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Five Musts for Franchise Candidateís Due Diligence

by Ed Teixeira

There are five items that every franchise candidate should include as part of their franchise due diligence.

When an individual decides, that they want to invest in a specific franchise opportunity, itís important that there is a complete evaluation conducted by the candidate and their advisors. However, on a practical basis, there is almost no limit to the amount of time and effort that can be spent evaluating a franchise opportunity.

During my franchise career Iíve had experience with some franchise candidates that literally took several months to complete their due diligence and come to a final decision. In these situations, the odds would favor that this type of candidate is not the best one to operate a franchise, so be forewarned. The procrastinator can be just as bad as the impulsive decision maker, when it comes to operating a franchise or any business for that matter.

Recognizing that the majority of individuals may not dot every I and cross every T when it comes to franchise due diligence, there are five areas that are virtually mandatory.

1. Contact as many franchisees as practical in order to gain feedback. Be sure to speak with new and mature franchisees from various parts of the country in order to obtain feedback from a cross section of franchisees. The Internet is populated by numerous sites that suggest the questions to ask existing and former franchisees.

2. Construct a franchise pro forma and cash flow projection. This is an absolute must for anyone considering a franchise opportunity. Franchisors can now provide cost and expense data. If they donít provide a Financial Performance Review known as an Item 19 disclosure, then consider walking away. If youíre not proficient working with Excel, find someone who can. Itís a great way to set up various cash flow models and operating scenarios. You can change revenue, expense and gross margin entries and build several other models.

3. Have a franchise attorney review the franchise documents. Donít use your brother in-law or some real estate attorney that you know. If youíre going to invest thousands in a franchise then be willing to spend a few thousand dollars to have an attorney with franchising knowledge, review your agreements.

4. Visit a working franchise location. Donít rely on franchise sales brochures and photos. Nothing is more effective than visiting a location to observe an actual operation. If itís a home based business try to arrange a few hours with a franchisee in order to gain some level of understanding regarding how a franchise and the franchisee operates.

5. Request a meeting with the franchise CEO and bring a qualified trusted advisor to join you. Itís very important to meet with the leader of the franchise operation, unless youíre buying a MacDonaldís or similar franchise. Bring someone who can be objective and has business savvy to join you in the meeting. Donít be afraid to ask some tough questions. Be sure to ask what the franchisee profile and key components the franchisor staff seeks in a candidate. Donít settle for the standard response; hardworking, strong people skills, passionate,etc. Look for a more in-depth response. Most importantly you want to evaluate the persona of the CEO or leader. I recognize itís not always easy to evaluate someone after an initial meeting; however, you and the person that accompanies you should try hard to determine if you feel comfortable with the person you just met. In most organizations, the leader sets the corporate culture so keep that in mind.

Conducting proper due diligence must be performed before investing in a franchise opportunity. Although there are a number of components to performing an effective due diligence the above five are must doís.

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© 2015 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow.com and Chief Operating Officer, FranchiseGrade.com. He is a former franchise executive and franchisee. He can be contacted at 631-246-5782 or at  franchiseknowhow@gmail.com

 

 

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