Franchisee Due Diligence Checklist

Below we have outlined various factors you may wish to consider:

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• Have you checked the Franchisor's background?

• Is the Franchisor's brand well known?

• Is the franchise system proven?

• What are the costs involved in becoming a franchisee?

• Are you required to enter into a premises lease/sub-lease and/or Occupancy Licence?

• Is the Territory being granted to you exclusive?

• Can the Franchisor compete with you online?

• Are you restricted to buying goods or services only from Franchisor approved suppliers?

• Will you have an option to renew once the initial Term expires?

• Are there any restrictions on you later selling the Franchised Business?

• What restraint of trade restrictions apply?  

• Do you have the skills and capabilities to match the requirements needed to operate a Franchised Business?

• Have you spoken with former or existing franchisees to get feedback on the Franchisor and franchise system?

• Make sure you obtain obtain appropriate legal, financial and business advice

• Do you have a business plan?

• Have you considered what structure to use to operate your business?Typical structures include:

  • Sole proprietor

  • Partnership

  • Company

  • Trust

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There are different taxation and liability advantages and disadvantages to each structure and appropriate professional advice should be obtained prior to establishing the structure.

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• Have you verified what licenses and permits you are required to obtain from government authorities in connection with the operation of the Franchise Business?

• What checks have you made into the types and styles of marketing material (brochures, catalogues, flyers, etc) the Franchisor will provide you on start –up?

• What are your on-going obligations to purchase marketing material from the Franchisor or can you purchase the material from third party providers?  

• Did you check what pricing strategy will be adopted by the Franchisor in relation to the products or services

• Are you able to set your own prices or will there be recommended prices imposed by the Franchisor?

• Have you verified if the Franchisor requires you to purchase specific computer hardware or software as part of the business systems?

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The above are just a few issues that you may need to take into account. ​Like any investment, purchasing a franchise is not a guarantee of success. Franchisees do fail for a variety of reasons, such as:

• inadequate research of the Franchised Business, Franchisor or brand;

• undercapitalisation at the start;

• underestimating ongoing operating costs;

• not understanding their rights and obligations under the Franchise Agreement;

• mis-match between a franchisee's skillset and that needed for the franchise;

• poor people management;

• poor business management;

• reluctance to follow the Franchisor's procedures;

• mis-trust between the Franchisor and Franchisee;

• lack of training & support by the Franchisor;

• etc. 

Obtaining appropriate legal advice can help you to be fully informed of your legal rights and obligations and minimise the risk of making a poor investment decision.