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Buying a franchise? See this due diligence guide first
Buying a franchise can be an exciting way to jumpstart your business journey, especially if
you’re a first-time entrepreneur or small business owner.
But before diving in, it’s crucial to do some thorough homework — otherwise known as due
diligence. Think of it as your roadmap to ensure you’re making a smart, well-informed decision
before deciding to bet your capital on a franchise.
Here’s a simple guide that walks you through internal due diligence before you buy a franchise.
Which franchise to buy and what options are available
Start by evaluating yourself. What are your interests? How would you assess your
entrepreneurial skills? What are your goals for buying a franchise?
Keep in mind that it’s best to look at as many options as possible before deciding on which
franchise you should invest in. Compare your options based on costs, responsibilities, and
franchisor reputation. ![]()
Can you afford to buy a franchise?
It’s not just about the initial franchise fee. There are also other costs, like equipment, marketing,
and ongoing fees, that you need to think about. Before you take the plunge, it’s a good idea to
assess your own financial situation.
Doing some simple financial planning now can save you from headaches down the road.
Understand your legal obligations and those of the franchisor
Make sure you understand what franchising is and what it is not before deciding to buy a
franchise. While you will be using your personal resources to run the business, franchisors
guard their brands very closely and can dictate how you run your day-to-day operations even if
it means it will cost you more.
The Franchising Code of Conduct is a mandatory industry code that governs franchising in
Australia. It lays out the obligations for both franchisors and franchisees, including disclosure
requirements, cooling-off periods, and the processes for dispute resolution.
As a prospective franchisee, it’s crucial to familiarize yourself with the ![]()
legal framework for
franchising![]()
in Australia to ensure compliance as well as to protect your rights.
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Review the Franchise Disclosure Document
The FDD is the foundation of your relationship with the franchisor. It outlines the terms and
conditions of the franchise, including your responsibilities, fees, and the duration of the
agreement.
Seek legal advice to understand the agreement fully, along with other disclosure statements and
information sheets the franchisor will be sharing with you. Watch out for clauses mentioning
termination, renewal, and dispute resolution, and make sure to review these thoroughly.
If you spot anything you think is important or that may be a cause for concern, make sure it’s
stated on the contract before you sign.
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Investigate the franchise
Make an assessment of the financial health of the franchise system before buying a franchise.
Ask for financial statements and historical performance data of both the franchise network and
the specific location you are interested in.
Understand the fee structure, including upfront costs, ongoing royalties, and marketing fees.
Find out how much it will cost you upfront, any unforeseen or hidden costs, and other potential
circumstances that could compromise your ability as a franchisee to profit from this business.
Find out more about the franchisor and the team behind it. Do they have the experience to run a
franchising business? Check the news, even ask other franchisees and company employees, to
find out more about how the franchisor runs their business and their relationship with
franchisees, suppliers, and customers.
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Check the systems, operations, marketing, and training
Find out more about the franchise’s day-to-day operations. Evaluate it against your personal
skills and plans to find out if it’s the best fit with how you want to run your business.
Look into the franchisor’s systems, supply chain, and how they handle marketing. Are these
processes efficient? Do they make sense for you?
Franchisors typically provide franchisees with access to their branding, intellectual property, and
marketing strategies. Ensure that the franchisor has clear ownership and protection of these
assets and that you’ll receive appropriate training and support to use them effectively.
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Understand the market
Don’t buy a franchise until you’ve investigated the demand for the franchise’s product or service
in your area. Conduct a thorough market analysis to assess whether there’s sufficient customer
interest.
Also, clarify whether the franchise agreement includes territorial rights, ensuring no other
franchisees can operate in your designated area.
It’s not just about the franchise itself — think about the industry it operates in. Is it growing?
What are the future trends? A franchise might look great on paper, but if the market is shrinking,
you could face challenges down the road.
You can check the Australian Bureau of Statistics for market and industry
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Get feedback from existing franchisees
Talking to current franchisees is one of the most insightful steps in your due diligence before
buying a franchise. They can provide first-hand accounts of the franchise system’s strengths
and challenges, operational realities, and whether the franchisor offers adequate support. These
discussions may also shed light on the franchise’s ability to meet the expectations set by the
franchisor.
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Ensure you have an exit strategy in place
Consider your exit options even before you sign the agreement. Find out what happens after the
agreement ceases to be in effect. Can you opt to renew? Are you allowed to set up a similar
business under a brand that you own? Are you allowed to sell your franchise?
Take all the time you need to evaluate all pertinent legal documents before buying a franchise.
You must know that the Franchise Code of Conduct gives you a 14-day cooling-off period.
Within this timeframe, you are entitled to terminate a franchise agreement and receive a refund.
How Business Adviser can help
When you’re thinking about buying a franchise, it’s easy to feel overwhelmed and the process
can become complicated. That’s where Business Adviser, a division of DAB Financial Group,
can support you.
Here’s how Business Adviser can help:
●Financial analysis
We can help you assess the franchise’s financial health and your own financial
readiness, ensuring that you understand all costs associated with buying a franchise.
●Legal guidance
We can review the franchise agreement, identify red flags, and ensure you’re fully
compliant with Australia’s franchising laws.
●Operational support
We will guide you in evaluating the franchise’s systems, market research, and every
operational aspect to make sure the franchise fits your long-term goals.
●Risk mitigation
We will identify risks in the franchise model or market, and help you develop strategies
to mitigate those risks.
●Ongoing support
We can provide continuing support post-purchase, helping you navigate the challenges
of growing your business.
If you’re thinking about buying a franchise and need expert advice, contact us today to schedule
a consultation.
