Franchising · 31 May 2016

Franchising A–Z: Due diligence – An essential part of building your brand

The impact of not doing due diligence could be catastrophic for your brand
The impact of not doing due diligence could be catastrophic for your brand

When it comes to conducting due diligence, it isn’t a case of “do I or don’t I” but of “how much is enough”. Here, ServiceMaster expert David Burton looks at what a prospective franchisor should consider.

Due diligence is essentially about completing an appropriate investigation or audit of an investment you’re about to make. Perhaps in some cases it’s a startup you’ve founded, and you may have already made significant investments into devising and developing a brand, but did you do your homework? Are you absolutely sure that you and you alone are the owner of your brand?

For any enterprise, especially for a prospective franchisor, the effects of not undertaking due diligence in areas such as branding, trademarks, legislative, political and other relevant socio-economic considerations could be catastrophic.

When it comes to your business – your life’s work –  you need to ensure that the brand you’re about to franchise is firstly, yours, and secondly, has the longevity to provide investors with a healthy return. A good amount of research at this stage could save you vast amounts of money, stress, pain and ultimately your business in time to come.

Do you own it?

This is a great starting point. You need to identify if you actually own the business or brand you want to franchise. You need to be sure that you have the right intellectual property (IP) protection for your brand or franchising model. Do you own the trademark, patent or copyright to the brand and did you originally create the idea whilst being self-employed or employed? There’s a difference.

According to advice from the UK government, if your idea was created whilst you were employed by someone else, you won’t necessarily own the idea. Establishing who owns the idea for the brand is integral at this stage before moving forward.

If you don’t have the sole rights to trade under your current business name, you will want to investigate avenues to purchase the IP for your brand name. However, if you discover another company trading under the same name as you but they have the trademark, it’d be wise to change the name of your business before franchising.

“The brand is of vital significance in franchising. Investors are buying into your brand, the identity, the history and the proven business model. The last thing you want is for another company to start a legal process to retain the rights to it after you’ve started to franchise your business,” said head of restoration services brand ServiceMaster Clean and Furniture Medic, Angus Dodds.

“We periodically discover organisations or individuals trading as a variant of our brand offering a similar line of service that they have either failed to undertake the appropriate due diligence in researching and launching their branding or maybe attempting to mislead consumers by creating a facsimile of brands – a practice known as “passing off”. Taking the time and effort and investing in this process now, will most certainly pay you dividends down the road.”

However, confirmation of who owns the IP not only includes the brand name but also elements such as website domain names, social media and any unregistered trademarks.

Does your business have legs?

As the franchisor, you are responsible for attracting the investments of, hopefully, a great number of franchisees into your system. It’s in your best interest to ensure your business has the longevity to provide a return for those investors.

Just because your local business provides a service in your area, are you certain this can be replicated across the country, indeed across the globe? If the service is niche, will there be demand in other locations? Is your business future-proof? Should we fall into another recession; can your business model sustain and recover? Perhaps a trial period in another location can help to monitor the successes and failures of the business as a franchise.

Some extensive research into your competition and your current service could return a hard-to-swallow realisation that your current service just doesn’t have the demand in other locations.

However, if your research tells you this don’t be downhearted because your analysis may have saved you from making a very expensive mistake and perhaps also identify other opportunities that may be available to you. What if you tweaked the business model or service delivery to reach a different target market or demographic?

Undertaking due diligence is about obtaining objective information to help you make informed decisions. Running through each and every foreseeable and reasonable scenario that may arise is integral to ensuring your franchise can overcome every obstacle.

Research your investors

Not only will your prospective franchisees be undertaking due diligence on you as a franchisor but you also have an obligation to carry out a similar process on them. This means an appropriate investigation into their backgrounds, work and investment history.

The due diligence process should allow you to build a profile and pick individuals who are likely to become successful franchisees, and in the process identify riskier options and develop a plan to avoid the serious risks of entering into a franchise agreement with individuals who are not the right fit for your model.

Prepare a franchisee profile, identify what you require in an investor and keep that your focus. Your business is not for everyone and it’s your duty to identify who you feel matches the profile of a franchisee best suited to be in your network.

You can also use this process to build trust and rapport with your investors, learn about them and find out what their motivations are – this is the very start of what hopefully will become a very successful ongoing business relationship.

Miss the previous article in our A–Z franchising guide? Go back and read “C for Coaching“. 

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ABOUT THE EXPERT

David Burton is the communications executive at ServiceMaster, one of the UK’s longest established and largest multi-brand franchisors. With a background in public relations, he provides communications support to the 350+ ServiceMaster franchises and is an advocate for franchising as a proven route to business success.

HR