Franchise Due Diligence: What to Expect

When you buy a franchise, the process can take anywhere from several weeks to several months, depending on whether you’re doing it on your own or with the help of a consultant. It starts with self-assessment, as you determine your goals and resources and think about what kind of business you want to run. The next phase, exploration and discovery, involves researching franchises to find a few options that fit your needs. Finally, you go through franchise due diligence.

This stage of the process involves in-depth examination of your top franchise choices. It’s often the most intimidating stage because you must review numerous legal documents and attend high-stakes meetings. Generally, it involves three steps: reviewing the Franchise Disclosure Document, speaking with current franchisees, and attending a “discovery day.” Here’s what to expect at each step.

Reviewing the Franchise Disclosure Document

From a financial perspective, the Franchise Disclosure Document (FDD) is the most important part of franchise due diligence. The Federal Trade Commission requires franchisors to provide this document, and it follows a standardized format. FDDs can be intimidating because they tend to be lengthy and full of legalese. But it’s very important to read them thoroughly. They contain crucial information about each franchisor’s business model,?financial track record , the leadership team’s experience, fees, and more–all the business details you need to determine whether a particular franchise is a smart investment.

Investigating more than one franchisor? Use the FDD’s standardized format to your advantage: put the FDDs side-by-side so you can compare how each business stacks up against the others. If you don’t understand anything you’re seeing, don’t be afraid to ask for help. Talk to your consultant if you’re using one, ask a franchise lawyer, or ask for clarification from the franchisor. And watch for red flags. These might include an inexperienced leadership team, lack of growth, or a history of bankruptcy (see?this post ?for more red flags).

Speaking with Current Franchisees

The next step of franchise due diligence can be the most fun. At this point, you get to speak with actual franchisees. Every franchisor’s FDD should include a list of current franchisees, and many franchisors will provide a shorter list of suggested references. Some will even make an introduction for you. Speak to as many of these people as you can. After all, this is your chance to find out how franchising plays out in the real world. FDDs often contain a lot of projections, averages, and trends. Validation calls are your chance to collect real data from real franchisees.

At the same time, keep in mind that franchisors’ reference lists may only include their most successful franchisees. Or they may connect you with people whose plans or experiences don’t feel relevant to you. If you plan to buy a?single unit , for instance, you probably don’t want to meet only with area developers. Or if you are a veteran,?woman , minority, or first-generation business owner, you may want to speak with franchisees who also fit those categories. Don’t hesitate to ask for connections who fit a certain profile, but also be open to speaking with franchisees who seem different from you. They may broaden your perspective and open your eyes to fresh?possibilities for success .

Attending a Discovery Day

The final step in franchise due diligence is a big one: discovery day. A discovery day is an event where potential franchisees meet face-to-face with franchisor leadership. Candidates usually bring their spouses and attend a mix of business meetings and social events. Pre-pandemic, these usually took place at and around franchisor headquarters. Many franchisors have conducted them virtually over the past year, but with much of the country starting to resume normal activity, in-person discovery days will probably become common again.

Be aware that a discovery day is not just your chance to learn more about the franchisor.?They are also vetting you . For a variety of reasons, good franchisors pick their franchisees carefully and don’t award contracts to everyone who asks. They look for people who are not just financially qualified but who will also represent the business well, be contributing members of?the owner network , and fit the company’s culture.

As a consultant, I walk through the due diligence process with my clients. I help them understand the FDD, I provide recommendations for what to ask franchisees on validation calls, and I coach them ahead of discovery days. My goal is always to make a complicated and intimidating process easier and more comfortable. At the end of it all, I help my clients assess everything they’ve learned so they can make the best possible decision for themselves?and their families . I’ve been through the entire process myself, multiple times, and can speak from experience. If that sounds like the kind of help you want,?book some time on my calendar . It only takes a 15-minute call to start the process!