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The ‘soft’ Due Diligence checklist

As we relax into summer, not only is it the season of family get-togethers and beach barbeques, it is traditionally also the period where many consider their future, how they avoid going back to work in their old jobs in the New Year and what sort of business they should buy.

As the end of 2020 approaches and we enter 2021, I suspect there will be a few more people thinking seriously around whether a franchised business is the option for them.

In previous articles I have discussed the various approaches in regard to due diligence, most recently suggesting that a potential franchisee entrepreneur should start with a motivational analysis, i.e. asking themselves “why” they are looking at buying a franchised business.

My assertion is this is going to assist in guiding a potential purchaser as to what types of businesses they should be looking at. But once they have done this, what are the other “soft” non-financial or legal due diligence items?

When we are guiding potential franchisee entrepreneurs there are three key areas we suggest they consider.

How much time do you want to spend in the business versus on the business, can you manage a business where you may get phone calls at any time any day, or do you need a business where you can compartmentalise your time?

The work-life balance

After all, the elusive work-life balance is the reason that many purchase their own franchised business. In many cases, it’s true, you could go for a surf during the day or watch the kids play sport, but the reality is it’s going to be your business, and ultimately there is no work-life balance, balancing work being really a part of your life.

The questions then are, how much time do you want to spend in the business versus on the business, can you manage a business where you may get phone calls at any time any day, or do you need a business where you can compartmentalise your time? Are you required to be in the business every day, and for how long?

From my experience, perhaps the number one issue that franchise business owners become dissatisfied with or more importantly, are not successful at, results from them misunderstanding, or mis-estimating the amount of time and effort required in running a business.

Family involvement

The motivation for many in purchasing a franchise business is to spend more time with the family in a family business.

It may come as a surprise that, according to the Franchise Relationship Institute, this motivation is actually inversely related to statistical business success rates.

The due diligence questions here are: have you worked with your spouse or family before, and how will you structure the business?

What will the respective roles be for each family member, how much time and attention will they be required to spend in the business.

And of course, what are the expectations from each family member in terms of remuneration?

People involved with the brand

The cliché is that being in a franchise business is being in business for yourself but not by yourself. This is reassuring. But a franchisee entrepreneur needs to take into consideration the other parties that are associated with the “not by yourself” part of the business. These include not only the primary franchisor and the key franchise support team members, but also other franchisees.

All of these people will have varying levels of contact with the franchisee entrepreneur and impact on their relationship with the brand. This impact can extend to other franchisees and how they manage their own business and represent the brand.

The due diligence process here is to speak to as many people associated with the brand as you can. Do so at the brand or head office level, and also at a franchisee and perhaps former franchisee level. Can you work with these people, are they competent, are they doing a good job by the brand that you are looking at investing in? Can you see yourself doing what they are doing?

Nathan Bonney
Director of Iridium Partners. He can be reached at nathan@iridium.net.nz or 0275-393-022

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