In our article ‘Points to consider when selling your business’ we discussed due diligence being an important step if you are a prospective purchaser of a business, as it can enlighten you as to risks and benefits of the business you were not otherwise aware of. The same applies if you are considering purchasing a business which is part of a franchise.
However, when you purchasing a business which is part of a franchise, you are not only buying a business, you are entering into an agreement with the franchisor. Most franchise agreements are heavily geared in favour of the franchisor and generally involve a commitment for at least three years.
Accordingly, in such a circumstance, a prudent purchaser would be wise to learn as much as they can about the franchisor. This is particularly so in the case of new franchises. Those franchises that have existed for many years are, more probably than not, operated by franchisors with a proven track record, generally the same cannot be said about new franchises.
When buying a franchise, who does the due diligence?
You will require any number of experts to provide advice as part of you undertaking a due diligence. However, you are best to engage one of the experts, most probably a lawyer or accountant, to manage the process for you. Done properly they will meet with you to formulate a plan as to which expert should be engaged to provide advice. For example, your accountant would review the financials, your lawyer would review any material contracts, an expert in asbestos contamination would assess the risk of such contamination, and Google may unearth unsavoury or positive things about the franchisor, etc.
Can I afford to not do a due diligence?
Unfortunately history will have to be the answer to that. If you don’t undertake a due diligence, and it would have unearthed something causing you to not proceed with the purchase, and that something rears its head costing you a lot of money, then the answer probably is “No”.
Of course, it’s for you to choose whether to “roll the dice” or adhere to the age old saying “it’s better to be safe than sorry”.
If we can be of assistance please don’t hesitate to contact us.