What type of due diligence should a prospective franchisee complete before investing?

Shelley Nadler writes:

The prospective franchisee should first assess its prospective franchisor. Franchise systems will be at different stages of development and the more franchisees there are the easier your task will be, as there will be many franchisees who you can talk to about what the franchise and franchisor have done for them.

Where the franchisor is just getting off the ground, greater care is needed in making a choice and you’ll want to check if the pilot testing has been wide enough and in sufficient representative locations over a sufficiently long period.

On the financial side, you should ask for a copy of its latest audited accounts and for a reference from its bankers. You should speak to existing franchisees - the franchisor should allow you to choose which ones to speak to. You should carry out a company search at Companies House to check the information you have been provided with.

You will also need to assess the business proposition of the franchisor, including initial and ongoing support and training provided, details of how the business is structured and operational details.

The prospective franchisee will want to find out the investment cost of a franchise, initial and ongoing fees and working capital requirements, plus figures for profit margins and expenses based on actual franchise businesses in the network. You should take advice from your accountant on any financial information you’re provided with.

Shelley Nadler is a legal director in Bird & Bird’s international franchising team and has many years’ experience of advising on all aspects of franchising.