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WEBINAR: What To Ask In Due Diligence

Sep 7, 2022 Franchise Information

Considering buying a franchise? The consideration phase is one of the most important steps of the process. This is the time to do your due diligence to make sure that a franchise model is a right fit for your lifestyle.

The franchising application process is extensive. Before diving in, it’s good to understand when due diligence occurs in the process.

Understand The Process

The running joke in the franchising industry is: that if you’re looking at getting into a franchise relationship, it’s like a marriage. There is constant work to be done by both parties to make it a success.

Using that analogy, the application process is really the “dating” or the “courting” phase of the relationship.

Step one is when you start to investigate. You’ve decided that you’d love to own a franchise and you start doing your research. You find a brand or a business that resonates with you and you submit an inquiry.

Step two: once we’ve received your inquiry as a franchisor, we’ll reach out to you to have a video call or a phone call. We’ll get to know you and get a sense of what you want to accomplish and work out your plans for the business.

Step three is when we tell you about ourselves as the franchisor company. You’ll learn about us as a company, about the support, about our requirements and our expectations and understand where you fit in and what your role and obligations will be. This is essentially when you decide whether you want to “marry” us.

If at step four, we feel that you’re going to be a great fit for our company, we’ll move you into the all-important due diligence phase of the process. This is when you’ll dig in and understand the business and see what it means to you and your lifestyle.

Step five is getting you into a “discovery day” where we bring you into one of our training restaurants. This is where you will shadow a general manager and get some practical experience of what running the restaurant will be like.

You would then go into the final step of the process: getting into an approval meeting with the brand leadership team. This is when they will meet, get to know you understand what you’ve learned through this process, and ultimately determine if you’ll be a fit as a franchisee with us.

One of the wonderful things about this process is that there are no timelines. There’s no set rule as to how long this process should take. We leave it with you to ensure you have a clear understanding and that you are comfortable before you move into each step.

Know Who Should be Involved

Now that we understand where the steps fit in, it’s good to know who should be involved in the due diligence process. Ultimately, this is the part of the process that’s most important to you as a franchisee.

This is where you start to understand what this business is really about.

We advise anybody else that may be involved operationally from a business perspective to join in the conversation at this step. If you’ve got some operational partners that need to be involved, as well as any potential financial partners, they need to be brought in at the due diligence step because every stakeholder is going to have a different perspective on your arrangement. We encourage everybody that has a stake or an investment in this business to be part of this process so that you can get all the possible answers to your questions. You may also come up with a series of different questions that need answers.

Learn the “Why”

It’s great to speak to an existing franchisee to get the “why” behind those answers. During steps 1 – 3 of our process we get to understand your profile so that we can match you to a relatable franchise owner.

We want to understand what markets you want to be in. We also want to understand your management structure. Are you going to be the sole manager? Is it going to be a family-run business? We want to get these questions answered so we can best accommodate your vision.

Lastly, we want to understand your growth goals. Is the restaurant going to be the sole unit that you operate? Do you want to grow to two or three franchises in five years’ time? All of that information helps us match you with a franchise owner that’s similar in nature, and who can give you more customized answers to your questions. We will have briefed the franchise owner ahead of time, so they will expect your call.

Don’t feel shy about asking them in-depth and sensitive questions about their businesses. They’ve been in your shoes and they will have answers to questions you didn’t even know you had.

The best way of getting this information is to schedule a meeting in the physical restaurant with the franchise owner. That means, actually going to their location. They’re going to proudly take you on a tour, show you the back of the house, and talk about everything to do with running the business.

As you get to know the franchise owner (hopefully in person) keep in mind that you’re building a relationship so that one day when you do open your restaurant, you’ve got somebody to call to ask questions.

Dig Into The Financials

Recipe Franchising Webinar Slide about Dig Into The Financials
Make sure to do your due diligence regarding the financials.

Now that you’ve made a plan to meet with an existing franchisee, let’s make sure that you’ve got a full list of questions prepared.

The first thing that you’ll want to understand is the financial picture of the business: what are the sales, what are the profits, and what do franchisees do to control food costs?

The P & L statement will tell you a story about your restaurant operations. In the restaurant industry, we don’t live in spreadsheets, we live in operations. We live with our teams and with our guests face-to-face every day. So just as you asked about food costs, do the same when asking about labour. Ask about scheduling. Perhaps the restaurant can staff five servers to cover the dining room on a busy Friday, but they notice when they add a sixth server the tables are cleaned faster, and they’re able to get a third dinner seating which can positively impact revenue.

What are the advantages of having salaried managers versus balancing out with hourly supervisors? Putting an associate on salary might add to the burden of fixed costs and the restaurant, but what value is added and where is that balance found? Is there more buy-in? Is there more business impact? Does that person help with retention? Your due diligence partners will have the experience to answer this.

Ask about vendor relationships, ask about order dates, ask about billing cycles, and ask about local marketing. How do these folks connect with their communities and motivate guests to come out when there is always plenty of competition out there?

From a franchisor’s perspective, Recipe takes care of national marketing for you. However, the secret to franchising is being part of your local community. So how can you do that? And what types of things have our existing franchisees seen that are successful for them?

The Franchisor Relationship: The Good, Bad, and Ugly

Here’s a great question to ask your franchisee partner: what is the franchisor relationship like? How was the training program? Did they feel ready when they opened their business? What should you expect during the opening process? Do they feel supported?

Ask all of the questions about the good, the bad, and the ugly, so you can go into your business opportunity with eyes wide open.

Why Do Your Due Diligence?

What is all this effort for? It’s about starting out on the right foot. It’s about making sure that you understand before committing. A standard franchise term is 10 years and most franchisees will renew for an additional 10  or 20 years. That could be one of the longest relationships of your life. The due diligence process is meant to give you time to self-reflect. It’s okay if you go through the beginning steps and your answer is “no”. We believe in franchising that “no” is the second-best answer. A “yes” is always exciting. But a “no” is better to have sooner rather than later.

Due diligence is ultimately the first concrete action that you will take for your business. Due diligence will help you determine whether this is the right opportunity for you. You don’t want to rush this step. This is where you really want to dig in. After all, we all want this marriage to last for a long time.

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