Franchise Due Diligence: The Horse & Jockey
Buying a franchise is a huge commitment. You will invest $100k to $300k+, possibly take on debt, dedicate your time, and sign a 10 to 20-year agreement.
Thorough due diligence is critical. Pick the right franchise, and you’ll be in the fast lane. Pick the wrong one, and it could slow you down for years.
You need to have confidence in both the horse & the jockey.
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The Horse aka the Business Model
Just because someone has a business model that works for them doesn't mean it will necessarily work in your market
To vet the business model you need to look at the following:
Demand, Pricing, & Expenses
Is there a demand for the product/service in your market?
You are looking at a premium boutique fitness concept. They target upper-middle income consumers who shop at Whole Foods, Starbucks, and workout at other boutique fitness concepts like Orange Theory, Pure Barre, etc.
If you live in a market with no "premium" stores, chances are there is not enough demand.
A good franchisor will be honest about the market viability. A bad one will try to convince you it'll work even if the demographics don't make sense.
Will your market support the recommended pricing model?
You are looking at an auto repair franchise that needs to charge $150 per billable hour
Validate by calling up a range of competitors:
Other National Brands
You want to confirm that $150 is in line with other national brands & lower than the dealerships.
You’ll have to re-work your financial model if not. You can justify charging a premium price if you deliver premium service, but that's a high bar.
How do expenses in your market compare to the financial model?
A) Labor - You are looking at a food concept that requires direct labor at $15 per hour to keep the payroll % on target.
Go through active Indeed postings to see what competitors are offering. You're good if you see many posts inline at $14-16 per hour. You will need to re-work your model if you see a lot of posts offering $18-20 per hour for similar jobs.
To take it another step further, post a fake job ad. Talk to a couple of applicants. You need to determine how difficult or easy it is to find employees
B) Rent - you need 1,000 sq ft class-B with a budget of $25/sq ft
Research the rental market by calling local commercial realtors. Ask for rental rates. You are good to go if they are around $22-27. If they are coming in at $40+ you may have an issue.
The Jockey aka the Leadership Team
Does the leadership team have what it takes to support you in building a profitable business?
To vet the leadership team look at the following:
Experience, Personality, and Support
How much experience does the leadership team have?
How big is their team? Are they a one-man show, or have they surrounded themselves with other high-caliber people?
In emerging franchises, the leadership is most likely the company's founder. They have built a successful business and decided to scale via franchising. How long have they been in business? I have more confidence in someone doing it for 10 years vs. 10 months.
Legacy brands usually have seasoned "C Suite" executives who may have worked at a variety of different brands & industries. These guys should have a solid track record of experience, even if they are relatively new to the brand.
Other things I take into account:
Do they personally own any locations or franchises?
How many units are open vs. units sold?
Legal issues - they are required to disclose past/current/pending issues in the FDD
Do you like them?
A franchise is a 10 to 20-year partnership. You need to have a warm & fuzzy feeling about the leadership team. You need to feel that they authentically want to see you succeed. That they are responsive, sharp, and not just trying to sell franchises, collect fees & move on
When going through the discovery process, you will be working 1-1 with someone on the franchisor development team. You’ll work with the founder in smaller franchises, and in larger franchises, you’ll work with someone on the franchise development team.
As you get further down the process, you need to speak with the leadership and operations team since these are the people you’ll be working with as a franchisee.
Does the franchisor have the ability to support you in building a profitable business?
You are buying a franchise to turn decades into days which requires a lot of training initially & ongoing support as you build the business.
You want clarity around the initial training, ongoing training, and in-market training. Every franchisor says they provide excellent training & support. It’s essential to verify the quality of this support by speaking to other franchisees (see below)
One of the final steps is to validate everything you've learned from the franchisor by talking to current & former franchisees. There is an art of making these calls.
Here's the process I follow:
Contact them via text or email
Never call the location asking to speak to them
Don't expect them to drop everything
Don't expect every single one to talk to you
Call people outside my target market (who could see me as competition)
Some will tell you a lot. Some tell you nothing
Take everything with a grain of salt - the good & the bad
Your goal is to get them to like & trust you. Give them some background on yourself and what you like about the franchise. Start with the easy questions to build rapport, then move towards the sales/margins/profit later in the conversation.
I created a list of 20+ Questions to Ask Franchisees as part of the validation process. There are 2 ways to get it:
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