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Purchasing a franchise can be a wise investment, as you are receiving an already established business. This can mean loyal customers, lower startup costs, and continued franchisor support. First, however, you need to ensure you are purchasing a franchise that will work for you. This is where due diligence comes in. Accordingly, it is important to ensure you are making the right decision. This article will provide some background and explain how you can conduct due diligence when purchasing a franchise.

What Is Due Diligence?

Before buying any business, you should do what you can to find crucial information about the seller and the business itself. A part of this process is conducting due diligence. This practice is a self-driven investigation that appraises a business and its viability for you as the prospective buyer. In particular, this may involve establishing its assets and assessing its commercial potential.

For instance, a sound due diligence process would air out whether a franchise has any skeletons in the closet and inform you if purchasing is going to be a wise decision or not.

Conducting due diligence involves seeking information on different topics from various resources available to you. As such, you should aim to get as complete a picture as possible of the franchise before you commit.

Why Do I Need to Conduct Due Diligence?

Completing due diligence can be an intensive process that many franchisees may not necessarily engage in. It can take extra time and money, which delays a purchase. Additionally, new business owners may not know what this process should look like. However, you must conduct a comprehensive due diligence investigation before signing your franchise agreement. Otherwise, you run the risk of signing onto a franchise that may be underdeveloped or over-priced. As a result, you are more likely to make mistakes and could choose a franchise opportunity that is too costly or does not suit you.

Therefore, you should better set yourself up for success by making an informed decision about your franchise purchase, which due diligence contributes to.

What Does the Due Diligence Process Involve?

As a result, you want to ensure that you find out relevant information that will inform your decision when conducting due diligence. This will largely depend on your skills as a potential franchisee, and how much knowledge you already have regarding the system. Therefore, you should:

  • make sure you understand how franchising works;
  • conduct research on the franchise you are considering purchasing;
  • find an accountant experienced in franchising finances to help you;
  • seek the aid of an experienced franchise lawyer; and
  • engage a banker with specialist franchise knowledge.

Consequently, ensuring that you operate on sound advice from experienced professionals will significantly improve your due diligence process.

What Kind of Information Should I Look For?

There is a variety of information that you should seek as part of your due diligence process, which can include:

  • commercial information regarding the franchise’s culture, customer loyalty, and its position in the market;
  • financial information, such as its historical sales and trade data, current clients, and works in progress;
  • legal information, including any outstanding court cases involving the franchise;
  • leasing information regarding any premises you are signing onto, such as its current rent and lease term;
  • operational information, including whether you need any licenses or other certification to run the business; and
  • other information necessary for you to make a confident decision about your purchase.

You want to ensure you sign onto a franchise that will prove a sound investment and result in positive returns for you as a franchisee. Therefore, you should look for information that confirms whether your prospective franchise is successful or not, and whether it would be a good fit for you.

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Where Can I Find Important Information For the Due Diligence Process?

You can find this information in many places, but ultimately you should closely read over the documentation that the franchisor gives you. This can include the:

The most critical of these is your franchise agreement, as it sets out the obligations of both you and the franchisor. Otherwise, you should seek out information from:

  • the franchisor themself;
  • other existing franchisees;
  • past franchisees;
  • your lawyer;
  • your accountant and banker;
  • the Franchise Association of New Zealand (FANZ);
  • online resources like franchisee forums, franchise research websites, and franchise industry publications; 
  • news stories about the franchise; and
  • customer reviews and social media.

For example, you may ask existing and former franchisees about the benefits that were promised to them when they signed on and whether the franchisor has followed through on those benefits. You should also ask about how much support the franchisor gives its franchisees.

Key Takeaways

Before purchasing a franchise, you should make sure to conduct due diligence. You should aim to find information that will help you decide and take advantage of professional advice where appropriate.

If you need help with purchasing a franchise, our experienced franchising lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions

What is a franchise?

A franchise is a business model where a franchisor manages multiple installations of their business, and franchisees run the day to day operations of those installations.

What is due diligence?

Due diligence refers to an investigation process you conduct before purchasing a business. This involves finding out relevant commercial, financial, and legal information about the franchise you may wish to buy.

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