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How To Perform Due Diligence

How To Perform Due Diligence

David Paulson, senior manager, international franchising at TaxAssist Accountants, offers some expert advice on researching a franchise

If you’re considering investing in a franchise opportunity in the UK today, there is a huge range of opportunities available to you - from accountancy franchises to mobile tyre fitting and coffee shops to children’s day nurseries. The most recent survey of the UK franchise market by the British Franchise Association and NatWest suggests there are in the region of 930 franchisors actively looking to recruit franchisees.

Attention

Franchisors, including us, will publish attractive adverts to grab your attention, with glowing testimonials from franchisees saying how great life is. We will send you professional literature telling you again how good our business is and have slick websites bursting with testimonials and information on the opportunity.

But how do you know which one best suits you and your skills, which one matches your ambitions, how you can shortlist the brands that will suit you, what research you should be doing and what questions to ask? Questions you should ask yourself include:

* Am I suited to running my own business?

* Am I willing to follow a prescribed business model/system?

* Do I have a track record in a customer facing role?

* Am I proven in dealing with people?

* Do I have the support of my family? If the answer is no to any of these questions, you should consider whether investing in a franchise is the right thing to do.

Once you’ve investigated the market and narrowed down your shortlist, it’s time to start your research. I’m a big believer in visiting the franchisor at its head office, so that you can assess the quality of the surroundings. While it is unlikely the franchisor will be based in The Shard or a similar location, you want to be sure the head office is appropriate for the franchise and that the training facilities are up to scratch.

By visiting a franchisor’s offices, you will also meet the key support team members, whereas if you meet at a neutral location nearer to home, it’s likely you will only meet with the franchise recruitment team.

Franchisor meetings either take the form of a group discovery day or one-to-one meeting/interview. Either way, this is your opportunity to learn about the nuts and bolts of the franchise and the background of the franchisor.

Be prepared - have your questions ready and do not be afraid to ask them. The franchisor will understand what a big decision you are considering making, so shouldn’t be put off by your questions.

A Google search of questions to ask a franchisor will give you lots of reference sites. The answers to some of your questions may be on the franchisor’s website, but ensure you leave the meeting with your outstanding questions answered to your satisfaction.

We also recommend you take your spouse, partner or other family member with you, as while they may not be directly involved in running the franchise, it’s important you have your family’s support before making an investment.

It’s reasonable to expect that when you leave the franchisor meeting you either take away with you or are sent on afterwards the following:

* Information for business planning.

* A draft copy of the franchise agreement you would be expected to sign.

* A directory of all the current franchisees within the network.

Plan

Regardless of whether you’re looking for bank funding or funding the investment from your own resources, it’s important to complete a business plan. This will tell you:

* The level of capital required to fund the business over and above the franchise fee.

* The forecasted levels of profit and break-even point.

* The viability of the business model.

* If the business can match your ambitions.

* Your operating plan for launching the business.

While the plan must be your own, the franchisor will be able to provide guidance and possibly a template to follow. If you aren’t comfortable completing a business plan yourself, an accountant will be able to help you.

The franchise agreement is the legal agreement between you and the franchisor and sets out, among other things, both party’s obligations, renewal terms, reasons for termination and the key factors for running the business.

While the franchisor won’t negotiate on the terms of the agreement, it’s important you have it reviewed by a British Franchise Association accredited lawyer, who will be able to advise you on its fairness and what the clauses contained within it mean, which will allow you to decide if it is something you are comfortable committing to for an agreed period of time, which could be anything from five to 20 years.

In my view, the most important part of researching a franchise is speaking with current franchisees. It is imperative the franchisor supplies you with a list that contains contact details of all its franchisees and not one that’s been hand-picked.

Questions

You should be given free rein to contact as many franchisees as you chose. While you will have lots of questions around the training and support provided by the franchisor, the profitability of their business, if it met their expectations and if the franchisor has delivered on what they promised they would, the key question for me is: knowing what you know now, would you do it again?

I’d also recommend visiting franchisees local to you to see the business in operation, so you can satisfy yourself it is something you are comfortable with.

Buying a franchiseisn’t a guarantee of success. You still need to go out there and implement the business model in your location, but by carrying out the research and due diligence to identify the franchise that best suits you, the chances of success will increase.

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