Buying a franchise? Do your due diligence.

Buying a franchise may be the best financial investment you ever make, but it is not something you should enter into without plenty of due diligence. You have probably read the franchisor’s website and talked extensively to the franchise salesperson. But there is much more you need to do before you make what may be one of the biggest financial decisions in your life. Insist on learning everything you can — the good and the bad. There are many things you should do to protect yourself from a bad investment. Below are a few.

Read the Franchise Disclosure Document (FDD)

The franchisor must deliver an FDD to you at least 14 days before you sign the agreement or make a payment. This document is lengthy and is broken down into 23 sections called items. The items describe the franchisor, the nature of the business, the relationship between the parties, information about the principals of the franchisor, an estimate of your expenses, the amount of your investment, the legal status of the trademark, contact information for current franchisees and should clearly delineate the duties of both the franchisor and the franchisee. Before you sign a franchise agreement, there are things you need to look for or beware of:

  • The franchise agreement. Read the franchise agreement carefully and consult with a franchise attorney so that you clearly understand your obligations and the obligations of the franchisor.
  • Amount of total investment. The FDD should tell you the amount of your total investment, but this number is probably not complete and does not include expenses such as the true cost of the lease and equipment.
  • Personal guarantee. The documents may not explain the consequences of a personal guarantee. Make sure you understand it.
  • Operations manual. Most franchise agreements incorporate an operations manual that you may not see until after you sign. Most of these manuals give the franchisor the unilateral right to change the rules.
  • Renewal. What is the meaning of renewal in the agreement? There are few franchise agreements that allow a franchisee to renew under the same agreement. Most renewals raise the fees, require an additional investment or impose other new requirements on the franchisee.

Assemble your own team of professional advisers

Don’t do this alone. You need a team to protect you and advise you. Integral to this team are a franchise attorney, an accountant and other business advisers. We will guide you through the documents item by item so that you understand the obligations and duties you and the franchisor have. We give you the tools you need to make a good franchise purchase decision.

Research, research, research

Call as many franchisees listed in the FDD as possible and start asking questions regarding the profitability of the business, whether they are satisfied with their purchase and what the relationship is like between the franchisor and the franchisee. Make a list of questions before you call them.