It is important to complete thorough due diligence and consider various factors to evaluate risk when investing in a franchise. This should involve using your advisors along the way. Here are six areas to evaluate as part of your due diligence.

Research the franchisor

Investigate their reputation by doing research online, reading feedback from customers and reviewing financial stability. Talk to existing franchisees to understand their experience with the level of support they receive and challenges they have faced.

Costs and fees

Understand the costs of initial set-up to buy into the franchise, along with initial outlay for assets and other start-up costs required. Understand what ongoing costs you will be liable for and the frequency of these costs, i.e. are there monthly ongoing fees for items such as advertising costs? It is important to understand your financial obligations through the life of the franchise agreement. It is prudent to create budgets and cash flow as part of your evaluation stage.

Training and support

Review what training and support is available and for what length of time. Training should be available for both you and your staff. After the initial training, what training is available for new employees and what manuals or guides are available for reference? A good support system can add value to the success of your franchise.

Territory and competition

Evaluate the territorial area your franchise will cover and whether it will provide a reasonable-sized customer base. Consider what competition is in the area – are there other franchises or small businesses with similar offerings? Understand the neighbouring territory’s location and whether there are any restrictions on servicing clients outside your area.

Pricing

Many franchisors have predetermined pricing when selling goods or services. Ensuring you understand the pricing framework means you’ll know what sort of profit margins to expect. You’ll want to understand pricing among regions and whether there is flexibility in the framework for your business to adapt to local market conditions.

Legal considerations

Seek legal advice to ensure you fully comprehend the franchise agreement, disclosures and terms and conditions of the agreement. Consider renewal terms, conditions for termination and any restrictions on transferring or selling the franchise in the future.

Summary

The factors above outline some of the areas to consider when deciding whether to invest in a franchise. Each franchise is different and will have different factors to consider. With any potential investment, we suggest analysing each aspect along with undertaking due diligence with your financial advisors to ensure you are making an informed decision.