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.
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