Denis Vranich, due diligence essential for franchise success

Every year franchises fail for a number of reasons, whether it is lack of funds, poor people skills, reluctance to follow the formula or poor management. That’s in part why, from my experience, I think that before anyone invests in a franchise, or decides to manage one, they should do their homework.   In 2000, I acquired the franchise rights for 13 Quiznos locations across southern Ontario, and although my experience was positive, it reinforced how important due diligence is when entering into the franchise business.

For me, seeking sound professional advice from people with expertise in this area was also a must.

Over the course of my career, I have leaned on specialists, like Tony Wilson, a franchising, licensing and intellectual property lawyer from Vancouver and Globe and Mail columnist, who knows the Canadian franchise landscape.

“Franchisors are essentially selling three things – the value of a recognizable trademark and brand, the knowhow associated with the franchisor’s business system and the lower unit costs that come from the purchasing power of a large buying group,” Wilson advised in a column published in the Globe and Mail.

Before signing any agreements, come up with a detailed and realistic business plan that can be your blueprint for success.

Start by nailing down your business objectives. Deciding to buy a franchise can be life-changing and not without its risks. So, make sure you are honest and realistic with yourself in your expectations.

“Like any other investment, acquiring a franchise involves a high degree of risk,” continues Wilson. “Some franchises work out very well for the franchisees. And some do not. Do not sell the concept to yourself. Be prepared to walk away.”

Next, think about what franchise will suit your lifestyle and whether this is a business you have a passion for.

Once you have pinpointed a franchise you have interest in, take a deeper look. What are the strengths and weaknesses of the business? What are the opportunities and threats?

“Don’t forget to talk to other franchisees in the system. Even if they’re in other parts of the country their input is invaluable. Ask these three questions – are you happy? Are you making any money? Would you do it again?” said Wilson.

The other part of the equation is the financing.  What is the investment or debt that is required to get things started? What are the revenue and profit expectations? And, what about start up working capital? As well as the additional capital you may need until the cash starts flowing?

The initial start up costs of buying a franchise are higher than buying other businesses because you are buying an established brand, a defined process and proven model. But, like I said, if done right, buying into a franchise can be life changing.