When acquiring an established franchisor or even a company that might be franchised in the future, there are several types of due diligence that extend beyond the bounds of traditional legal due diligence or financial due diligence.
Of course, the key to any acquisition lies in the soundness of the business model at the individual operating unit level. But in franchising, this analysis should not be limited to the business model itself. Because the acquisition candidate must compete both in the consumer market and in the franchise market, the buyer must also look at issues including:
- How does the franchisor compare with other franchise companies in the market in terms of franchisee value proposition?
- Is the structure of the franchise (fees, royalties, territories, etc.) appropriate given the position of the franchisor in the marketplace and the amount of support needed by franchisees?
- Is the organizational structure of the franchise appropriate given desired levels of growth and support – or has the acquisition candidate been trimming staff over time to artificially inflate the bottom line in anticipation of a sale, but to the detriment of long-term growth?
- Are there organizational or systemic gaps that will need to be filled to get the acquisition candidate prepared for more aggressive growth?
- How is the franchisor organization performing versus its franchise competitors on Franchise-Sales-Specific Key Performance Indicators (cost per lead, cost per sale, closing ratios, time-to-close, media specific KPIs, salesperson specific KPIs, etc.) and what do these KPIs tell us about the franchise sales and marketing issues being encountered by the franchisor?
- How satisfied are existing franchisees with the support being offered by the franchisor and by the value proposition of the franchise – and what are the implications of this satisfaction level relative to franchisee validation (and future sales) as well as to the potential for future litigation?
- Are franchise marketing efforts being conducted appropriately and effectively?
- Are franchise sales efforts being conducted properly and effectively?
- Are Franchise Operations Manuals written professionally or do they present potential exposure to vicarious liability lawsuits because they are overly prescriptive or step across the “agency line”?
Having assisted with the due diligence of numerous franchisor acquisitions, the iFranchise Group is uniquely qualified to help buyers through this process. We understand both the buyer’s and the seller’s needs to conduct this due diligence expeditiously and, of course, confidentially.
Depending on the situation, we have used proprietary mystery shopping techniques both to assess franchisee satisfaction and franchise salesperson performance without ever raising the slightest internal concern or raising any unwanted questions. And our knowledge of the franchise marketplace, franchise organizational structure, and franchise KPIs is second to none.
To learn more about how we can help with due diligence on a targeted acquisition, contact us confidentially at 708-957-2300 or [email protected]. Or, if you would like, we would be happy to send you a White Paper on Franchise Acquisition Due Diligence co-authored by Mark Siebert for the International Franchise Association’s Legal Symposium by clicking here.