Shopping for a Franchise: Conducting Your Due Diligence Part #2 — Quantitative Research
So, you’ve decided to become your own boss by acquiring a franchise. Perhaps you’ve scanned internet sources, read magazines or even worked with a franchise broker to identify an industry that interests you and an opportunity or two that look particularly promising.
Before investing dollar one, you’d be well advised to conduct your due diligence. Simply put, it’s a comprehensive appraisal of a business undertaken by a prospective buyer.
With it, you’ll establish an operation’s assets, liabilities, rights and obligations. You’ll also evaluate its commercial potential as well as your prospects for personal satisfaction and financial success.
Two complementary strategies to pursue
When conducting their due diligence, many choose to divide their research efforts into two approaches. Supportive of each other, both are important in evaluating your franchise opportunity:
- Qualitative research — which we addressed in our Due Diligence Part #1 blog— gathers information from which you’ll form an opinion. Think of it as acquiring impressions, experiences and views.
- Quantitative data — which we’ll cover here — collects the facts and figures you’ll also need to assess an opportunity. Think numbers, percentages, contractual terms and the like.
Addressing quantitative due diligence
Working in teamwork with your accountant, attorney and/or other trusted advisors, you’ll seek answers to questions such as:
- How much will it cost to get the franchise up and running?
- What are the franchise fees and royalty rates?
- Are there advertising or marketing fees?
- When can you expect to break even with your new franchise?
- What are the franchise renewal terms?
- What is the franchisor’s failure rate?
- What is the franchisor’s turnover rate?
- Will your franchise be granted an exclusive geographic territory?
- What are your franchise transfer and termination rights?
- How are any franchisor/franchisee disputes resolved?
- Does the franchisor have a history of litigation?
Getting answers to your questions
Where can you find the answers to these questions and probably many other quantitative questions? The franchisor’s Franchise Disclosure Document will be a good place to start. To assist you in your evaluations and comparisons, know that all FDDs adhere to the same 23-step format.
If offered to you, the Franchise Agreement will be another key source of quantitative information. This is the formal contract that a franchisor will provide after discovery day — if you continue to show interest and if the franchise network sees you as a good franchisee candidate.
A parting word: Image360 welcomes any and all questions from those seeking to learn more about us.