How to do franchise due diligence

Hey folks,

Part two of my franchise-buying series. 

Last week: how to know if you're ready. 

This week: how to vet opportunities without wasting months.

(Next week: discovery day and closing the deal.)

Let's dive in.

1. Build a short list (2–3 brands max)

Once you've filtered your options using your criteria list (like my GROCE framework from the last issue), you need to narrow things down fast.

I recommend getting to a short list of 3 brands. That's it.

Any more than that and you're spreading yourself too thin. Any fewer and you're not giving yourself enough optionality.

Go deep. Talk to the franchisors. Learn about their support, their growth trajectory, their ideal franchisee profile.

But the real work happens in the next two steps.

2. Read the FDD (the right way)

The Franchise Disclosure Document (FDD) is the legal document every franchisor has to provide before they can sell you a franchise.

It's long. It's dense. And most people read it wrong.

Here's what I tell people: The FDD is your bible. Everything you need to know about the business is contained in the FDD’s 23 items. 

But before you jump into my article on how to read the FDD, there's one item that matters more than the rest:

Item 19: Financial Performance Representations

This is where franchisors can (but don't have to) share actual financial data from their franchisees.

If a brand doesn't include Item 19, that's a yellow flag. It doesn't mean the business is bad, but it means you're flying blind on the numbers.

If they do include it, pay close attention to:

• Average revenue by unit

• Costs as a percentage of revenue (COGS, labor, marketing, rent)

• How many franchisees hit those numbers vs. how many don't

But here's the thing: even the best FDD can't tell you everything.

That's why validation is so critical.

3. Talk to franchisees (this is the most important step)

It’s time to talk to people actually running these businesses. 

Sometimes the franchisor will give you a list of current franchisees with phone numbers. Some people worry that the list is “cherry-picked.” Maybe. But even the happiest franchisees will tell you the truth if you ask the right questions. 

Here’s what I ask:

On financials:

• What's your average ticket?

• What are your conversion rates?

• What do you spend on marketing as a percentage of revenue?

• What do you pay your people?

On operations:

• What's the most challenging part of the business?

• What does your best day look like? Your worst day?

• How responsive is the franchisor when you need support?

On growth:

• How has the business trended since you opened?

• If you could go back, would you buy this franchise again?

• Would you buy more units?

The goal isn't to hear only good things. The goal is to find out what challenges this business has, so you know what you’re walking into. 

Now you know what you're walking into.

Wrapping up

That's enough for now. To recap: 

Get your short list down to 3 brands. Read the FDD (especially Item 19). Talk to franchisees and ask real questions. 

Once you’ve done that, take a good hard look: does this franchise meet your goals? When you defined your why, is it compatible?

Then, it’s time to move forward.

These are big questions. I get it. And if you’re doing it for the first time, it can be overwhelming. So if you're ready to move forward and want some help navigating this process, book a free strategy call. No strings attached.

Next week, I'll walk through discovery day, the pre-discovery prep you need to do, and what happens when you sign the franchise agreement.

We’re almost there.

Connor

P.S. If you missed last week, we went over (1) defining your why, (2) getting your financials in order, and (3) filtering your options. Start with that before jumping into this stuff.

Ready for the next step? Here are 3 ways I can help you: