You’ve worked hard to save every dollar you have to start your own business, so you want to know that your franchise will be a success.
As much as there will always be a risk with any investment, you should be in a position to mitigate that risk as much as possible. So, before you take the big leap and spend your hard-earned cash, it’s important to conduct a proper due diligence. We’ve put together a checklist of some the most important things to look at to help you decide if your investment will be a success.
Due Diligence Checklist for Buying a Successful Franchise Business
- Ask to see the financials
Ask the franchisor and business vendor as many questions as possible about the business you want to buy. It’s important that you base your purchase decision purely on today’s performance and not any future potential. Franchisors have financial data available for prospective franchisees to help you understand the business performance to date. Things to consider include:
- Cost of goods
- General expenses such as rent, staff etc
Where possible ask for at least three years profit and loss statement to help you get a feel for the direction the business is taking. Look at the stability of the revenue and question any increase or decrease.
Understanding business seasonality
Ask for the month-to-month revenue over the past 12-month period to get an understanding of the seasonality of the business. This will help you know exactly what to expect when you take over the business. For example, if you settle just before a quiet period then you may need to have a bit more working capital in the bank to cover your business expenses. On the plus side, you would have more time to get to know your business. Make sure you know what support is available from your franchisor during a quieter time. Similarly, if you settle right before the busy period of the year, check that you will have everything you need to cope with the amount of work as a new business owner.
- Understand your customer base
Understanding your customer spread is critical when reviewing a business. While you won’t be able to access customer names, you can ask for the 10 Industries forming the revenue of the business.
Look at the percentage (%) of total revenue your top customer represents as well as a percentage breakdown of the top 10 customers for the business.
It’s important to understand the relationship between the customer and the risks associated with it. For example, if a customer represents 20% of total revenue, then it is a significant loss to the business if you lose that customer.
By nature, the more diverse your customer base the better. Not only are you less exposed when losing any key customers, but a bigger spread also means you have more opportunities to grow your existing base. A customer representing 20% of your total revenue is probably spending quite a lot of money, leaving less room for growth compared to a customer who only represents 0.2% of the business revenue.
- Transparency is Key
One of the warning signs to look out for when deciding to buy any business is not having access to all the information you need to make your decision. Transparency is key and also the basis for developing a strong relationship with your franchisor.
At Kwik Kopy, for example, we pride ourselves on complete transparency about our system, the support we offer and the costs associated with becoming a franchisee. All prospective franchisees receive a Due Diligence Checklist to help you identify and assess key areas of the business you want to purchase. During the recruitment process, you also receive full disclosure documentation which gives you all the information you need to know about the Franchisor.
- Talk to Other Franchisees
The franchise purchase/recruitment process is a two-way street where the franchisor and potential franchisee are both assessing each other. The franchisor will provide you with plenty of information but to get real insight into an organisation then it’s a good idea to speak to existing franchisees.
Current franchisees in the system have been through the same process you’re going through and they can also provide you with real insight into day-to-day operations and if running the business is exactly what they expected. They can also let you know about the culture of the organisation and the type of relationship they have with the franchisor.
You want to ensure that your franchisor is going to deliver exactly what they say they deliver, for example, at Kwik Kopy, you are required to talk to at least three franchisees of your choosing as part of our recruitment process. In fact, the more you can explore the business from the perspective of existing franchisees, the more you can also learn about potential of your own proposed business. Questions to ask include:
- What was the first year of being in business like?
- When did they start to break-even?
- When did the business become profitable?
- How do they rate the support they receive from their franchisor?
- Trust your instincts
If something doesn’t feel quite right, then it’s important to trust your instincts and look at your franchise business opportunity in more detail. Surround yourself with advisers who can provide you with the right advice about your purchase. You want to know exactly what you’re getting into before signing on the dotted line, so analyse all the data available to you and conduct thorough research. Don’t let your emotions influence your decision and instead make sure you have all the information you need for a successful negotiation.
- Study your Local Area
Take time to explore your local area as it can provide plenty of insight into the potential of your proposed business. If you’re seeing local businesses closing their doors due to significant neighbourhood transformation or economic distress, you might need to reconsider the type of franchise you’re starting.
Try attending networking events or the local Chamber of Commerce meeting to meet and chat to local community members and business owners working in the area. How are they doing? Is their revenue growing or reducing? Even though they might come from a different industry, this can still help give you an understanding of general trends in your surrounding area.
Why not tell us more about your current situation and where you want to be. Our experts can help you identify if Kwik Kopy is right for you and help you find the right business to suit your budget and aspirations.
Don’t delay! If you’re ready to take the next step in owning your own business, we’re here to help. To find out more about what it takes to join the Kwik Kopy System, send us an email enquiry at firstname.lastname@example.org or give us a call today on (02) 9967 5500.