Franchise Due Diligence: Your 3-Step Roadmap to Making a Smart Investment

When you're considering investing in a franchise, due diligence is a critical step that can make or break your success. It is the main way of finding out about the business and all that it entails.

This in-depth vetting process involves reviewing key legal documents, speaking with current franchisees, and meeting face-to-face with the franchisor.? It can feel intimidating, especially for first-time franchisees - but it doesn't have to be.?

In this article, we’ll cover 3 key tips for navigating each step of the process and making a confident, well-informed investment decision.

Step 1: Deciphering the Franchise Disclosure Document

The Franchise Disclosure Document (FDD) is the most important document you'll review during due diligence.?

This standardized document, required by the Federal Trade Commission, provides comprehensive details about the franchisor's business model, financial performance, leadership team, fees, and more.?

Tips for reviewing the FDD:

• Check the financial data first, if it looks good to you, then proceed further. If the range of start up costs are already out of your budget, or will stretch you pretty thin, you may want to reconsider that option. If numbers do not look good, dig a little to validate and then eliminate if it still looks rough.
• Don't be intimidated by the length or legal jargon; take your time and read ones you are truly considering, thoroughly
• If you're considering multiple franchisors, compare their FDDs side-by-side and use a spreadsheet or comparison tool
• Don't hesitate to ask for help from a franchise consultant, attorney, CPA, or the franchisor, we all want you to make the best choice for you
• Watch for red flags like inexperienced leadership, lack of growth, or a history of bankruptcy. These are the red flags you investigate fully to see what has caused these and if there is a long history here
• Don't get distracted by perceived red flags that may not actually be issues, like a young team or slow-but-steady growth, you want to validate this with the franchisees and see how they are performing

Step 2: Validating with Current Franchisees?

Reviewing the FDD is crucial - but it only tells part of the story.?

To get a real-world perspective on a franchise opportunity, you need to speak with current franchisees.?

The FDD includes a list of current owners, and many franchisors will provide references or even make introductions.

Tips for franchisee validation:

• Speak with as many current franchisees as you can; gather a wide range of perspectives
• If you're looking for specific insights (e.g. as a veteran, woman, or multi-unit owner), ask to connect with franchisees who share those characteristics that are more like your background and experience range?
• Be open to speaking with franchisees who seem different from you; they may offer valuable insights you hadn't considered
• Prepare a list of questions in advance, but also let the conversation flow naturally
• With permission, visit franchisees in person if possible to see the business in action

Step 3: Acing Discovery Day

The final step of franchise due diligence is attending a Discovery Day, also referred to as Confirmation Day in some franchises. This event is your chance to meet face-to-face with the franchisor's leadership team, usually at their corporate offices.?

It typically involves a mix of business meetings, presentations, and social events.

Tips for a successful Discovery Day:

• Attend in person if at all possible; there's no substitute for face-to-face interaction
• Prepare thoroughly; review your notes from the FDD and franchisee conversations, and come with thoughtful questions?
• Treat it like an interview; the franchisor is evaluating you as much as you're evaluating them
• Be authentic and engage in genuine conversation; they want to know the real you
• Involve your spouse or partner if they'll be part of the business; franchisors want to meet them too

Final Thoughts

Franchise due diligence may seem daunting, but it's an essential step on the path to successful franchise ownership.?

By thoroughly reviewing the FDD, validating with current franchisees, and engaging authentically at Discovery Day, you'll gain the knowledge and confidence you need to make a smart investment.

Remember, you don't have to navigate this process alone. Working with an experienced franchise consultant can help you understand the FDD, connect with the right franchisees, prepare for Discovery Day, and ultimately make the best decision for your unique goals and circumstances.?

With the right guidance and a commitment to thorough due diligence, you can find a franchise that fits your needs and sets you up for long-term success!

Ready To Explore Franchising? Let’s Talk!

Mack and Sharon Strange are on a mission as Franchise Consultants to help others go from “Start” to “Success” when it comes to franchise ownership.

If you’re curious about exploring franchising as a career pivot, investment vehicle or lucrative side hustle, let’s talk!

Frequently asked questions (FAQs)

Q: How do I book a call?

A: You can book a free, no obligation call with Mack here and/or a free call with Sharon here.

Q: How much do your services cost??

A: As Franchise Consultants, there’s no fee for our services. We’re compensated by franchisors only if and when you decide to move forward with (and are approved for) franchise ownership.

Q: What do you do??

A: ?Our role is to serve as a trusted guide and educational resource.

Q: Where can I learn more??

A: You can learn more about our story and how YOU can follow in our footsteps via the Franchise Together Podcast.

We look forward to connecting with you soon!