Franchisors perform background checks on prospective franchisees to ensure that onboarding them will be in the best interest of both parties. Doing due diligence is the first step to ensuring that a prospective franchisee is a good fit for the role.
A franchisor-franchisee relationship should be mutual, so prospective buyers should also do due diligence to protect their interests. Many potential investors hire a franchise litigation lawyer for the best results.
Key Factors Potential Buyers Should Consider
The Federal Trade Commission requires franchisors to disclose all aspects of their businesses in the Franchise Disclosure Document. These disclosures include, but are not limited to:
- Franchise fee;
- Rights and restrictions;
- Duties and obligations;
- Dispute resolution;
- Breach of contract and solutions for the same, and more.
Potential investors base their buying decisions on the information contained in the FDD. This document can help you identify red flags and avoid potential risks.
Here are the key factors to consider before appending your signature to a franchise contract:
Replication of the Concept
Business success boils down to consistency, but in franchising concept replication is key. Replicating a business concept means operating a similar business in another location or market successfully.
Replicating your concept is arguably one of the greatest strengths of your business model. The following factors can be used to determine if a business concept can be replicated:
- The number of locations;
- The number of successful franchisees in the same business;
- Brand awareness in the target market;
- The general success rate for businesses in the same industry;
- Market competition;
- Legal regulations in the target market, and more.
Brand Reputation
Brand reputation refers to the outlook of your business to the general public. Alternatively, brand reputation defines how prospective clients perceive your brand or business.
Any prospective franchisee would want to invest in a reputable business. A reputable brand is a trusted brand and it shows the franchisor has put in the work to be where they’re.
Potential buyers can conduct a background check to determine the reputation of a business before investing their hard-earned money. Interviewing prospective clients or analyzing the franchisor’s website can help potential franchisees make informed choices.
Brand Awareness
The success of a new outlet is dependent on numerous factors, including brand awareness. Research shows that prospective clients prefer buying from familiar brands to foreign or brands they’re not aware of.
Promoting a brand in a domicile country is easy, but it can be challenging in a foreign country. A potential local franchisee can succeed without much compared to an international franchisee. That said, buyers must weigh their options before making financial commitments.
How the Franchise Operates
Different franchises have different operation styles, procedures, standards, and policies. All these are typically documented in operations manuals.
The contents of operations manuals can include details about the system, suppliers, and training, among others. These factors help maintain customer experience while meeting their expectations.
As a prospective franchisee, ensure the operation styles, procedures, standards, and policies of the franchisor match your expectations. Review the FDD to make this momentous decision.
Brand Performance
The performance or success rate of a franchise is key to prospective investors. Besides, everyone wants to invest in profitable businesses.
Financial records like trading, profit, and loss statements, balance sheet, and cash flow statements can help you assess the performance of the business you want to invest in.
Support
By law, prospective franchisees are entitled to receive support from franchisors. The franchise fee is paid by a franchisee in exchange for operating a business under the franchisor’s name.
By using the franchisor’s name or trademark, the franchisee is entitled to support from the franchisor. Support, in this case, can include:
- Identifying the location of the new outlet;
- Training;
- Introduction to suppliers and other stakeholders;
- Marketing, and more.
Prospective franchisees should thoroughly evaluate the franchise documents to understand the support they’re entitled to before signing the franchise contract. Knowing what you’re entitled to is the first step toward protecting your rights and avoiding potential franchise disputes.
Dispute Resolution
Conflicts are part of business and they’re bound to arise however much you try to avoid them. Serious conflicts can bring even the most thriving business to a halt.
What matters is how a franchise addresses or handles arising and potential conflicts. A good franchise agreement or FDD should include a dispute resolution clause.
Dispute resolution clauses define how disputes should be resolved. The common dispute resolution mechanisms are:
- Franchisor-franchisee resolution;
- Mediation;
- Arbitration, and
- Legal action as a last resort.
A conducive work environment is key to the success of a franchise business. That said, prospective franchise buyers must ensure dispute resolution features in the FDD and franchise agreement.
Prospective franchisees should consider the factors discussed in this article for informed investment decisions. A franchise law attorney can help.
