How Important is Due Diligence When Buying A Franchise?

by Sufyan 28th of September, 2015

There are a number of advantages to looking at franchises for sale, and ultimately purchasing one. Typically, such endeavours have a firm business plan in place that represents a framework for profitability.

However, like any business transaction, long-term success is not guaranteed, and it's important that would-be franchise owners carry out due diligence of the opportunity itself, as well as the supporting network around it.

How does this whole process work when buying a franchise over a standalone business?

More research, better results

Joint research from Griffith University and the University of New South Wales suggested that the most common type of due diligence carried out by prospective business owners is a consultation with an accountant.

While this can be an effective way to gauge the financial fitness of the opportunity in question, it isn't the be-all and end-all. The research actually found that it's easier to assess the prospects of a franchise than it is a standalone business.

The reason being is that the franchise model is well regulated, meaning that there's greater transparency if and when a new business owner asks the difficult questions.

Questions and answers

So, what should potential franchisees be querying with the franchise owners? Well, Entrepreneur contributor Carol Tice highlighted the following:

What's the primary focus? The ideal answer to this question is 'the success of our franchise owners'.
What problems do franchises face? This can help in assessing whether there are any pressing issues that consistently put similar businesses in trouble.
How are these issues resolved? Disagreements between franchisees and the overarching company are par for the course, but fixing them sensibly doesn't have to be laborious.

Ultimately, buying a franchise is much like taking the plunge on any business for sale. However, with tighter regulations and more answers available to most pressing questions, carrying out due diligence before making the final decision can help you get an idea of whether the endeavour is worth pursuing.