Check...before Cheque!

Use this checklist to assist you in performing your due diligence on your shortlist of prospective franchise investments

The Franchise Owner Prospectus should contain...

• Business background of Directors and key Executives
• Track record of the company
• Description of the franchise
• Breakdown of the initial investment required
• Details of other payments due to the franchisor
• Guidance on raising finance
• Requirements for franchise owner's participation
• Terms for termination/renewal of agreement
• Number and success rates of existing franchise owners
• Franchisor's site selection/approval rights
• Overview of guaranteed training and support
• Report on the performance of the pilot operation
• Financial statement from the franchisor
• Details of the franchisor's professional advisers

What to find out from the franchisor...

• Financial health and track record of the company
• The company's franchising history
• Results of the pilot operation
• Current number of franchise owners
• Permission to talk to existing franchise owners
• Company's main source of earnings
• Value, appeal and long-term viability of product/service
• Head office commitment to support
• Full details of the initial training programme
• Additional training costs to the franchise owner
• Total size of the franchise investment requirement
• Realistic estimate of working capital needed
• Bank and other references
• Territorial practices and exclusivity terms
• National and regional advertising practices
• Exclusivity of product supply contracts
• Franchisor's margins on product supply
• Target obligations
• Realistic franchise owner profit and loss figures
• Management service fees or royalty payments
• Restrictions on franchise owner's operations
• Franchisor's launch assistance programme
• A sample of the franchise agreement

Be wary if the franchisor...

• Tries to get you to sign a deposit agreement to reserve a territory
• Does not offer an automatic right to renew your agreement
• Has a very short-term contract
• Pressures you to "act now" before the cost goes up
• Tries to trade you up to a higher fee
• Demands large front end licence fee
• Promises huge profits with thin investments
• Promises "easy sales"
• Promises profits by sub-franchising
• Promises large income working from home
• Fails to give statistics on sales and profits
• Evades identifying Directors or principals
• Has no data on financial track record
• Cannot give plans for future development
• Has incomprehensible contract or vague territories
• Is vague about support and training
• Has a name similar to a well known business
• Is ignorant of competition
• Has weak advertising
• Avoids detailing your financial obligations
• Tries to meet only in a hotel or has poor head office premises
• Is evasive about access to existing franchise owners