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How to Conduct Due Diligence

How to Conduct Due Diligence

Learn how to conduct due diligence to evaluate a franchise business opportunity. 

Opening a franchise business requires a lot of hard work and dedication, and one of the most important steps happens before you ever put any money down or sign on the dotted line. Due diligence is a comprehensive risk and opportunity assessment that will provide the information you need to pursue a franchise business opportunity with confidence. Although time consuming and tedious, consider it a labor of love to ensure you’re making a sound investment. Knowing how to conduct due diligence, what to review and the advisors to lean on for assistance can help the process flow more smoothly.

What is Due Diligence 

The phrase “due diligence” is used often and can mean different things depending on the situation. In a nutshell, performing due diligence for any endeavor simply means doing your homework. When opening a franchise business, due diligence means taking a deep dive into the franchise business opportunity that you are interested in buying. While you may already know top line information, you need to investigate the key elements of the business and the products or services you will be providing. Taking a good look at finances, legal documents and operational specifics can help uncover any deal-breakers that may not be evident on the surface. Before attempting any business acquisition, it’s imperative to do your due diligence to ensure the venture is worth pursuing. 

How to Perform Due Diligence

Proper due diligence can be a long, complicated process but thoroughly assessing a franchise business opportunity is worth it in the end. It involves doing your own research to familiarize yourself with the business by digging through records, analyzing projections, investigating competitors and checking references.

Due diligence shouldn’t be done alone. Enlist the help of an accountant to review financial records and an attorney to review legal matters.

Assess the Finances

Financial due diligence involves evaluating the economic standing of the franchise business opportunity. Plowing through financial records can be a daunting task, especially if you aren’t sure how to interpret the information. Rather than take an uneducated guess, hire an accountant to weed through the numbers with you and properly evaluate the findings. 

Study the Franchise Disclosure Document (FDD) to get an overview of the franchisor’s financial health. Pay special attention to income statements, balance sheets and cash flow statements. Look for irregularities in assets and liabilities and review historical trends from year-to-year to determine if the market is growing, shrinking or stagnant. A business should have a healthy cash flow, and you should be able to tell where the revenue stream is coming from. Review sales and gross profits by product to get an idea of what you may be able to expect as revenue once you become a franchisee.

As you review the financials, take a close look at annual projections. Find out how they were calculated and compare historical forecasts to actual results to get a feel for their accuracy. Note the size and value of all real estate, equipment and furnishings as well. Most importantly, ask for all business tax details to ensure that there are no surprises later. 

Look for Legal Issues 

Legal due diligence involves reviewing legal contracts and other documents to ensure there are no hidden risks or outstanding issues that could cause the business to incur liability. Seek the professional help of a lawyer to complete this important inquiry to make sure nothing is overlooked. All contracts such as leases, purchase agreements, distribution agreements, sales contracts and employee and contractor agreements need to be reviewed thoroughly. Be aware of all trademarks, copyrights, trade secrets and patents along with articles of incorporation and business registration documents. When it comes to doing business under the franchise brand’s name, do not make any assumptions. Your rights and responsibilities as well as those of the franchisor should be outlined clearly in legally binding documents such as the franchise agreement and FDD. 

Investigate Operations

Operational due diligence involves investigating how the business is run and includes factors such as the business model, market and competition. Your review should reveal customer patterns, industry trends, competitive threats and how the business is perceived by customers as well as suppliers. Pay special attention to marketing expenditures to properly calculate ROI. Study past and present tactics and how well they performed. 

The location of your franchise is important as well. Research the demographics and learn who the target customers are and how to reach them. What is the geographic economic outlook? Is the business located in a thriving area? Who are your competitors and what threats do they or could they pose to your business? You should already have a good idea of industry trends and profit margins by the time you reach this stage, but getting your hands on every piece of data available will help set realistic expectations of what life will be like as a franchisee. 

Due Diligence is Imperative

Not completing your due diligence can result in more than simply buyer’s remorse. Aside from making a bad investment that can cause you to lose money, you could inherit an unknown debt or worse, a lawsuit. Opening a franchise business is a major investment in your future. Before you open your doors, make sure you know everything that’s inside by conducting a thorough due diligence review.

2023 Entrepreneur's Franchise 500 Top Rated for Veterans badge

We Proudly Support Our Veterans

Participating partners with the VetFran program, The UPS Store offers qualifying veterans $15,000 off their franchise fee to start their new business. To learn more, contact The UPS Store Franchise Development Team.

Entrepreneur's Franchise 500 Ranked #4 in 2023 badge

Ranked for over 30 Consecutive Years

The UPS Store has been ranked #1 in the postal and business services category for over 30 years and remains in the top 5 overall for the seventh consecutive year according to the Franchise 500 list.

Kristin Howard

Franchisee, Michigan

The reason my husband and I decided to go into franchising and specifically with The UPS Store, is the different opportunities we're given with the business. The UPS Store has name recognition as well as opportunities to expand.

Debbie Adams

Franchisee, Kentucky

What I enjoy most about being a The UPS Store owner is working with my customers. We are the solution specialists for our customers.

Jim George

Franchisee, Illinios

My favorite part about The UPS Store network is the camaraderie with other franchisees. Everybody loves to help everybody else. You’re really part of a family.

Greg Murray

Franchisee, Florida

The interesting thing about The UPS Store is that when a customer walks through the door there's an extremely high probability that they're coming there to do something that is important to them. So at the end of the day, what we do for customers is very important and they are trusting that we are going to do it well.

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Mariana Huberman

Franchisee, Washington, D.C.

One of the things that I love about The UPS Store franchise system is that you're not ever in this by yourself. The franchisees of The UPS Store network are great.

Heidi Morris

Franchisee, Colorado

The thing I enjoy most about being a The UPS Store franchisee is I get to get up, go to work and know that I'm helping other business owners succeed in what they're doing.

Bob Brown

Franchisee, Tennessee

Owning a The UPS Store franchise has changed my life because it's finally given me the opportunity to engage my customers and my staff and be able to take real pride in what I do. As a franchisee, we get faced with solving peoples' problems every day and we do everything we possibly can to try to help.

Marie Jensen

Franchisee, Oregon

My favorite thing about The UPS Store is the variety. I love the variety of customers, I love the variety of services; getting to know the customers, meeting their needs, finding out how we can help them accomplish what they need to accomplish and seeing how happy they are. That makes me ecstatic.

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Tad Mollnhauer

Franchisee, Florida

With the products and services that The UPS Store provides we can make a difference in people's lives and that is the best reason for being a The UPS Store owner.

Joy Batchelor

Franchisee, Idaho

What makes being a The UPS Store franchisee worthwhile at the end of the day is the customers. The customers treat us like we're family.

Paul Erchinger

Franchisee, Texas

One nice benefit of owning a The UPS Store franchise for me has been that it gives me the opportunity to be more involved in the community. As I make relationships with others it seems like no matter what the environment is, in one way or another business comes out of that and that's not my objective—it's been a secondary benefit to being involved in the community.

Chris Reminder

Franchisee, Ohio

There are several things that I really enjoy about being a The UPS Store franchisee. First and foremost it allows me to get to know the people in the local community and that is a lot of fun. We get to see people on a regular basis. We get to know their life stories. That's a lot of fun.

Bruce Jones

Franchisee, Kentucky

Since we have joined The UPS Store, our life has changed by just having more time to spend together as a family. We've been very fortunate with the stores that we have and we have a great staff that looks out for our best interest and we look out for theirs.

Lonnie Williams

Franchisee, Oklahoma

What makes The UPS Store so successful is it gives each individual an opportunity to grow with the network and just meet the challenges that are brought to them on a daily basis. Every day gives us a new opportunity to help another person, to help another small business, to answer a question and to solve a problem.

Jeff Graham

Franchisee, Alabama

I love my customers. I love my employees. I love every person, every face that comes into my store. I enjoy every day going into work and I can't see doing anything else for the rest of my life.

Stacie Stigar

Franchisee, Alaska

I think that this franchise is so successful because of all of the resources that are available to us as center owners—we have marketing materials, we have so many different opportunities for help from the home office, and it just really makes for a great franchise.

Don Pollard

Franchisee, New Jersey

I think the thing that makes this franchise successful is a number of things. First of all we have an outstanding system, we have a great product, a great brand, and we're able to attract dynamic people to run these centers and run the business. So I think when you put all that together it really provides for a winning combination.

Mary Ellen Nichols

Franchisee, Tennessee

The thing I love about the franchise is that you have the UPS name backing you but yet you also have the autonomy to make your own decisions to promote.

Laura Griffin

Franchisee, Florida

In the eight short months I've owned my The UPS Store it has really changed my life. I've gone from being an employee of someone else to being an employer of my associates. It's a big responsibility but it's exciting every day.

Sandy Scandrett

Franchisee, Wisconsin

Being a The UPS Store franchisee has improved every aspect of my life. It's very rewarding financially, professionally, and emotionally. I have a large number of regular customers who are really, really appreciative of everything we do.

Kristie Robison

Franchisee, Alabama

I would say owning a The UPS Store location has changed my life to where I have more time and flexibility. In owning your own business you get your store up and running and you get employees that you can trust that are going to help keep your store running. This allows me to attend my two boys' ball games and also travel and do things with them so it has really changed my life for the better.