The concept of ‘franchise due diligence’ should be on the mind of everyone thinking about buying a franchise. Unfortunately, the majority of prospective entrepreneurs do not put enough effort into doing their homework to even understand what they should be examining or how to analyze the information available to them. It’s also unfortunate that most franchise buyers let the franchise salesman or franchise broker do the homework for them. But as we all know, salesmanship is not homework or due diligence. It’s dream fulfillment.
First, all franchisors are required to provide ‘franchise disclosure documents’ (FDD) to prospective buyers. But it’s the buyer’s responsibility to read, understand and ask questions about those documents. And of course, if they don’t understand what is written, the buyer should retain adequate counsel to help interpret what is claimed. In terms of income or moneymaking potential, all franchise disclosure documents contain an ‘Item 19’ where claims of financial performance can be found. This section won’t tell you how much franchisees earn, but it will provide statistics on how to start studying the subject more closely. If you find no information within this section, what does that tell you?
Second, nurture relationships with existing franchisees and eventually they will help you gain insight as to the franchise performance and how the numbers work. And heed this word of caution. If you choose to investigate through existing franchisees, go beyond the names of owners provided by your salesman. Of course they’re going to send you to successful units. Visit as many units as you can manage.
Again, and above all, do your own homework and get help with those things you don’t understand. The Focus Program for Emerging Entrepreneurs provides an outstanding training section on how to understand a franchise and begin your due diligence.