Due Diligence When Buying a Franchise

When buying a franchise, it is important that you conduct due diligence. This will help you ensure that you are making a well-informed decision. As part of the due diligence process, there are several steps and questions you need to consider.

1. Understand the franchise agreement: The franchise agreement outlines the obligations and rights of the franchisee and the franchisor. It is important that you carefully review the franchise agreement. You may like to consider seeking legal advice to ensure you understand the terms and conditions of the agreement, and any potential implications.

Ask yourself: Do I understand the terms and conditions of the franchise agreement?

2. Review the disclosure document: The franchisor is required to provide the franchisee with a disclosure document. This includes important information about the business system, fees, litigation history and financial performance of the franchise. It is vital that you thoroughly read the document as part of the due diligence process.

Ask yourself: Do I have any questions from the disclosure document?

3. Financial assessment: Consider the financial health of the franchise. Look into financial statements, details regarding the initial and ongoing fees, as well as the potential return on your investment. You should consider seeking independent financial advice as part of your due diligence.

Ask yourself: Am I satisfied with the financial health of the franchise?

4. Market research:  It is important you research the market to understand the demand for the franchise’s products or services in the area you are planning on starting the franchise. Consider any competition in the area and assess the potential growth of the business.

Ask yourself: What did I learn from the market research?

5. Speak with existing franchisees: Consider contacting current and former franchisees to learn from their experience. Ask about their satisfaction with the franchise’s profitability, ongoing support and any challenges they have experienced.

Ask yourself: What did I learn from current and former franchisees?

6. Evaluate the franchisor's support:  Look into what support is provided by the franchisor. Consider factors such as ongoing training, marketing contributions and operational assistance.

Ask yourself: Does this align with my expectations and needs for support?

7. Site selection and lease agreement: Consider the proposed location for the franchise, by examining factors such as demographics and foot traffic. Also, review the terms of the lease agreement.

Ask yourself: Am I satisfied with the agreement?

8. Legal and regulatory compliance: The franchise must comply with all relevant legal and regulatory requirements, including the Franchising Code of Conduct and any industry specific regulations. PW Lawyers can help you determine if the franchise is following all necessary legal and regulatory requirements.

Ask yourself: Am I satisfied that the franchise is complying with legal and regulatory requirements? 

9. Exit strategy:  Examine the terms related to exiting the franchise such as selling your franchise or terminating your franchise agreement especially if it is just not working out.

Ask yourself: Am I satisfied with any potential exit strategy?

10. Professional advice: Seeking professional advice from an accountant, business advisor, financial planner or lawyer is any important part of the due diligence process. Many people wait to speak to professionals till after they’ve signed the contract. This is taking a significant risk when you can get advice before you sign on the dotted line.

Ask yourself: Do I need to talk to a lawyer and/or an accountant?

Contact us for a free thirty-minute consultation with a lawyer specialising in franchises.

Any information on this website is general in nature and should not be taken as personal legal advice. We recommend that you speak to a lawyer about your personal circumstances.

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