What Is Franchise Diligence?
If you are on this site, there is a good chance you have been exploring franchises. You may be looking for a specific Franchise Disclosure Document (FDD) or even have received a few from various brands, and you are going through ~300 page PDFs wondering where to start.
Diligence is a term often used when going through the franchise process. What does it mean?
Franchise Signal is a neutral data platform that ingests, structures, and surfaces FDD data and FDD-backed analysis for research and diligence.
We provide data in the form of:
- Public FDDs and their extracted and structured data,
- Time series information for year-over-year comparison and delta analysis,
- Top-down analytics to compare brands and provide various benchmarking.
The first thing to be aware of in franchising are incentive structures. Many advisors, consultants, brokers, and brands may talk to you "for free" as they are compensated when you invest and sign on as a franchisee.
Some franchise portals or discovery platforms may make money through lead generation or referrals, and some brands may work with and pay YouTube influencers for leads.
There is nothing wrong with this, but it does provide an incentive structure to be aware of as you move through various stages of research and discovery.
Franchise Signal makes money if you sign up for specific analytics packages or purchase research reports. As such, our incentive is to provide high quality data and neutral analysis as you perform research and/or diligence.
- Use this Key Insights box next to sections and items on a brand page for explanations and review.
- Model out upside and downside risk (and any potential liquidated damages or other clauses) as you research a brand.
- Understand the franchise model of a business concept vs the same business as an independent.
We do not provide lead generation and we are not brokers, agents, or investment or legal advisors.
If data looks incorrect or you have questions, please contact info@franchisesignal.com.
Where Does An FDD Fit Into Diligence?
Why is an FDD important and what does it represent? Franchising is a specific business model. A franchisor offers a business opportunity as outlined in the FDD and set forth in contractual terms in the Franchise Agreement. As a franchisee you provide investment, time, and expertise to start and run the business.
One of the main questions to consider when reviewing the FDD is: "Why am I in the unique position to take this opportunity?"
In other words, a franchisor may be offering their business model: a playbook, systems, structures, territory, pooled purchasing savings, operating procedures, concept, etc. Why have they decided to scale their business with you instead of expanding and running this themselves? They are experts in the business and have deployed capital and hired before. If the margins and systems are so strong, why are they selling you this opportunity? Why has the franchisor not decided to operate this business?
This is not to say this is a bad thing, but you as a franchisee are investing your capital, your time, and your expertise and signing a multi-year, (often 10-year) contract to license the brand and playbook for a defined timetable. What are you getting in return?
Who owns the downside risk in this agreement if economic factors change? If a competitor opens nearby? If a concept is not performing in a changing market?
With any business, you should also consider investment amounts and expectations and model out exit scenarios in consideration of who will be buying your business.
Be sure to model out and understand downside. What kind of liquidated damages or penalties may be present if you are terminated or things do not work out as expected?
How does all of this compare with starting your own independent business outside of the franchise model?
Reading An Entire FDD, While Absolutely Necessary, Is Not The Complete Diligence Process
Just like a 10-K does not give the full picture of a public company you may purchase stock in, an FDD does not provide all diligence aspects in any decision to start a franchise business.
In fact, an FDD discloses less in many cases than a 10-K would. There are no defined Item 19 disclosure standards. You will need to stitch together multiple years' worth of FDDs for a brand to help understand their changing trends in investment, expenses, financial performance, outlet growth and churn, and other contractual changes.
All of which is where Franchise Signal comes into play.
An FDD is just the start to diligence. Take a look at other FDDs, free and available on Franchise Signal, or freely accessible on certain disclosure state websites.
You should talk to other current and former franchisees, and a mix of high performers, middle performers, and low performers.
Talk with independent business owners in the industry you may be considering.
Analyze competition in your local market. Look at how long various businesses have been around and how many 5-star Google ratings they have.
Ask yourself about your skillsets and if they transfer to your potentially new industry. Will you enjoy working with what may be completely different personalities on a day-to-day basis?
Depending on the brand you are considering and startup vs. resale, you may be purchasing a job for at least the first couple of years while you learn the industry and establish systems.
As you can see, diligence is an involved process. And it should be, especially given the stakes, your investment, your time, and the contractual agreement you may be considering.
How To Use Franchise Signal
FDDs are a dense and complex document. It takes a while to understand the specifics of the 23 items, what is and isn't disclosed, how item sections relate and flow, how certain aspects may be selectively framed, what to look at year-over-year between documents, and how to read between the lines.
Linked below is a guide to read in an FDD, along with questions and themes to consider.
As someone researching a given franchise or sector, start by browsing to the sectors or franchise directory.
Each franchise has a brand page where you can see key highlights and details, considerations for each section, a year-over-year delta report, and the ability to download the FDD from each year.
The analytics features offer interactive reports to look at sectors from a top-down perspective, helping to compare a given brand among competitors or a sector as a whole.
You can use the natural language feature to directly query FDDs and their brand/source.
For someone just getting started understanding FDDs, we are rolling out a new case study in diligence with a full walkthrough of a brand.
Sign up for a free account and we will email the details.
About And Disclaimer
I am a former franchisee, and my prior professional background is in software architecture and engineering. I created Franchise Signal to surface and help make available FDDs to help with all of the above.
Please feel free to email or DM on LinkedIn.
It is important to note that nothing on this site is investment or legal advice. This site does not constitue full diligence in any way. You should reference the FDD(s) of any brand you are looking at. Franchise Signal may make mistakes. If you are actively considering investing in a franchise you should consult with a franchise attorney.