The Importance of Conducting Due Diligence when Buying a Franchise.
When buying a franchise or an existing business most of the steps of due diligence are the same. However‚ one important exception to the due diligence process that prospective franchisees will encounter will relate to evaluating and determining the value of the franchise system. This is an intangible and extremely relevant to evaluating and determining whether or not your purchase of a particular franchise investment is a good move. Consider that‚ although an intangible‚ value in a franchise system is important to you as a franchisee because‚ unlike an independently operated business‚ you will be paying the franchisor ongoing royalty fees that‚ presumably‚ are payments to the franchisor for allowing you to utilize the franchisor's superior business and marketing systems.
When deciding the value of a franchise here are some things you should to consider:
- Higher sales do not necessarily mean that you will be making higher profits – Unlike an independently operated business a franchise requires that royalty fees be paid to the franchisor. Royalty payments are usually based on a percentage of your gross sales at your franchise location.
- Make sure the franchise you are considering is properly run – Some franchises offer an adequate amount of help from the franchisor while other franchisors poorly run their franchise and offer the franchisees little to no help.
Basically‚ when you select a franchisor you need to see value in the franchise system – that you you must have reason to believe that the franchise system will afford you a higher opportunity to generate revenue and higher profits than if you selected another franchisor or if you decided to got it alone with an independent business.