Before this course, and your due diligence plan
Before you buy a used car you read the papers, ask the last owner, and let a mechanic look under the bonnet. You do not decide in the showroom. Due diligence is that careful look, for a franchise.
- Before this course: Franchise Basics: what franchising is (course 2.27.1) and Franchising: buying or starting a franchise (course 2.27). You should already know franchisor and franchisee, the fees (initial fee, royalty, advertising fund), what a disclosure document is, the four self-check questions and the warning signs. This course goes deeper and does not repeat them.
- Due diligence means checking the facts before you commit: the franchisor, the numbers, the contract, the other franchisees and yourself.
- The U.S. Federal Trade Commission (FTC) says franchising is an investment with no guarantee of success, and that a problem found after signing may be very expensive to fix.
- In the United States, the franchisor must give you the Franchise Disclosure Document (FDD) at least 14 days before you sign any contract or pay any money to the franchisor or an affiliate. Other places have their own rules (Lesson 7).
- A due diligence file has six folders: (1) documents you received and the date, (2) the money model, (3) the contract notes, (4) franchisee calls, (5) professional advice, (6) your decision memo.
- Keep a dated log of every promise made to you, who made it and how (call, email, expo, meeting). Ask for anything important to be put in writing.
- Never pay a deposit, sign a letter of intent or sign a confidentiality agreement without reading it, and ask a lawyer what each one commits you to.
- Create six folders (paper or on your computer) with the names above.
- Write the date you received the disclosure document and count 14 days forward (or the number your country's rule gives).
- Start a promise log with columns: date, who, what they promised, written proof (yes or no).
- Write the date you plan to meet a lawyer and the date you plan to meet an accountant.
- Write the date by which you will make a decision, and tell the seller you will decide after your advisers have read everything.
- Check: every folder exists, and the promise log has a place for proof.
Videos by other creators on YouTube, for reference. They are not made by or affiliated with The Future Market.
Read the video script
[Host] "You would not buy a car without a mechanic. A franchise costs far more, so check it properly."
[Text on screen: Six folders: documents, money model, contract, calls, advisers, memo] "Build a file with six folders: the documents, your money model, the contract notes, your calls, your advisers, and your decision memo."
[Screen: promise log] "Write down every promise, who made it, and whether you have it in writing."
[Host] "Set your own decision date. A good franchisor will wait for your lawyer and your accountant."
Create the six folders and the promise log for one franchise you are considering, or a practice one. Write your three key dates: lawyer, accountant, decision.
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I'm learning "Franchise Due Diligence: reading FDDs and contracts" on The Future Market. Lesson 1: "Before this course, and your due diligence plan". What the lesson teaches: - Before this course: Franchise Basics: what franchising is (course 2.27.1) and Franchising: buying or starting a franchise (course 2.27). You should already know franchisor and franchisee, the fees (initial fee, royalty, advertising fund), what a disclosure document is, the four self-check questions and the warning signs. This course goes deeper and does not repeat them. - Due diligence means checking the facts before you commit: the franchisor, the numbers, the contract, the other franchisees and yourself. - The U.S. Federal Trade Commission (FTC) says franchising is an investment with no guarantee of success, and that a problem found after signing may be very expensive to fix. - In the United States, the franchisor must give you the Franchise Disclosure Document (FDD) at least 14 days before you sign any contract or pay any money to the franchisor or an affiliate. Other places have their own rules (Lesson 7). - A due diligence file has six folders: (1) documents you received and the date, (2) the money model, (3) the contract notes, (4) franchisee calls, (5) professional advice, (6) your decision memo. - Keep a dated log of every promise made to you, who made it and how (call, email, expo, meeting). Ask for anything important to be put in writing. - Never pay a deposit, sign a letter of intent or sign a confidentiality agreement without reading it, and ask a lawyer what each one commits you to. The exercise I'm working on: Create the six folders and the promise log for one franchise you are considering, or a practice one. Write your three key dates: lawyer, accountant, decision. I'm stuck. Please: 1. Explain the main idea in plain, simple words with one everyday example. 2. Walk me through the exercise one small step at a time. Ask me what I've done so far before giving the next step. 3. Don't just give me the final answer. Help me do it myself, and check my work when I share it.
I'm a parent helping my child (about 8 years old) with a lesson called "Before this course, and your due diligence plan" from the course "Franchise Due Diligence: reading FDDs and contracts". Here's what the lesson says: Before you buy a used car you read the papers, ask the last owner, and let a mechanic look under the bonnet. You do not decide in the showroom. Due diligence is that careful look, for a franchise. The activity: Create the six folders and the promise log for one franchise you are considering, or a practice one. Write your three key dates: lawyer, accountant, decision. Please explain this so an 8-year-old understands: short sentences, a fun everyday example, and no hard words. Then give me 3 simple questions I can ask my child to check they understood, and a way to do the activity together, one tiny step at a time.
Sources
- FTC, A Consumer's Guide to Buying a Franchise: www.ftc.gov/business-guidance/resources/consumers-guide-buying-franchi
- FTC, Franchise Rule: www.ftc.gov/legal-library/browse/rules/franchise-rule
Reading the disclosure document in layers
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Earnings claims, outlet data and the franchisor's finances
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Build your own money model
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Reading the franchise agreement
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Franchisee calls and checking the story
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Rules by country, pressure, and your decision memo
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Final project
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Quiz
What is due diligence?
Checking the facts about the franchisor, the numbers, the contract and other franchisees before you commit.
Why should every important promise be put in writing?
So you can compare it with the contract and prove what was said.
Why is gross sales not the same as profit?
Costs such as rent, wages and royalties still have to be paid out of sales.
Why look at the median and the range, not only the average, of an earnings claim?
A few very big outlets can pull the average up.
How do you calculate turnover for a year?
(closed + transferred + terminated + not renewed) ÷ outlets at the start of the year × 100.
In the practice table, why is rising turnover a warning even when the system grows?
More owners are leaving each year, so ask why.
How do you calculate break-even sales?
Fixed costs ÷ (1 − cost of goods % − royalty % − advertising fund %).
Why build a slow-month column in your money model?
Rent and wages do not shrink when sales drop, so you see whether you could survive a bad period.
Which three kinds of franchisee should you call?
New owners, long-time owners and a former owner.
What should you do if you find a difference between the agreement and the disclosure document?
Ask the franchisor in writing which one applies, and take it to your lawyer.
What should you do if your country has no disclosure law for franchises?
Ask for the same information in writing and have a local lawyer review it.
What are the three possible answers in a decision memo?
Yes, not yet or no.
Final exam
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Certificate
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