Here are some key reasons why due diligence is essential:

  1. Understanding the Franchise Offering – Through due diligence, you can gather detailed information about the franchise, including its history, business model, products or services, target market, and competitive advantages. This helps you determine if the franchise aligns with your interests, skills, and financial goals.
  2. Evaluating the Franchisor’s Reputation – Conducting due diligence allows you to research the franchisor’s track record, reputation, and experience in the industry.
  3. Assessing the Franchise Financials – This information is vital in determining whether the investment is financially viable for you.
  4. Understanding the Franchise Agreement – Due diligence allows you to review the agreement thoroughly and seek legal advice if necessary to ensure you fully comprehend its terms and obligations.
  5. Speaking with Current and Former Franchisees: Talking to existing and former franchisees provides invaluable insights into the day-to-day operations of the business, challenges they faced, and the level of support received from the franchisor. This firsthand feedback can help you make an informed decision about whether the franchise is a good fit for you.
  6. Identifying Potential Risks: Due diligence helps you identify and assess potential risks associated with the franchise, such as market competition, changing industry trends, or legal issues. Being aware of these risks allows you to develop a strategy to mitigate or manage them effectively.
  7. Securing Financing: Financial institutions and lenders often require evidence of due diligence before providing financing for a franchise purchase. A well-documented due diligence process can increase your credibility with lenders and improve your chances of securing the necessary funding.

Refer to this Due Diligence Checklist when researching your franchise opportunities of interest.

The Franchise Prospectus should contain:

  • Business background of Directors and key Executives
  • Description of the franchise
  • Breakdown of the initial investment required
  • Details of other payments due to the franchisor
  • Guidance on raising finance
  • Requirements for franchisee’s participation
  • Terms for termination/renewal of agreement
  • Number & success rates of existing franchisees
  • Franchisor’s site selection/approval rights
  • Overview of guaranteed training and support
  • Financial statement from the franchisor
  • Details of the franchisor’s professional advisers

What to find out from the franchisor:

  • Financial health and track record of the company
  • The company’s franchising history
  • Results of the pilot operation (if applicable)
  • Current number of franchisees
  • Permission to talk to existing franchisees
  • Company’s main source of earnings
  • Value, appeal and long-term viability of product/service
  • Head office commitment to support
  • Full details of the initial training programme
  • Additional training costs to the franchisees
  • Total size of the franchise investment requirement
  • Realistic estimate of working capital needed
  • Bank and other references
  • Territorial practices and exclusivity terms
  • National and regional advertising practices
  • The exclusivity of product supply contracts
  • Franchisor’s margins on product supply
  • Target obligations
  • Realistic franchisees profit and loss figures
  • Management Service Fees
  • Restrictions on franchisee’s operations
  • Franchisor’s launch assistance programme
  • A sample of the Franchise Agreement

Be wary if the franchisor:

  • Tries to get you to sign a Deposit Agreement to reserve a territory
  • Does not offer an automatic right to renew your agreement
  • Has a very short-term contract
  • Pressures you to ‘act now’ before the cost goes up
  • Tries to trade you up to a higher fee
  • Demands large front-end licence fee
  • Promises huge profits with thin investments
  • Promises ‘easy sales’
  • Promises profits by sub-franchising
  • Promises large income working from home
  • Fails to give statistics on sales and profits
  • Evades identifying Directors or principals
  • Has no data on financial track record
  • Cannot give plans for future development
  • Has incomprehensible contract or vague territories
  • Is vague about support and training
  • Has a name similar to a well-known business
  • Is ignorant of competition
  • Has weak advertising
  • Avoids detailing your financial obligations
  • Tries to meet only in a hotel or has poor head office premises
  • Is evasive about access to existing franchisees

The Franchise Agreement must cover:

  • Description of exact training and support offered
  • Precise price, commissions and rental fees involved
  • Precise boundaries of the franchise territory
  • Obligations to the franchisor
  • Rights to renew or extend beyond the original term
  • Your rights to sell/transfer ownership of the franchise
  • Terms and conditions for terminating the contract
  • Heir’s rights in the event of your death

If you need any assistance to talk through franchise due diligence please do get in touch with us:

0330 016 0028