Franchise due diligence

Entering into a franchise is a significant investment, so it’s important that as the franchisee you undertake your due diligence. In this article, we discuss what franchise due diligence looks like, so you can ensure that you’re making the right decision.

Thinking about entering the franchise world, or even just curious about how franchising works? Get in touch with Liston Newton Advisory to discuss your options.

Before you start

The idea of starting or entering into a franchise is an exciting one. It can also be daunting.

While running a business with an already established brand can seem appealing, there’s a lot that you should consider. The benefits include:

• Reduced barriers to entry into a specific market
• Equity of an established brand
• Specific templates for you to use

There can feel like less thinking, and more doing. But before you buy into a franchise it’s important to make a thorough sense check of what you’re actually getting yourself into. You need to ensure you know the ins and outs of your potential new business, and understand how the franchise model works in Australia.

Do your research

Don’t just jump into a franchise — do your research first. Learn the value of the industry you’re looking at, and whether it’s going to provide you with the returns you’re after.

Find an industry you’re excited to enter. If you try starting up a business in an industry you don’t have a passion for or interest in, you’re likely not going to get very far.

Also, don’t just rely on what a franchise salesperson tells you. Instead, study the business independently. Look at what people are saying on online reviews, blogs, and other social media platforms. Make sure you’re aware of all the elements playing on the business, so you can make an educated decision on whether it’s going to help you achieve your goals.

Get information from the source

As well as reading information online, another aspect of due diligence for franchisees is going directly to the source and speaking with other franchisees in the industry. They’ll be able to tell you their experience with the industry you’re looking at entering, and can provide you with location-specific advice.

Review your personal finances

As a potential franchisee, due diligence includes looking at your personal situation. You should undertake a review of your personal finances to see how much you’re able to invest in the business without putting your other personal assets at risk.

Knowing your personal financial situation and limits is the first step. You should also speak with your accountant and financial adviser to discuss the optimal financial conditions to enter into a franchise.

We also recommend speaking with a lending provider to see what funds will be available to you if necessary.

Seek professional advice

After making an initial assessment of the franchise opportunity yourself, it’s important to then seek professional advice from a franchise accountant and franchise lawyer.

They can provide you with a realistic and honest picture of what you’re likely to get yourself into and help you plan your way forward.

Franchise accountants

Franchise accountants specialise in the financial rules and obligations involved with running a franchise. They know what to look for when setting your financial goals, and the most appropriate way to manage your business and tax planning.

They’ll help you plan for the upfront fees you’re required to pay, the number of staff you’ll need to get started, and surprise overheads you didn't even realise exist.

Your franchise accountant will help you familiarise yourself with the financial risk involved when buying into a business, and guide you through managing your financial and reporting obligations.

Importantly, they’re specialised in franchise tax minimisation strategies and cash flow forecasting, so you can ensure your business has the foresight required for the long term.

Franchise lawyers

Franchise lawyers deal with the specific laws and codes of conduct that relate to operating a franchise in Australia. So, a crucial part of your franchise due diligence is engaging the services of an experienced franchise lawyer.

Each franchise is different and will have its own unique franchise agreement, so it’s important to familiarise yourself with this. Your franchise lawyer can help you understand the specifics of this document, so you know exactly what you’re getting yourself into. They can point out any disclosures or fees that are applicable upfront, and what to be aware of during the lifetime of your franchise.

Essentially, what they’re doing is making sure the franchise agreement is compliant with franchise law in Australia, and helping you understand what can often be a dense, confusing document. Also, they can check to make sure the document itself is above board, and you’re not accidentally agreeing to any conditions you haven’t been made aware of.

Your franchise lawyer will review the necessary franchise documents, including agreement and disclosure documents, manuals, and financial statements, and make sure they’re compliant with Australian franchise law. They can help you review or draft the sale document, and even negotiate with the franchisor on your behalf, providing some clout to help resolve any disputes.

As a new franchisee doing your due diligence, you’ll also need to set up a lease for your new business. Your franchise lawyer can help with this too. They can manage the leasing negotiations for you, as a tenant, and draft the licensees and disclosure statements required for your specific state.

When your business is up and running, they can help you maintain compliance with the Franchising Code of Conduct, and keep all necessary documents up to date.

Starting the business

When you’ve made the decision to enter into a franchise, it’s critical that you’ve taken all the right steps to get your business set up correctly.

This can include:

• Setting up the correct business structure
• Completing a detailed business plan that details your budgets and cashflow forecasts
• Registering your Tax File Number, ABN, and business name
• Registering for GST, Pay As You Go, payroll tax, fringe benefits tax
• Registering any licences or certifications required for your industry
• Setting up your accounting software
• Opening bank accounts, which at a minimum should include a business transaction account and a business savings account
• Establishing merchant credit facilities, EFTPOS, or a point of sale system

It also includes getting your employees set up, which includes:

• Signed employee contracts
• Completed employee packs (name, contact details, Tax File Number, next of kin, bank details etc)
• A completed TFN declaration form and superannuation form
• Copies of any necessary qualifications and licences

The final word

While the benefits of owning and running a franchise are attractive, it’s critical to make sure you’re prepared for the workload and obligations that are coming your way.

When set up correctly, with thorough due diligence, owning a franchise can open the door to a fulfilling and successful career.