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Operational due diligence – researching franchising

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By: Graeme McCormack – Founder & CEO Faction  

Would you buy a house without a having land survey or building inspection done? It might appear to be a great buy, well priced, nicely presented with a new coat of paint and manicured gardens, but would you risk buying it without knowing whether it is in a flood zone, or whether its foundations are infested with termites, or both?
Similarly then, why would you buy a franchise without obtaining independent expert advice on the operational framework, culture, competencies and systems of the business you are buying?
One of the most over-looked exercises a prospective franchisee can undertake is detailed operational due diligence on not only the franchise system they are considering, but the actual site and/or area-specific deal within which they will be operating that franchise.
According to Graeme Samuel, Chairman of the ACCC, prospective franchisees “should have thoroughly researched the franchisor and other key personnel and had an independent expert assessment carried out. The small amount this costs could potentially pay for itself hundreds of times over in preventing a poor investment.”
Similarly, the Franchise Council of Australia says “The hardest task is not operating the franchise. The hardest and most ignored task is research during the due diligence period, prior to signing on the dotted line of the franchise agreement. Not enough people who venture into a new business spend the time in pre-entry due diligence, yet many franchisees can play the blame game if it all goes wrong.”
All too often prospective franchisees choose to undertake their own “form” of operational due diligence which might involve them passively observing the franchise store or location they are considering, being a customer in that store or speaking with other franchisees within that system. Whilst there is some benefit to undertaking these activities, alone they are superficial at best and offer no real in-depth knowledge or understanding about the business opportunity being considered.
In the case of retail franchises, it should never be assumed that a busy store or location will directly translate to a profitable business. There is a lot more critical information which needs to be discovered. Key factors such as occupancy conditions, trading hours, proposed local Council and/or Centre re-developments, supplier relations, staff culture, operations and training standards, local brand equity, competitor analysis and geographical exclusivity all need to be investigated thoroughly, preferably with the assistance of an independent franchise business expert.      
Similar to a solicitor or accountant, the role of the franchise operations expert is to act independently on each clients behalf in obtaining all the necessary due diligence required for them to make the most informed decision possible on whether or not to buy a specific franchise opportunity. The expert should act exclusively for the client and not be remunerated in any way by any franchisor in regard to franchisee recruitment.  
Buying a new or existing franchise involves making significant business decisions and taking risk, all of which could have profound effect on a person’s personal life and financial situation for better or worse. Whilst there can never be any guarantees with any business, it is imperative that all necessary steps are taken to ensure all of the key facts are discovered and understood, and that the most informed decision is made prior to commitment.
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