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Due Diligence Before Buying a Franchise

The most important thing you can do in reviewing any franchise opportunity is to contact every franchisee you can to determine-not how much money they are making but to analyze if the franchisees actually like the franchisor, like the franchise concept, like the franchise system, felt they spent too much or not enough, do they feel the investment was worth it, so far.-these are the questions you should ask-not about sales or profits but ask about everything from, did the table of initial investment costs (Item 7) appear to be accurate-what did they have to spend more on; what do they wish they spent more on, were there any significant expenses they had that were not listed; how was the training class-what was the most important part, what was a waste of time, what was not covered that should have been covered; and the assistance after training- how is the responsiveness to requests from corporate; who is their favorite officer/employee and why, who is their least and why; what parts of the model do they like best, what parts least, and why, what parts are not really working as well as they hoped, what parts are the most important, what parts do they wish they a change....and most importantly---what would they have done differently, or would they do it over.

What you need is the realistic viewpoint from franchisees that have been open maybe a year or 2 years-these franchisees will have the most recent experiences in the first year and pre-opening process. The Franchise Disclosure Document contains the list of franchise locations-however this is usually out of date so you need to get an up to date list-the franchise website will generally be up to date but won't have the owner names.

If you are one of the first franchisees, this is an unfortunate VERY risky position as you are the testing franchisees that other after you will be asking these questions. The best due diligence is extensive research on the principles, and officers, as well as really taking a good look at why their first company store is so successful because chances are there are different circumstances that you or your location will not enjoy that make your franchise different. The fact the franchisor has no experience in a franchise business is a big concern that should buy you some significant concessions for taking this giant risk. This is where a good attorney will help you negotiate or at least point out ideas and options the Franchisor generally agree just to get the first few franchises sold.

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Click Here to Review Articles by Janet Martin on Important Franchise Law Issues