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What are the Four Steps in the Process of Doing Due Diligence on a Franchise?

Dan Durney
Feb 20, 2017 8:00:00 AM

In this interview, Dan Durney, CFE, describes the steps involved in doing due diligence on a franchise. Each step is essential in helping you and the franchisor determine whether the franchise is a good fit for you.

Some of the items Dan hits on are:

  • Qualification (0:18)
  • The Federal Disclosure Document (0:32)
  • Validation (1:01)
  • Discovery Day (1:23)

Video Transcription

There are four steps in the process, obviously you have minor steps in between, but four major steps of doing due diligence on a franchise.

First: Qualification and Disclosure

The first is the qualification stage, and that’s where the franchisor explains what the brand is about, who they’re looking for, etc. Then, you fill out an application and submit that. Some refer to it as a request for consideration (RFC).

Once the franchisor receives that, reviews it, and determines that there’s a minimal qualification, they will send you the disclosure document, the FDD. That is the second stage, disclosure.

It’s a 200-page document that can be very daunting, but you’ll have an opportunity to ask questions about it, review it, and I also strongly recommend you have a franchise attorney help you review the disclosure document.

Next: The Validation Phase

The third stage is called validation, and that’s where you talk to the franchisees that are in the system. It may be difficult in a new brand, especially if they only have one corporate location. So, this stage may not even exist for some scenarios. But, when you talk to a franchisee, you are basically validating the information that you’ve received from the person who represents the franchise and the FDD.

Discovery Day: The Final Phase

The fourth step then, assuming everybody likes each other through this stage, is you’ll have an opportunity to be invited out for a discovery day. That’s where you meet the people from corporate who will be supporting you, and they have a chance to meet you. It’s kind of a dual interview - as much as you’re checking them out, they’re checking you out, determining whether they want to award a license to you.

At the end of the day franchises are awarded, not sold. Typically, you sign a ten-year agreement, which is 2.5 times the average marriage in the U.S., so you need to take it seriously.

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