Tweet

Franchise Due Diligence - Do you really need to do it?

Guest post by: John Henning

Article Overview: You have been searching for various businesses for sale and now you have found that perfect business to buy. The business is represented by a reputable broker. You are comfortable with the terms, and now you wish to enter into contract and proceed with the due diligence phase. Everything you have been told by the seller and broker sounds good and feels right. So what’s next? How deep do you need to dig?

Franchise Due Diligence - Do you really need to do it?

You have been searching for various businesses for sale and now you have found that perfect business to buy. The business is represented by a reputable broker. You are comfortable with the terms, and now you wish to enter into contract and proceed with the due diligence phase. Everything you have been told by the seller and broker sounds good and feels right. So what's next? How deep do you need to dig? Deep my friend.

So what should you be digging for? Here is a partial list:

1.Negative business trends;

2.Negative industry trends;

3.Expected but undisclosed competition;

4.Any hint of a personal matter that would restrict the seller from selling;

5.Any partner, spouse, shareholder, or related party that would restrict the seller from selling;

6.Existing or past credit problems with banks or suppliers;

7.Any pending litigation against the company;

8.Any claims, liens, or encumbrances against the company or company real estate;

9.Unpaid income, sales, FICA, unemployment insurance, or other taxes;

10.Timely filing of all tax returns;

11.Expected but undisclosed loss of one or more major accounts;

12.A current disaster recovery plan;

13.A current management succession plan;

14.Stale or nonexistent policies and manuals (including personnel manual, training manual, safety manual, and sexual harassment policy)

15.Retention of key employees;

16.Retention of key accounts;

17.Recent bad publicity;

18.Expiring/ renewal of property lease;

19.Leases that are not assignable;

20.Restrictions on business or property expansion;

21.Capital assets that are at or near their expected life;

22.An established reserve for capital improvements;

23.Obsolete equipment and machinery;

24.Overvalued inventory;

25.Product obsolescence;

26.Expiring licenses, patents, franchise agreements, etc.

27.Difficulty in obtaining raw materials, products, or services;

28.Expiring vendor or supplier agreements;

29.Recent increases in all types of insurance rates;

30.Employee awareness regarding the business sale;

31.Customer awareness regarding the business sale;

32.Vendor and supplier awareness regarding the business sale;

33.Non compliance with safety and environmental requirements;

34.Potential labor union or other employee related issues;

35.Any web site related issues.

As you can see there are many issues that really need to be investigated. Many are very technical. You will likely need to enlist the help of other professionals for assistance. An attorney and an accountant are a must.

Related Articles
  What is the best Franchise?
  Question Your Franchise Decision Making
  Hiring a Franchise Lawyer
  The Importance of Due Diligence When You Buy a Franchise
  TEN FRANCHISES POISED FOR GROWTH
  Steps to a Successful Franchise Experience
  Are You Ready to Start a Franchise?
  Buying an Investment Franchise Business Opportunity
  Finding a Franchise
  Franchising Your Business Should Not Be Smoke and Mirrors
  5 Tips to Select the Right Franchise Opportunity
  Twenty Questions to Ask before you Buy a Franchise
  Franchising with all its Success
  Diligence
  About 60% of all franchise opportunities have less than 50 units.
  Finding the right Franchise
  Why Use a Franchise Consultant?
  Did you know: NIIT Franchise was present in Malaysia in 1997?
  To Franchise or Not to Franchise, That is the Question
  Financing a Franchise in Canada

Article Tags: franchise due diligence, perform the right due diligence



Related Forum Posts
Re: Enticing Franchises - Top 9 List - All Franchise listed above are in millions of dollars. Do you have the list of Franchise in thousands
Re: Info for would be franchisers... - [quote="Sebastien":1d29sdv1]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to. I just want to mention that all these magazines are NOT franchisee oriented. I mean these magazines are for franchise professionals. If you're looking to buy a franchise, you won't find much information in there. To answer your question, getting published in Franchise Times was fairly easy. I don't want to brag too much but I think I am known in the franchise industry. I was the marketing guy at Franchise.com for a few years before joining my new company, the World Franchising Network. So people know me and I have a very good relationship with Nancy Weingartner, the Managing Editor at Franchise Times. I was talking with her at the last Franchise Expo South in Miami and she mentioned she'd like me to be profiled. I was like "ok, sure!". I like this franchise executive profile thing in Franchise Times as it is rarely BS. People are usually really natural in there.[/quote:1d29sdv1] Thanks for the follow up Sebastien! And I can't say that I'm surprised that networking with the right people and managing your relationships with them properly are the keys to being published. I guess the old adage holds true of "it's not who you know, but who knows you" that's important.
how much for a franchise fee? - Dear Colleague There is no easy answer to this question. Things to consider: [list=] The sizeof the Franchise Clent base Expected Turnover Intellectual Property costs (recoup) Number of Franchises Number of employees Original Set up costs Franchise admin costs An example: A franchise that I was involved in setting was to a simple "lawn mowing/home repair" franchise. The Franchise included national/local advertising - preparation of client lists - general admin - central accounting etc The Franchise involved 300-500 clients - and an annual turnover of about $300,000 . The annual franchise fee was $30,000. Hope that this gives you some idea Take care Ian[/list]
Re: Franchise Surveys - Another good tool to researching a franchise is to speak with their existing franchisees. This contact information is included in most Franchise Disclosure Documents. In order to get a Franchise Disclosure Document or FDD as it is often referred to, you will have to complete a basic franchise application. The franchisor will then usually provide you with the FDD at that time. Included in that book of information is a list of the existing franchisees, the contract, the investment information etc... This information is required by Federal Law to be disclosed to your prior to making a purchase. So be sure to do your research and start with the Franchise Documents to get the initial information.
Re: Info for would be franchisers... - [quote="Sebastien":2gam0klq][quote="BuzzAroundBooks":2gam0klq]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to.[/quote:2gam0klq][/quote:2gam0klq] That is really what I look for in any industry publication. We lead busy lives and when people fill their magazines with fluff, not only does it benefit no one, but it makes us truly appreciate those that don't. Thanks!


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

The Importance of Master Data Management (MDM)

Severance and Separation Agreements

Starting a Business with Bad Personal Credit

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.