Thinking of Buying a Franchise?

What Your Due Diligence Should Actually Look Like

Purchasing a franchise is one of the most significant financial decisions you will make. The franchisor’s pitch may be compelling, but your job during due diligence is to look beyond the brochure. Here is a practical checklist of what serious prospective franchisees should be doing before they sign anything.

1. Read the Disclosure Document Carefully

Under the Franchising Code of Conduct, franchisors must provide you with a Disclosure Document at least 14 days before you sign any agreement or pay any non-refundable funds. Don’t skim it. This document contains critical information about the franchisor’s history, financials, existing and former franchisees, litigation history and the key terms of the franchise. If anything is unclear or missing, ask questions and get answers in writing.

2. Check the Franchise Disclosure Register

This is one of the most underutilised tools available to prospective franchisees, and it’s completely free. The Australian Government’s Franchise Disclosure Register requires franchisors to lodge their disclosure documents publicly. Use it to:

• Learn more about the franchisor independently of what they’ve told you, including how the system has grown, contracted or changed over time.
• Verify consistency between what you’ve been given and what has actually been lodged. Discrepancies should prompt serious questions.

If something doesn’t add up, that’s a red flag worth investigating before you go any further.

3. Speak to Current and Former Franchisees

The Disclosure Document will list current and recently departed franchisees, for those who have agreed to have their details disclosed. Call them. Don’t just speak to the ones the franchisor refers you to. Ask candid questions: Is the support what was promised? Are the financials achievable? Would they do it again? Former franchisees in particular can offer unfiltered insight into what life in the system is really like.

4. Scrutinise the Financial Model

Carefully review any financial projections or earnings information provided. Understand the full cost of entry, including the franchise fee, fit-out, equipment, working capital and ongoing royalties. Engage an accountant experienced in franchising to stress-test the numbers and model realistic scenarios, not just the best case.

5. Understand the Territory and Market

Does the franchise grant you an exclusive territory? What are the boundaries, and are they enforceable? Research the local market: foot traffic, competition, demographics, and whether the franchise’s product or service has genuine demand in your area.

6. Review the Lease, if applicable

Review the lease and all your obligations, and not just the financial obligations. For example, what are the end of term and make good arrangements? Does the lease term align with the term of your Franchise Agreement? Can the lease be negotiated? Is there refurbishment required?

7. Get Independent Legal Advice

This one is non-negotiable. Have a franchise lawyer (not just any commercial lawyer) review the Franchise Agreement and Disclosure Document (as well as other documents such as the lease) before you sign. Franchise agreements are typically non-negotiable in their core terms, but a lawyer can help you understand your obligations, identify unusual or onerous clauses and advise on your exit rights.

8. Understand the Exit

How do you get out if things don’t work? Review the termination, transfer and renewal provisions carefully. What are the conditions? What are the costs? What happens to your goodwill? Knowing your exit options before you enter is not pessimism. It’s good business.

9. Assess the Franchisor’s Culture and Support

Due diligence isn’t only financial and legal. Spend time with the franchisor’s team. Attend a discovery day if offered. Ask about training, ongoing support, marketing and how disputes are handled. You’re entering a long-term relationship, so make sure the values and culture are ones you can work within.

The bottom line: Due diligence in franchising is not a formality. It’s your best protection. The tools are available. The information is out there. Take the time to use them.

If you’re assessing a franchise opportunity and would like guidance on disclosure documents, the Disclosure Register, or your legal rights as a prospective franchisee, feel free to reach out to our team on 0478 041 646 or info@gablelawyers.com.au. #Franchising #FranchiseLaw #DueDiligence #SmallBusiness #AustralianBusiness #FranchiseDisclosure #BusinessOwnership #Franchisee #gablelawyers