The importance of due diligence in franchising
"Due Diligence" is a term often used these days when requesting prospective Franchisees to conduct a thorough research process of the Franchisor's business operations before making application to become a Franchisee.
However in my opinion, due diligence applies equally to the Franchisor i.e. has the Franchisor conducted a satisfactory due diligence process relating to the prospective Franchisee, before asking the prospect to make application to become a Franchisee?
Entering into a franchise agreement is a serious undertaking. Many problems arising between Franchisor and Franchisee subsequent to a Franchise business commencing, may never have arisen had the Franchisor taken the time to execute a thorough research process as to the suitability and background of the prospective Franchisee.
A Franchisor's due diligence process should include but not be limited to the following:
Congruence of values.
What evidence is there that the prospect Franchisee demonstrates similar business values to the promoted values of the Franchisor? This may take several meetings to determine.
Consider your meetings in a similar manner as an employer prospective employee interview. Like all of us, each time we meet somebody, familiarity, trust and sense of comfort can begin to build in the relationship and vice versa! We begin to identify the day to day personality and values of the "real" person in front of us.
Remember, one of the major causes of stress in a relationship is when there's a clash of values, so best find out in the early stages of a potential relationship if there is an obvious congruence of values or otherwise.
Personality style benchmarking.
Breakdowns in communication frequently occur because of a lack of understanding of the other person's personality style.
The same applies in relationships between Franchisors and Franchisees. Asking prospective Franchisees to complete a simple DISC exercise as part of the Franchisor's application process, provides the Franchisor with valuable information as to a) how well the applicant's personality fits into the benchmarked personality styles of other Franchisees and b) how to effectively communicate with that applicant once he/she becomes a Franchisee.
Previous business experience.
Applicants should provide a Franchisor with a detailed summary of his/her business experience over the past 10 years (less, depending on the circumstances). This summary should include but not be limited to the name of the company/companies the applicant has previously owned or worked in; whether it was full time or part time participation; the number and % of shares previously and perhaps still owned by the applicant and details of position/s held e.g. director, partner, shareholder
Market and product knowledge.
This important component of an applicant's suitability for a franchise, goes without saying. A key factor in any Franchisor's consideration of a Franchise application should be whether or not the applicant demonstrates sound knowledge of the products and services the Franchisor sells, the Franchisor's competitors and the marketplace the Franchisor's products and services are distributed.
The most suitable applicants are those who have taken the time via either coal-face experience or extensive research, to gain this critical knowledge. Again, it's all about Franchisors asking the right questions to gain important information from applicants. Not doing this simple task can be financially costly down the road.
There's no point in accepting a Franchise application if six months later the Franchisee runs out of money! For this key reason it's critical that Franchisors obtain information from applicants regarding their assets and liabilities.
Assets can include; cash at hand (bank and other sources); personal residence details (current market value); value of any investment property; shares, securities, bonds, etc; other assets including motor vehicles and personal Items.
Liabilities can include; total mortgages on property with lenders details; business overdraft/s and any other loans.
Complete details of at least two business and two personal references should be provided. This information should include the business name the business referees are currently working in, address and telephone contact details etc. Email referee checks should be avoided as they tend to be impersonal and not address key information being sought. A telephone call however allows the Franchisor the opportunity to have a deeper discussion as responses to his/her questions open up further questioning avenues.
Three further important points when it comes to referees. Firstly, never settle on one referee's responses, always seek information from at least two, you may be surprised at the difference in their responses to your questions. Secondly, use questioning techniques that drill deep down to discover who the real person is that you are considering as a Franchisee. Thirdly, try to always seek referees that the prospect has worked closely with.
Education and qualifications.
Basic non-negotiable tertiary qualifications are the norm for most Franchises (or should be). However Franchisor should also look for evidence of on-going education. The best Franchisees in today's highly competitive business environment are those who are continual learners. Just because an applicant emerged from a university 5/10 years ago does not necessarily mean that person will make a great Franchisee. Therefore, look for Franchisee prospects who can demonstrate a history of continual up-skilling, particularly in the
Get independent advice.
Even if all the above due diligence has been completed, there may still be uncertainty in the Franchisor's mind about the suitability of a Franchise applicant. In these circumstances it's best to seek the advice of an independent expert before perhaps making the wrong decision.
Business plan and projections for profit and cash flow.
To me as a Franchisor, my "hot button" gets turned on when an applicant assumes the need to provide a business plan, a marketing plan, market research and cash-flow projections. These are the guys that automatically tell me they are smart, passionate, hungry for success and have a clear vision of their future. They go to the top of my list every time!
They know exactly how their new franchise business is to be structured and owned i.e. as a sole trader, partnership or corporation. If a partnership, then who are the other partners? What % shareholding and other financial relationship do they have to each other? If a corporation, similar information is given together with satisfactory evidence of the usual legislative requirements regarding directorships and financial controllers etc