The Franchise Due Diligence Roadmap: What You Need to Know Before You Invest
Hey everyone, Giuseppe Grammatico here, your Franchise Guide. Welcome back to the Franchise Freedom Podcast! In this episode, we’re diving deep into a topic that’s absolutely essential for anyone looking to transition from corporate life into franchise ownership: the due diligence roadmap.
I’m often asked about the best way to research a franchise, and the truth is, it’s a structured process designed to help you avoid rookie mistakes and make a confident, informed decision. This isn’t about guesswork; it’s about following a proven path to clarity.
Let’s break down the five key milestones on your due diligence journey.
1. Understanding the FDD (Franchise Disclosure Document)
The FDD is the cornerstone of your research. It’s a comprehensive legal document that provides a wealth of information about the franchise system. While I always recommend reading it cover-to-cover, here are some key sections to focus on:
- Items 5 & 6 (Fees): These outline your initial and ongoing fees, such as royalties and marketing contributions.
- Item 7 (Estimated Initial Investment): This gives you a high and low range for your total startup costs, typically including working capital for the first 90 days.
- Item 19 (Financial Performance Representation – FPR): This is where the franchisor can share historical financial data from existing franchisees. It’s not a guarantee of your earnings, but it provides crucial insight into the potential.
- Franchisee Information: The FDD lists current and recently departed franchisees, giving you a pool of people to contact for validation.
My Advice: Don’t get bogged down by the FDD on your first call. First, determine if the franchise model is a potential fit. Once you’re seriously considering a brand, then dive deep into the document. And as you near a decision, I highly recommend engaging a qualified franchise attorney to review it with you.
2. Franchisee Validation: What to Ask Current Franchisees
This is arguably the most insightful part of your due diligence. Speaking directly with the people who are living and breathing the business every day provides a level of honesty you can’t get anywhere else.
When you connect with franchisees, go beyond surface-level questions. Ask about:
- The Good, The Bad, & The Ugly: Get a balanced perspective.
- Franchisor Support: Is the support they receive in line with what was promised? How does the franchisor handle challenges?
- Financial Reality: Is the investment range in Item 7 accurate? What does their path to profitability look like?
- A Day in the Life: What is their actual role? How many hours are they working?
- The Big Question: “Knowing what you know now, would you do it all over again?”
Talk to a mix of new owners, veterans, full-time operators, and semi-absentee owners to get a complete picture. This is your chance to validate the culture and the reality of the business model.
3. Item 19 & Financial Performance: Decoding the Numbers
The Item 19 FPR is a critical data point, but it’s important to understand what it really tells you. The level of detail can vary significantly between brands. Some provide full profit and loss statements, while others might only show top-line revenue averages.
Use the Item 19 as a starting point to build your own pro forma (financial projection). Factor in variables like your local market costs, whether you’ll have a general manager, and your specific operational plan. Then, use your franchisee validation calls to get real-world context for those numbers. Remember, the FDD data is historical; ask franchisees about their more recent performance to get the most current picture.
4. The Role of a Franchise Consultant: Your Guide Through the Maze
Navigating this process alone can be daunting. As a franchise coach, my role is to bring experience and a strategic framework to your search. Many of us, myself included, have been franchisees and have navigated the corporate world. We understand the transition.
A good franchise business consultant helps you:
- Look Inward First: We don’t start with a list of brands. We start with you. Your goals, skills, finances, and desired lifestyle.
- Build Your Model: We help you create a detailed model of your ideal business, which becomes the filter for all potential opportunities.
- Provide a Big-Picture View: We help you see beyond the “widget” and understand different business models, like B2B vs. B2C or executive semi-absentee franchise ownership.
- Set Expectations: We provide a realistic understanding of what it takes to succeed, ensuring you don’t fall for common misconceptions. As I often say, “If your plan is to buy a McDonald’s to change the menu, probably not a good fit for franchising.”
Think of a consultant as your experienced guide, helping you avoid pitfalls and stay focused on what truly matters.
5. Discovery Day & Decision-Making: The Final Step
Discovery Day (or Confirmation Day) is typically the final step in the investigation process. It’s your opportunity to meet the leadership team, either virtually or in person, and ask your final, hard-hitting questions.
By this point, you should be about 80% sure you want to move forward. This isn’t a day for initial research; it’s for final confirmations. After Discovery Day, the franchisor’s team will meet to decide if you are formally approved. If so, you’ll be presented with an offer, and the final decision will be in your hands.
Your Roadmap to a Confident Decision
This due diligence roadmap is designed to replace fear and uncertainty with knowledge and confidence. By systematically working through these steps, you can ensure you’re not just buying a franchise, but investing in the right franchise for you.
Want a step-by-step due diligence checklist and the 40+ questions I give my clients to ask franchisees? Schedule a call with me, and I’ll walk you through it.
Find the franchise that is a right fit for you at https://ggthefranchiseguide.com/right-fit
