Before you begin to explore any franchise opportunity you need to determine if becoming a franchisee is the right decision for you.

1. Can you follow a formula or do you need to do things your way?
2. What type of businesses do you think you would like to operate?
3. What are your skills, strengths and your weaknesses?

There are a hundred different questions you need to ask yourself before you become a franchisee. Take your time. There are hundreds of different industries that use franchising and thousands of franchise opportunities to choose from. Sit down with some trusted friends and family and do a due diligence on yourself because finding the right opportunity is a lot easier, once you answer some basic questions about yourself.

Net, become educated on franchising. There is also a lot of information available online that you should consider. Possibly the best online material can be found right here on the International Franchise Association’s website. Here you will find online courses, research, articles, and other helpful information. The IFA’s website will also provide you information on the franchisors that are members of the association. The franchisor members of the IFA include many of the world’s leading franchise investment opportunities.

Investing in a franchise is complex and it is not the time to go it alone. You should always have your own experienced independent franchise advisor. On the International Franchise Association’s website you will find a section highlighting the IFA’s Supplier Forum where you can search for franchise lawyers or accountants to assist you in evaluating franchise opportunities. Keep in mind that franchise law is a specialty and your local lawyer will generally not have a sufficient understanding of franchising to be helpful to you, and may even be harmful to a successful transaction.

Many of the lawyers listed on the IFA  web site specialize in franchisor work and may not work with franchisees. To save you some time, one of our members, MSA Worldwide,  has put together a list of lawyers that represent franchisees – www.msaworldwide.com/franchise-resources/franchisee-lawyers.

Franchise brokers and franchise sales organizations that are members of the IFA supplier forum are another source of support. Franchise brokers and franchise sales organizations work with many franchisors to help them find franchisees and are paid by the franchisor when you sign their franchise agreement.

It is essential that you perform a thorough and supported due diligence to ensure your investment decision is fully informed. Professionals in franchising and federal and state franchise regulators recommend that you engage knowledgeable independent advisors to assist you in making your franchise investment.

1. Analyze the Franchise Disclosure Document (FDD)

The Franchise Disclosure Document (FDD) is a critical component of your due diligence process. This document, required by the Federal Trade Commission (FTC), provides an in-depth look at the franchise’s legal, financial, and operational structure.

• Review the Financial Information: The FDD contains information on the costs you may expect to incur in developing and operating your franchised businesses and the financial condition of the franchisor, including the infill franchisee fee and other required expenses.  The FDD may also contain “financial performance representations,” or information about franchisee earnings.
• Understand the Franchisor’s Responsibilities: The FDD outlines the franchisor’s obligations, such as training, marketing support, and operational guidance, giving you insight into the support you can expect and how it aligns with the franchisor’s business model.
• Evaluate Territory and Competition Rights: Make sure you understand any geographic restrictions or protections provided. This is particularly important if local competition is a concern.
• Check Litigation and Bankruptcy History: The FDD will disclose any legal actions or bankruptcies involving the franchisor. A history of lawsuits or financial instability could be a red flag.
• Is the Franchise System Growing or Shrinking: The FDD will provide you with charts that will give you information on whether the franchise system is growing or shrinking.
• Financial Performance: Most franchisors disclose information on the financial performance of their franchisees.

These are just a few of the material terms you should consider about a franchise opportunity before deciding to make an investment. There are twenty-two items and a receipt in every FDD. Make sure you read and understand the franchise offering. While some of the material may look like boiler plate information, each offering will be different. Review the FDD carefully, ideally with a franchise attorney or other experienced independent advisor, to ensure you understand all sections and can make informed decisions.

 2. Speak with Current and Former Franchisees

Hearing directly from franchisees gives you invaluable real-world insights into the franchise’s day-to-day operations, support, and profitability. This step is crucial to understanding the franchise’s strengths and weaknesses from the perspective of those who know it best.

• Ask About Their Experiences: Find out about the quality of support, challenges they face, and how long it took to achieve profitability. These conversations can provide a realistic view of what to expect.
• Understand Revenue Potential and Expenses: While individual results vary, franchisees can share approximate figures that help you set expectations for revenue and expenses.
• Ask About Franchisor Relationship: Discuss if the franchisor is responsive, transparent, and supportive. Good relationships often correlate with franchisee satisfaction and success. Inquire about whether the franchise system has an active franchise advisory council and/or independent franchisee association, and if so, speak with the franchisee leadership of each.
• Look for Patterns: Speak with several franchisees to identify recurring themes, both positive and negative. Consistent feedback across franchisees can indicate broader trends.

Reaching out to former franchisees is also helpful. They can provide insights into why they left the franchise, which may reveal potential pitfalls. You may find the contact information for all existing franchisee and those who have recently left the franchise system in the FDD. The most important question to ask each franchisee is “With the knowledge you have today, would you still make an investment in the franchise opportunity?”

3. Evaluate Initial and Ongoing Costs

One of the most important aspects of due diligence is understanding the financial commitment involved. This includes both upfront costs and ongoing expenses, as well as whether the franchise will provide you with a satisfactory return on investment.

• Review Initial Investment: This covers the initial franchise fee, as well as expenses for real estate, equipment, inventory, opening marketing efforts, and many other start-up expenses. Confirm that you have the available cash and ability to raise capital/loans that aligns with these requirements. Understand that the working capital shown by the franchisor may not be all you need before you begin to make a profit.
• Assess Royalty and Marketing Fees: Franchisors typically charge royalties based on a percentage of revenue, along with additional marketing, technology and other continuing fees. These can affect your bottom line, so it’s essential to account for them.
• Identify Additional Expenses: Some expenses may not be highlighted in the FDD, such as payroll, utilities, and insurance. Speak with franchisees or a franchise financial advisor to understand the full scope of ongoing costs.
• Estimate Break-even and Profitability: Based on costs and projected revenues, calculate how long it might take for you to break even. This helps you set realistic financial expectations and make informed decisions about profitability.

A clear understanding of all costs enables you to create an accurate financial plan and ensures you have sufficient resources to support your business. Understand that franchisors will not be able to evaluate your financial plan with you before you sign your franchise agreement. This is not because they don’t want to, but because franchise regulations prohibit them from doing so.

4. Research the Product and Service Industry and Market Demand

Understanding the health and market demand for the franchise system’s products or services is essential for assessing its long-term potential. Even a well-run franchise can struggle if the demand for its offerings is limited or the industry faces challenges. This step is crucial for any prospective franchisee or potential franchisee evaluating a business opportunity. Choosing a franchise brand with proven brand recognition and demand improves long-term success.

• Analyze Market Trends: Look at recent industry trends, growth projections, and consumer demand. Research whether the franchise operates in a resilient sector, or if it is affected by seasonal or economic changes.
• Evaluate Competitors: Identify local and regional competitors. Consider how they compare in terms of brand strength, pricing, and customer loyalty. Overcrowded markets can limit growth potential.
• Assess Demographic Suitability: Review the target audience and their needs. Some franchises thrive in particular demographics or locations, so make sure your area is a good match.
• Understand Future Growth Potential: Some industries and franchise brands are expanding rapidly, while others may be stable or declining. Choose a brand that aligns with your growth goals.
• Technology is a Benefit and a Challenge: Understand how technology, internet sales and future trends may impact the franchisor’s industry. Make certain the franchisor has the ability and willingness to make changes to stay ahead of the competition and market changes.
• Understand the Real Estate: Cost of real estate and local development costs vary widely from market to market. Make certain that the real estate you need is available, in the markets your customers visit at a cost that is affordable.

This research helps you make an informed decision about whether the franchise is a viable opportunity in your chosen area.

5. Examine the Franchisor’s Support and Training Program

Training and support are crucial to your success as a franchisee, particularly if you are new to the industry. Understanding what the franchisor provides can help you assess whether the franchise system is a good fit for you personally.

• Review Initial Training Programs: Most franchisors offer initial training to help you get started, covering everything from operations to customer service. Find out how comprehensive this training is and how long it lasts. Does the training include classroom sessions that help you understand how to manage your own business, hire staff and manage costs as well as on-the job training in an operating location. Does the franchisor provide any on-line training that you can take before you go to your initial training program.
• Check for Ongoing Support: Support typically does not end after the initial training. Look into the ongoing assistance provided, such as field support, marketing guidance, and technology updates. Ask your franchisor to introduce you to the headquarters support people. Whenever possible, you also want to meet with the field consultant that will be working with you and understand what types of support they will be providing to you.
• Understand Marketing Assistance: Many franchisors handle broader marketing campaigns, but ask about local marketing support, too. Ask if they offer guidance on social media, digital advertising, or local outreach. If you are joining an emerging brand that does not have significant brand recognition, you are opening a location in a new market for the franchisor or you are introducing a new product or service, understand what the franchisor’s market introduction program is and what your initial marketing investment will cost you.
• Inquire About Peer Support Networks: Franchise Advisory Councils and independent franchisee associations can be invaluable for advice, shared resources, and moral support. Get the contact information for the head of the Franchise Advisory Council and Franchisee Association and include them in your due diligence questioning.

A robust support system can make a significant difference in your success, especially during the early stages when you may need guidance with your franchise business plan and business goals.

6. Consult Professional Advisors

Consult with professionals who specialize in franchise law and finance. They can provide expert insights into the Franchise Disclosure Document, financial commitments, and legal obligations to ensure you’re fully informed.

• Franchise Attorney: A franchisee attorney has specialized experience necessary to support you in your review your FDD and Franchise Agreement, helping you understand legal terms, renewal and exit options, and other obligations. They’ll also highlight any risks and protect your interests. Your local attorney may not have sufficient experience in franchising to be helpful and may actually create problems for you.
• Financial Advisor: A franchise financial advisor or accountant can assess the business’s financial viability, review revenue projections, and help you create a realistic business plan. They can also assist with budgeting and financing strategies.
• Tax Advisor: Taxes can vary significantly depending on the franchise’s structure. A tax professional can help you understand tax obligations and identify any potential deductions or benefits.
• Bankers, Loan Brokers and Investment Counselors: There are any number of ways to finance your franchise investors. They can introduce you to financing sources that may make investments you did not think you could afford – possible.

Professional advisors offer specialized knowledge that ensures you’re making decisions based on a comprehensive understanding of all factors.

Due diligence is a critical step in the franchise decision-making process, providing you with a 360-degree view of the opportunity. By conducting thorough and supported due diligence, which should include analyzing the FDD, speaking with franchisees, understanding the market, evaluating costs, assessing support, and consulting experts, you can make an informed choice about whether a franchise aligns with your goals and expectations. Thorough due diligence can help you enter the franchise world with confidence and clarity.