How to Perform Due Diligence During Your Search for the Right Franchise

As with any investment, it's important to do your research before making any type of financial commitment. The best place to start is by obtaining a franchisor's disclosure document. This document can also be referred to as a Franchise Offering Circular. While you can ask for this document at any time, the FTC specifically requires that you receive it at least ten business days before you're explicitly asked to pay any money or sign a contract.

When you do get the disclosure document, it's important to take your time and actually read the whole thing. If you encounter any provisions that you don't fully understand, be sure to bring it to the attention of a legal or other advisor who can clarify it for you. While it's always a good idea to review this type of document with a qualified professional, here are some details that will help you make sense of exactly what you're reading in this document:

Business Background

One of the basic components of a disclosure document is it will give you details about the past experience of the organization's executives. The important thing to keep in mind is not just the team's business experience, but how much experience they have with franchises. The other key factor is that a team with proven experience is going to be significantly less risky than a new franchise with an inexperienced management team.

Previous Litigation and Bankruptcy

Whether it's felony fraud or a civil action related to the franchise, you'll be able to find out if the franchise has a history of litigation. While there may be reasonable explanations for certain types of litigation, the presence of these issues can raise a red flag. The same is true if a franchisor or any members of its executive team have been involved in filing for bankruptcy.

Detailed Costs

One of the most common concerns people have about getting involved with a franchise is how much it's going to cost them. While it's not hard to find ballpark estimates online for how much different franchises cost, it's much more reassuring to get a detailed breakdown of exactly how much you'll be required to pay and for what. Fortunately, a franchisor's disclosure document provides that exact information. You'll be able to find out about all required and potential costs, including ongoing royalty payments, advertising payments, operating licenses, real estate improvements, training, legal fees, accounting advice, insurance and employee salaries.

Restrictions

While restrictions on suppliers, services, customers and territory are fairly common with franchises, it's important to really dive into the specifics to find out if there's any cause for concern that one or more restrictions may hinder the ability of your business to flourish.

Making the decision to invest in a franchise is a big step. Although there's at least some degree of risk with every type of investment, as long as you take the time to perform your due diligence and make the most of all the resources that are at your disposable, you will be able to find the franchise that's the right fit for your financial goals.

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