Franchise Due Diligence Roadmap (5 Steps to Avoid Rookie Mistakes!)

Ready to invest in a franchise? DON'T sign anything until you watch this! 🛑 In this crucial solo episode, Giuseppe Grammatico lays out the complete "Franchise Due Diligence Roadmap" to help you research wisely and avoid costly rookie mistakes. Learn the 5 essential steps:
Understanding the FDD: 

1. Key items to review in the Franchise Disclosure Document.
2. Franchisee Validation: What to ask current franchisees to get the REAL story.
3. Item 19 & Financials: Decoding performance claims and spotting red flags.
4. The Role of a Franchise Consultant: How an expert guide streamlines your search.
5. Discovery Day & Decision-Making: How to prepare for the final step.

Want a step-by-step due diligence checklist? Let's connect and I’ll walk you through it.

DISCLAIMER: The information on this podcast is for general information purposes only. Franchising involves risk and careful consideration should be given before making any decisions.

00:00 247:  The Franchise Due Diligence Roadmap. What you need to know before You Invest.
00:03  The Franchise Due Diligence Roadmap. What you need to know before You Invest.
01:29 Franchise Due Diligence Roadmap
01:46 Understanding the Franchise Disclosure Document (FDD)
04:22 Franchisee Validation: Key Questions to Ask
08:03 Role of a Franchise Consultant
11:43 Discovery Day and Decision Making
12:33 Conclusion and Next Steps

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The Franchise Freedom: Discover Your New Path to Freedom Through Franchise Ownership, Book by Giuseppe Grammatico https://ggthefranchiseguide.com/book or purchase directly on Amazon.

Transcript

giuseppe_1_06-04-2025_150337: 0:03

Our role is to bring experience to the table and, have you look at the big picture. Not all, but many franchise consultants, including myself, have owned franchises. I've owned franchises, non franchises have had side hustles, worked for corporate America, have been downsized and everything else in between. I jokingly say if your plan is to buy a McDonald's to change the menu, probably not a good fit for franchising. My one guarantee to you is you'll learn something in the process, won't cost you anything but 20 minutes.

0:33

Welcome to the Franchise Freedom Podcast, where you can escape the corporate trap through franchise ownership. Here's your host, Giuseppe gr, the franchise guide.

giuseppe_1_06-04-2025_150337: 0:46

Welcome to an exciting episode of the Franchise Freedom Podcast. I'm your host, GI Matico, your franchise guide, the show where we help corporate executives experience time and financial freedom. Thanks for joining us today. We are continuing our series of answering your questions. Gonna be solo, gonna be a little bit shorter in length, but wanna address a key topic with five subtopics there. Kind of, these bullet points that we're gonna put here in the show notes. And I thought it would be really helpful. I get a lot of this content based off your questions. Some people aren't ready to chat, so let me put it out there. There's no cost aside for some time. And if the 10, 15 minute shows are too quick. I always jokingly say we, we put'em on one and a quarter, 1.5 speed. We all sound like chipmunks. All right, what are we talking about today? The franchise due diligence roadmap. What you need to know before you invest. I wanna teach you guys, how to research get your due diligence done and avoid any rookie mistakes. So this was a. This is an interesting one. We're gonna jump into key areas. Number one, understanding the FDD, the franchise disclosure document. So I had a couple franchise attorneys on the on the show. I asked them, silly me for asking this, but what was most important areas of the FDD. And they said, as an attorney, it's the entire agreement. And that is true. FDS are extremely important. You need to read them cover to cover. And by the way, the FDD is the large agreement and within the FDD will be the franchise agreement. As part of the FDDI know a lot of people thought that was a separate document. That's the document that actually gets filled in. When you purchase, you put your name, your legal entity. The territory, any special arrangements and agreements and things like that. A lot of key areas there's 23 items. There's gonna be a financial section you wanna go through that, you're gonna get listings of existing franchisees that you can speak with. You're gonna get to see the financials of the franchisor how many new franchises to what changes there have been transfers. Usually that happens when they sell terminations or closings. There's gonna be a lot of great stuff in there. There's gonna be the item five and six, which are all your costs. Your item seven, which is gonna be your itemized low and high-end investment, initial investment, along with an item 19, which is a financial representation used to be called an earnings claim. Did away with that because of the wording. Franchisor doesn't know what you're gonna make, but they can give you historical information, kind of what the top or average, franchise, top, top 25% franchisees are doing middle bottom, and kind of breaking it down that way in different tiers. So the FDD is super important. Now, with the FDDI tell everyone it is a very large, it could be 2, 3, 4, 500 pages depending on some of those areas. Before diving in there. Figure out the franchise is a good fit. You're probably gonna have a couple calls with the franchisor before reading that document. It could get stale. It's a legal document, but it's important to read. You can comb through it. Figure out the fits there and if you wanna go, you're gonna read that cover to cover. You're gonna ask questions as they come up, bring up concerns. Hey, I don't understand this section. Can you talk to me? Why this reads this way? And then towards the end of the process, once you've gone to a discovery or, confirmation day narrow it down to one brand you have the option. It's recommended, but not mandatory to hire a franchise attorney. They can set the expectation and say, yeah, I know this kinda reads funny, but this is what it truly means. Or this is a red flag. We should bring this up to the, to the to the brands. Maybe get some clarification. Not really meant to be changed. On occasion we, we've seen an addendum here and there, not often. But really important topic two franchisee validation. What are you asking current franchisees? So after a couple calls with the franchisor, you get the franchise disclosure document. You're gonna be speaking with franchisees, and as I talked about in previous episodes, and I tend to repeat myself because I don't know what order you're watching these episodes. You're gonna get to speak with those franchisees. They may be one-on-one conversations, it may be a group live call which is great. You get to hear other questions from other potential franchise owners as well as prerecorded calls for those that are working. And maybe listening on the ride home. That's, franchisee validation is crucial. Usually happens after you understand the brand, the model. Not just what the product or widget is, but what the role of the franchisee is. And yeah, you're gonna spend some time here, talk to me about the good. The positive, the negative. Let me, let me talk to the top performer. Maybe he's been there 10, he or she's been there 10 years. And the person that just started and everyone in between, the person that started full-time versus the person that started semit absentee, all crucial. You wanna speak with these individuals and when you buy the franchise, you may be asked to handle validation calls and you're gonna be meeting with them at the annual conference. And you also may be partnering with them. If you have a couple franchises in your state, you may share resources and marketing. Maybe do events together, maybe even share vendors or labor. Maybe you have a big job and you need a few additional technicians. These are all important things and having those calls are important. It also shows you kind of the culture, everyone chipping in for the greater good of the brand. So that is a very important we got item 19 in financial performance. We talked about that. One key topic here is the item 19 will read differently. So let's set the expectation. Some will be blank if it's a newer brand or they change their model. They're kind of redoing things. Some will have the profit and loss of every franchisee that has over a year in the, of performance before the closing, which is usually, if you're today is June 4th of 25. So the franchise, usually that data ends. Usually we would end December 31st, 2024 depending on their fiscal year. And that could change depending on the brand. So yeah, so going through that reviewing it making sure you're comfortable with it. Some will give you just top, top level, top, top 25%, next 25, the third quarter, and the fourth kind of breaking it down what they're doing on average. Ultimately, you're getting your kind of investment range. You're putting together a pro forma. There's gonna be some variables there. Cost could go up. Maybe you hire an employee, it costs you a little bit more. Your involvement's gonna be a little bit less. Now you need a general manager. You gotta factor all this stuff in so you know exactly what your break even is. And you know exactly what you need to bring in revenue in order to make a profit on a monthly basis. Really important stuff. But ultimately, you're gonna ask these specific questions to the franchisees. Keep in mind today's June 4th, so from January 1st until today, none of this information that has occurred is gonna be in the current FDD'cause it only gets updated once a year. Usually they come out in the spring. So talking to the franchisees Hey, you started in December you got about six months in. Talk to me about was the investment in line. What are some things I should consider? Maybe some ways to cut costs. Financially they, have you made a profit? Were you able to pay yourself? What does that look like? Remember, everyone's situation's different. Some people don't need to pay themselves, so they're able to reinvest back in the business, and some people do need to pay themselves. So ask those questions and dive in a little bit deeper. Prepare five to 10 questions when we work one-on-one. I think we have a listing of about 40 questions that we have prepared that I sent to all of the families that I work with. I'd love to share that with you. Role of a franchise consultant. Our role is to bring experience to the table and, have you look at the big picture. Not all, but many franchise consultants, including myself, have owned franchises. I've owned franchises, non franchises have had side hustles, worked for corporate America, have been downsized and everything else in between. So a good franchise consultant can really not start talking to you about brands on the first call, but they really spend time getting to know you. What are your goals? Not simply asking you in an, kind of an interrogation style as they jokingly say, do you want a restaurant or not? Great? Do you want brick and mortar or not great and checking down the list like a portal. Sometimes you need to go in down a few layers. I don't want brick and mortar. Why is that? It takes too long to get open. All right, that's maybe a question. If that business could potentially get up and running in less than a year, would you be able to, yeah. Okay. Let's talk to that franchisor about their selection process. The third party that they potentially hire to find the right location to really expedite things. Now no one can predict how long that will take, but let's put that fear aside and not leave any stone unturned to make sure that. We figure out, okay, if we're ruling out brick and mortar, that's great. We, we have a selection. We gotta narrow this down. But let's look at the specifics. We're gonna look at, financials. If you can't afford it, why look at it. What are the funding options? Just because you have a million dollars and a traditional IRA that you can use, you may not be comfortable using retirement. So we'll look at should you use it? The pros and cons, should you look at different resources? The skillset you bring to the table. Most people think, to own a McDonald's, you need to know, you had to have worked in fast food and you do not. That franchisor will easily put together a system and teach you and train you on that. But what skillset do you need to the table? If that specific business has you knocking on doors and cold calling and that is not for you that may not be a good fit, regardless of what the widget, what the product or service is. So we really spend the time explaining. Covering the process and what to expect, setting the expectations figuring out more important than anything else if a franchise is a good fit or not, based off of what you're looking to accomplish. I, I jokingly say if your plan is to buy a McDonald's to change the menu, probably not a good fit for franchising. But if you're looking to buy invest in a franchise and have some autonomy and run the business, handle the marketing. Over and beyond, do a podcast and do meetings and town halls and TED talks and stuff like that over and beyond. That's great. You know that those are things to actually talk about with the franchisor. About the different roles of the franchisee. So we look at everything. We don't just simply take it at face value. We break it down, we dive a little bit deeper. Why are you attracted to a certain brand? I like food because there's a lot of demand people have to eat. What about business coaching? What about expense reduction? What about it's inevitable, right? Water and smoke damage. There's gonna be fires and natural disasters. That's falls in the category, recession resistant types of businesses. We recently had COVID that was a stress test for some businesses where they were forced to change. We saw the businesses that thrive, the businesses that closed. We don't wanna ever see that again, but what, which companies thrive, which, what were the differences? What has changed since then? Those are all things to consider. We have our finger on the pulse of franchising. We talk to on a weekly basis, founders, CEOs, presidents franchise professionals, funding professionals, franchise attorneys CPAs financial advisors, regular attorneys. The list goes on. So kind of see what's going on. Love talking about the impact of AI marketing, how franchisees are taking advantage of certain and helping their franchisees in the process. And then finally discovery day and decision making. What happens what happens, and that's usually end of the process. You're hiring that franchise attorney if you decided to go that route and doing either a virtual or in person. There's a handful of brands that don't do any discovery because the founders involved heavily in the calls. But what does that look like? And really I tell everyone, you wanna be about 80% certain about moving forward with that brand before committing to a discovery day. You don't have to say, have to make that decision, but be close to it. The franchise team, you'll ask your questions, get to hear from other Fran potential franchisees, and then the team will meet as a group to see if you're formally approved for the franchise and the number of locations and territories. And then from there, you're giving us some time to kind of make, your final decision on the brand itself. So if you wanna step by step guide to or essentially a due diligence checklist schedule a call with me, we'll go through that of what other things to be looking for. There's a lot more here that we can unpack. We can share those questions. I think it's about 40 questions or so to ask the franchisees. And better yet, we also have a list of questions to be asking the franchisor. Would love to share that with you. And that's something that I offer to everyone we work with. I'd love to share all that with you. Book a call with me, gigi the franchise guide.com. Take advantage of the resources. Take advantage of the free call. We'll figure out together in 20 minutes or less if a franchise is a good fit. My one guarantee to you is you'll learn something in the process, won't cost you anything but 20 minutes. Thanks again for joining, guys, and I'll talk to you guys soon. See you.