10 tips for doing Due Diligence
This article appears in the March/April 2014 issue of Business Franchise Australia & New Zealand
When buying a franchise it is important to fully understand the commitment you are making, before signing a franchise agreement.
This means thoroughly researching your decision, (otherwise referred to as conducting due diligence) to ensure you are making an informed decision.
As part of this process it is essential to get professional advice and the Franchising Code of Conduct (the Code) encourages this by recommending you get accounting, legal and business advice.
The Code also requires a minimum 14 day period from when the franchisor provides you with a disclosure document before you can legally sign a franchise agreement, which provides you with an opportunity to get the necessary advice.
If you feel you are not yet ready after the 14 days and need more time to obtain advice and undertake further research into the franchise offer, then don’t be afraid to tell the franchisor or broker.
You should be cautious of any attempt to rush you into signing a franchise agreement before you are ready.
By the same token, if during the disclosure period you come to the conclusion the franchise you have been considering is no longer for you, then you should withdraw from the process gracefully and before you incur further costs.
Here are ten tips to assist you with your due diligence:
Get advice from experienced advisors
When seeking professional advice it is a good idea to seek out professionals with experience in franchising as they will have a better understanding of the business model. Many potential franchisees often assume their family lawyer, who may have done their wills or some property conveyancing for them previously, will be franchise experts.
This is unlikely to be the case and as a result, you could end up with poor advice, or a more expensive bill as a result of the extra time the advisor needs to get up to speed in dealing with the matter.
In addition to getting professional advice, you must invest the time and effort to read the franchise agreement and disclosure document (and anything else provided) for yourself.
This will put you in a better position to understand the advice from your professional advisors, and to get a better sense of the extent of the obligations you will be undertaking.
Speak to current and former franchisees
The disclosure document will include a list of contact details for current franchisees, as well as former franchisees who have left the franchise system in the last three years.
Where possible, try to contact as many current and former franchisees as possible to discuss your interest in the franchise, and their experiences with the franchise too.
This can provide great insight into the business and its ability to succeed, as well as reveal potential concerns.
Talk with current or potential customers
Speak with current and potential customers to get an idea of the demand for the business’ goods and services, and how the brand will be perceived in its intended destination. This can be an informal type of market research that may lead to a more detailed assessment at a later stage.
Verify the information you have received
As much as possible, you should verify the information presented to you in the disclosure or other documents.
For example, if the franchisor’s site selection methodology indicates the territory has a certain population of homeowners, or that a certain number of cars go past a proposed shopfront, you should try to independently verify the figures provided.
You can do this by obtaining information from the Australian Bureau of Statistics (www.abs.gov.au), plus local and state government agencies, as well as landlords and providers of demographic information and modelling.
Further information on assessing a site or territory is included in the Pre-Entry Franchise Education program.
Undertake web searches
In this day and age, the world is more interconnected than ever, making it easier to find out information about an organisation and the people behind it.
Common web searches on the franchise and its directors or executives worth considering are:
• Australian Competition & Consumer Commission (ACCC) - www.accc.gov.au: The ACCC polices the Competition and Consumer Act 2010 and the Franchising Code of Conduct, so if a company or an individual has breached either, chances are that a search of the ACCC website will reveal their name and the relevant circumstances.
• Australian Securities & Investments Commission (ASIC) - www.asic.gov.au: ASIC regulates the conduct of companies in Australia, and maintains a range of information about companies including a list of directors.
• The Australian Stock Exchange (ASX) - www.asx.com.au: The ASX website may be relevant if you are considering a franchise which is part of a public company. On this website you can find information about the company, its share price and its announcements to the stock exchange, including annual reports and dividend information.
• Australasian Legal Information Institute - www.austlii.edu.au: This website contains a list of legal judgements for both State and Commonwealth courts. A search of this site will identify court action relevant to the franchise.
• IP Australia - www.ipaustralia.gov.au: To confirm the franchise has registered the trademarks it has claimed in its disclosure document.
Engage your partner/spouse, family and friends
A franchise investment will often involve borrowing against assets that may be jointly owned by a couple, so it is vital that a partner or spouse who may not be expecting to be involved in the business is at least involved in the due diligence process.
Similarly, many franchisors may consider the moral and emotional support of your spouse or partner in their assessment of you as a potential franchisee along with family or friends, particularly if they are to be involved in the business in some way.
Assess your own living costs
While at first the requirement to assess your own living costs may not seem relevant to buying a franchise, it is.
The reason is simple: If your monthly household expenditure is high, you have to ask yourself if the franchise you are proposing to buy can consistently deliver a large enough income for you to meet your household costs.
Franchisees often draw a similar wage from the business as the income they previously earned through paid employment, rather the wage they would pay if they were to employ a manager in their place.
This needs to be considered along with your living costs as any wages you draw from the business need to be realistic.
Do a business plan
Many franchisors will need a business plan before granting you a franchise.
Accountants will also need a business plan (or help you create one) to determine the viability of the business, and banks will need one before lending to most businesses. Many banks offer templates on business planning, as well as a number of business planning tools.
State and government agencies can also help individuals and groups in preparing and presenting a business plan. See www.business.gov.au.
Take your time
To properly research a franchise offer takes time, patience, and a little money.
Rushing the process could lead to a disastrous outcome. It is far better to take a bit longer and do it right than to rush into a hasty decision and overlook key items of vital information.
The amount of time and effort you put into your due diligence should be proportional to the size of the investment you are considering.
Additional due diligence resources
Please note the above tips are only a sample of the steps you can take when doing your due diligence.
Griffith University’s Asia-Pacific Centre for Franchising Excellence has developed a free, online Pre-Entry Franchise Education Program to further assist people to assess franchise business opportunities.
The program is funded by the Australian Competition and Consumer Commission and can be accessed at: www.franchise.edu.au/home/education/all-education-and-training/pre-entry-franchise-education.
Remember, there are no short cuts, and the more thorough your due diligence the less surprises you will have later on.
And remember, if you are not satisfied with what you learn during the due diligence process, take more time for further research or simply do not buy the franchise.
Professor Lorelle Frazer is Director of Griffith University’s Asia-Pacific Centre for Franchising Excellence and one of the world’s leading franchise researchers and educators. Lorelle has been actively involved in franchising research and sectoral policy initiatives for more than 15 years. She also lectures in franchising and is a member of the Australian Competition and Consumer Commission Franchising Consultative Panel. Her research is often used to inform sector policy and in 2010 Lorelle was awarded the Franchise Council of Australia’s national Contribution to Franchising Award.
Griffith University’s Asia-Pacific Centre for Franchising Excellence aims to drive franchise sector best practice through practical, independent research and education. To find out more visit: