Due Diligence Checklist
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