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Homework for New Franchisees:  

"The soul of the sluggard craves and gets nothing, while the soul of the diligent is richly supplied”, is a proverb written by King Solomon in about 700 BC. The scriptures say that God gave Solomon not only knowledge and wisdom, but also riches, wealth, and honor. Solomon is also known for being the king of Israel during that time he built the first temple in Jerusalem.

The homework that prospective franchisees complete before buying a franchise and signing a franchise agreement is referred to as due diligence. It is the process of ensuring that they have all the information they need to make an informed decision before buying the business. 

There are two really good ways to perform and complete the due diligence process in franchising; thorough evaluation of the Franchise Disclosure Document (FDD) and precise Validation, speaking with existing franchisees of that brand to determine their real-life experience as a franchisee. 

There are many attorneys that specialize in franchise law that will be happy to look over a franchisor’s FDD and review your franchise agreement for a reasonable fee. Also, there are franchise consultants and advisors who would be willing to do the same for a fee. This is time and money well spent. Both occupational disciplines spend many hours with FDDs and franchise agreements and can spot warning signs easier than many first-time franchise candidates.

Candidates working through a validation process need patience and direction. Existing franchisees may be hard to connect with and the validation process may stretch out longer than a prospective franchisee would like. It may be more appropriate to ask the franchisor to suggest names of franchisees that would be easier to connect with and more willing to share their story. While this means that the candidate will be talking with “hand-picked” franchisees, as opposed to ones randomly selected from the FDD, it does, at least, get the process underway and opens the lines of communication. Existing franchisees will often be happy to make introductions to other franchisees with whom they are acquainted within their system. This can be another good independent way to move forward.

These are the views of many naive investors. Potential franchisees need to know what they are committing to before they decide to buy a franchise. This homework is known as due diligence. It is the process of ensuring that investors get what they think they are buying - and that what they buy is actually worth what they pay. You wouldn’t buy a car before taking it for a test drive, having it checked by a mechanic, and making sure there was no money owing on it.

Franchisees should take a franchise purchase even more seriously, for two reasons. First, a franchised business is likely to cost much more than a car. Second, unlike when you buy a car, there are no consumer warranties when you buy a franchise. Franchisees must take responsibility for their own investment decisions.

The Disclosure Document will tell a prospective franchisee about who the franchisor is and will provide copious information about the actual business the franchisee will be running. Most franchisors operate within a group of companies. The Disclosure Document will not provide information about most others in the group. Who owns them? Have the directors and all of the companies in the group got a good credit rating? Do they own the companies that the franchisee will have to rely on? Might this influence them?

It's OK to rely on friends and family to tell you your new haircut looks great, but buying a franchise is a big step. When considering such an expensive commitment, it is time to visit a lawyer and an accountant who really understands franchising. As franchisees and franchisors have very different interests you’ll need to make sure your advisers have experience in advising franchisees.

Time spent in reconnaissance is seldom wasted

You can do a lot of homework yourself by googling the brand, the industry (to study trends), and the franchisor themselves. You should check out regulators’ websites. You can find out from the ACCC’s site whether the franchisor has the regulator’s permission to require you to buy from specific suppliers.

The ACCC investigates breaches of the Franchising Code of Conduct and publishes information about these investigations. The ACCC does not investigate breaches of franchise agreements so you could search on AustLII to find out whether the franchisor has had any court battles. Disputes that are still in progress may not appear in AustLII so it pays to also dig around in blogs or online media. And, remember that most Australian franchise disputes are resolved through confidential mediation so you will not find anything published about them.

Find about the trademarks and patents the franchisor will require you to use by searching IPAustralia.

By entering the name of the franchisor and each of its directors on the ASIC website you can find out about their corporate activities. Even though it costs a bit you should also do a credit check on the franchisor. A credit check will give you a very good picture of your franchisor’s and their directors’ attitude to paying bills on time.

There are blogs such as bluemaumau where you can ask questions and, of course, you should visit existing franchisees.  Don’t just call them - actually visit them at work to see what the vibe is in their business. Remember an existing franchisee might be bound not to say anything about a dispute they have had with the franchisor. They might have signed a confidentiality agreement at the end of a mediation. Don’t just passively accept everything you are told.

You can educate yourself by visiting the ACCC’s site and searching under ‘franchise’. The ACCC has funded an online pre-entry franchise education program run by Griffith University. This will help you decide whether franchising is for you.

Don’t rely totally on any one source of information. Remember, there is always going to be another franchise opportunity so if you are not completely happy, do not rush into buying. Franchisors want satisfied and successful franchisees just as much as you want to be happy and run a profitable franchise.

Demonstrate dispassionate interest

Research has revealed that potential franchisees are often complacent about conducting proper due diligence. Many do not devote enough time or are unwilling to pay for expert advice. Their emotional attachment to the brand often overrides objective information. To undertake effective due diligence a prospective franchisee needs to keep an open mind and to seek out and dispassionately question all information.

In a time where every day of the year seems to be a holiday or a special day carved out for someone or something, January 28th, every year, is set aside as National Fun at Work Day. Although that is the official date of the “unofficial holiday,” many prefer to celebrate on the last Friday in January, regardless of the date. How odd, and perhaps sad, it is that there is only one day out of 365 that American workers are supposed to acknowledge the need for fun at work. 

Here are four really good reasons to be intentional and thoughtful about having fun at work: 

Job Satisfaction Increase - According to Fortune Magazine’s “100 Best Companies to Work For” list, 81% of the employees at those companies that described their company as “great,” said that they worked in a “fun” environment. The obvious reason is that employees who have fun at work are very satisfied with their jobs and the companies they work for.

Productivity Increases - Fun workplaces cultivate an environment that enhances learning, productivity, and creativity while reducing employee burnout and absenteeism. In fact, doing workplace fun activities and events is an active prevention measure for burnout. It shows appreciation for the time and effort employees give to the organization.

Heightened Trust - In Patrick Lencioni’s book, Five Dysfunctions of a Teams, trust is described as the foundation on which a team is built. Having a fun working environment builds trust, opens up, encourages, and increases communication, and enhances creativity and innovative ideas. When people see each other’s vulnerability and find ways to connect with each other, it builds trust. When coworkers team up for a corn hole game or soundly defeat each other in ping pong, it seems to remove any pretentious insecurities.

Employee Retention - Google is seen as the gold standard of fun workplaces. Google’s co-founder Larry Page maintains that “we don’t just want you to have a great job. We want you to have a great life. We provide you with everything you need to be productive and happy on and off the clock.” Obviously, most companies can’t provide their employees with “everything” they need off the clock, but there are probably many things that many can do to enhance the lives of their employees outside of work. 

The benefits of having a fun working environment are contagious - it’s like creating ripples in the water; its effects are felt even by customers. Matt Weinstein, the author of multiple books on having fun at work, says it best, “if you want your company to provide excellent customer service, you first have to provide that same kind of attention and appreciation to your internal customers—your own employees. You cannot expect your employees to provide service with a smile if you don’t give them something to smile about.”

Happy employees attract happy coworkers, customers, and vendors and, in turn, positively impact the whole business.

About the author

Christopher H Goethe, SCORE Mentor

Mr. Goethe is a small business coach who helps individuals make the transition from working for others to become successful entrepreneurs. For the last four years, he has worked in the industry of franchising, helping others accomplish their dream of owning top-tier franchise brands.   Prior to his experience in franchising, Chris worked for a small business start-up in the Atlanta area, helping grow it, over nine years, to a robust, international training and consulting organization. He is the owner of Voyage Franchising.  Today, he coaches others and guides them through the process of business decision-making.

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Diligence vs. Due Diligence