David Banfield, President of The Interface Financial Group, asks if due diligence is a necessity when buying a franchise.
Due Diligence – Yes, Instant Gratification - No
As every day passes we seem to live more and more in a world that requires instant gratification. The email we just received needs an immediate answer. If our computer doesn’t respond in less than a second we are annoyed and start thinking about a faster, newer model. Remember when you had to line up at the bank to get to a cashier? Well at least that has changed - now we line up at the bank machine in the hope that it will be faster and better.
Everything seems to be geared to how fast you can travel, how quickly a task can be completed, and so on. There are some things, however, that really defy a fast approach. There are things where you need to sit back and take time to reflect.
One such area is in seeking out a franchise model. There are some would-be entrepreneurs who think they can select a franchise model and literally buy it off the shelf the same day. For the serious entrepreneur nothing could be further from the truth. To start with, most franchisors do not sell franchises but rather they award them to suitably-qualified individuals. Therefore, it is not just the would-be franchisee that is doing some due diligence - the franchisor is also engaged in the same process.
People often think that buying a franchise needs little or no due diligence based on the fact that they are acquiring a brand that has probably been around for many years - as such, the longevity of the franchise speaks for itself. To some extent that argument may be true, but it certainly does not address the suitability of both parties to work together in a franchisee-franchisor relationship.
So what is this mysterious thing called due diligence? First, let’s say that it is not mysterious but just a simple and basically common sense approach to acquiring a business. Even if you think you know a brand very well - maybe you pass one or more outlets on a daily basis; maybe you know a customer of the franchise that you are pursuing - however do you really know what’s going on behind the scene? That’s what due diligence is going to reveal - the big picture.
Because a franchise usually represents an established brand, it means that they have accumulated a wealth of experience and history. The majority of franchisors are more than ready to share that history with prospective franchisees. As a prospective franchisee, you need to acquire that information and to carefully review it.
Most franchisors offer additional due diligence opportunities that are also an essential part of the review process. One core item is participating in a Discovery Day type event. These functions vary greatly from franchisor to franchisor, often depending on the underlying type of business that the franchise covers. Some Discovery Days involve your participation in travelling to the franchisor’s location to be immersed in how their franchise works.
This is naturally an important aspect of reviewing what works best for you and the franchisor. Some Discovery Days also come in the form of webinars, whereby you don’t need to undertake any travel and can participate in an interactive review of the franchise from your location. Whether travel is involved or not, you must factor in the appropriate amount of time, and sometimes cost, to fully engage in this type of due diligence investigation.
Talking, and often meeting with a franchisor, and reading their detailed material is a must in any review process. It will take time and there are few, if any, shortcuts that should be taken in this regard.
This is also true of probably the most important part of your franchise selection – talking with existing franchisees. To fully understand a franchise and the day–to-day operations of the business, it is not good enough to be a customer or pass by the location, as we have said - you have to see what is behind the scene. The best and most revealing aspect of your due diligence will come in the form of franchisee validation. This is a process whereby the franchisor will, at a point when they are also comfortable with the prospective franchisee, introduce that person to their franchisees.
This then becomes an opportunity for the prospective franchisee to really see and hear how the business operates on a day–to-day basis. It is not only understanding the business operation, as much of that will have been covered in the franchise literature and Discovery Day, but also delving into the support mechanism that exists for the franchisee from the franchisor. Much will probably have been discussed about this element of the franchise, but it is not until there is a discussion with a fully active franchisee that the full extent of that support becomes clear.
In many franchises the support element is the deciding factor as to whether it is an appropriate franchise or not. A franchise, as we have said, is a proven and established system - these things are well known and documented. What lies behind the façade in terms of support and involvement with franchisees is a crucial part of due diligence.
No matter how well you think you know a franchise from their outward appearance, if you are seriously pursuing that franchise then you must dig below the surface and conduct a thorough due diligence operation to satisfy yourself that what you see actually represents the true picture. For many people acquiring a franchise is a life-changing occurrence. Many franchisees were formerly corporate executives, and making the transition to entrepreneurship and self-employment is often a quantum leap - clearly not something that can be rushed. When you are awarded a franchise, it is not for a year or two - but hopefully for many, many years - so investing in your future demands that you devote the appropriate time at the outset - there are no shortcuts or instant gratification to due diligence.
The Art of Validation
18th November 2016
David Banfield tells is that when it comes to buying a franchise, the logic and investigation process should be thorough.
Are two locations better than just one?
18th October 2016
IFG discusses if franchising brings a different dimension to the growth opportunity with a multiple locations.
Togetherness with IFG
23rd August 2016
Togetherness really works in the IFG work-smart environment.
Franchising has changed
25th May 2016
David Banfield talks about the change in franchising to a world that covers literally hundreds and hundreds of different opportunities.
Problem Solvers Wanted by IFG!
29th April 2016
David Banfield recounts the narrative of a small business owner and his need to grow, which entails finding adequate working capital to...
Fact or Fiction?
29th March 2016
IFG has been in business for 44 years and David Banfield hopes to set the record straight on three of the greatest myths.
The Broad Approach to Franchising
29th February 2016
IFG discuss the broader view of franchising - it is not something to pursue in a hurry or without due diligence and a solid business plan.
Is Hard Work the Key to Success?
26th January 2016
Working smart rather than working hard is certainly the Interface approach, and it is still paying dividends after 40+ years of operations.
I have been comfortable in a financial setting given my background. This combined with the model of being low overhead, no employees and in a professional setting where I could control my hours made it a perfect fit.
4th August 2016
The numbers add up for IFG Franchisee Bruce Williams
18th November 2016
The Art of Validation