Doing Your Due Diligence Before Buying a Franchise

Franchising is a popular method of doing business and your chances for success are greater than those of independent business owners. To ensure survival you should follow some basic but vital steps. Essentially, do your due diligence or you could risk everything.

Know your market. Once you have a clear picture of what you can afford and the type of franchise concept you want to invest in, investigate the demand for that particular product or service in your area. Just because one type of business works in one region does not mean it will work in the community where you want to open your franchise. Some things to consider are the level of competition in your target market and whether a concept has only seasonal marketability.

Comparison shop. Even if your heart is set on one company, it never hurts to look at other opportunities to make sure you are signing on with the best concept for your skills and interests. One way to do this is by attending a franchise tradeshow and/or using a franchise consultant who will enter your criteria into a database and then present companies that match your parameters. There are numerous Web sites that allow you to see a snapshot of several concepts at once. You also will want to talk to existing franchisees of the franchise company in which you are interested.

Study the franchisor's offering. Do not sign any contract or make any payment until you have the opportunity to investigate the franchisor's offering. The FTC requires all franchisors to disclose important information about the franchise system through the Franchise Disclosure Document (FDD). This document contains important information about the franchise including company background, past litigations, costs, franchisee obligations, lists of current and former franchisees, audited financial statements, and more. Because investing in a franchise involves a substantial investment, you should consider having an attorney review the FDD and franchise agreement, as well as have an accountant review the franchisor's financial statements.

Find out what training and support (technical, administrative, training, etc.) the franchisor provides. One of the advantages of buying a franchise is that the franchisor provides intensive training on how to run the business and offers some kind of ongoing support.

Talk to existing franchisees. This is an important step because they can give you honest feedback and substantiation of what the franchisor tells you. Ask them about their experiences, good and bad, and if they have any advice for you.