How to Investigate a Franchise Before You Buy

The decision to buy a franchise is an exciting one. It’s a powerful path to entrepreneurship, offering the chance to be your own boss with the invaluable support of a proven business model and an established brand. Finding a few brands you’re excited about on a franchise directory is the fun and easy part of the process.

Now comes the most critical phase of your entire journey: the deep, meticulous, and sometimes tedious work of due diligence. This is where you move from being a hopeful dreamer to a sharp-eyed investor. A great franchisor will not only welcome this scrutiny, but they will actively encourage it. They are looking for a smart, informed, and dedicated long-term partner, not an impulsive buyer.

To ensure you’re making a wise investment, you need to conduct a thorough investigation. Here is a step-by-step guide to help you.

Scrutinize the Franchise Disclosure Document

This is the single most important document in your entire investigation. In Canada, franchise legislation is a provincial matter, and franchisors are required to provide prospective franchisees with a detailed Franchise Disclosure Document (FDD). This is not a marketing brochure; it is a comprehensive legal document that contains all the crucial information about the franchise system.

You must review this document in its entirety, ideally with the help of a lawyer who specializes in franchise law. Pay special attention to the detailed breakdown of the total initial investment, the complete list of current and former franchisees, any information provided on the financial performance of existing units, and the audited financial statements of the franchisor itself.

Call the Current (and Former) Franchisees

This is, without a doubt, the most important step in your entire due diligence process. The FDD provides you with the contact information for every single franchisee in the system. This is your golden ticket to the unvarnished truth.

Make the calls. A good franchisor will be proud of their happy and successful owners. A struggling system may have a lot of unhappy owners who don’t want you to talk to them. Call a wide range of people, from new owners who have just opened to veterans who have been in the system for a decade. And don’t be afraid to call a few people from the list of those who have recently left the system.

Ask them the tough questions:

• “Was the initial investment estimate in the FDD accurate for your experience?”

• “How is the quality of the initial training and the ongoing support from the corporate office?”

• “How long did it take you to become profitable?”

• “Knowing everything you know now, would you make this same investment all over again?”

“Secret Shop” the Brand and the Competition

Before you become an owner, you need to experience the brand as a customer. Visit a few existing franchise locations in a nearby city.

• Is the location clean and professional?

• Is the staff friendly and well-trained?

• Is the business busy and successful?

• Is the customer experience one that you would be proud to own?

At the same time, you need to “secret shop” your local, independent competitors. What are they doing well? What are they doing poorly? Is there a clear and obvious gap in your local market that your chosen franchise is perfectly positioned to fill?

Do a Hyper-Local Market Analysis

A great national brand can still fail if it’s in the wrong local market. You must become the expert on your specific, proposed territory.

Use official government data to analyze the demographics of your community. Does the ideal target customer for this franchise actually live or work in your area in sufficient numbers? For example, a high-end children’s fitness franchise requires a high concentration of young, affluent families. A senior care franchise needs a large senior population.

Investing in a franchise is a life-changing decision. By taking a patient, methodical, and “trust but verify” approach to your investigation, you can dramatically increase your chances of choosing a strong, supportive, and profitable franchise partner.