Value Assessment of the Franchise

Due diligence is required of an investor before deciding to purchase a franchise. One of the decisive factors of whether to purchase, is the value of the franchise itself. Attempting to figure out the value requires the investor to ask the right set of questions.

The first set of questions attempts to understand the franchise business concept itself. Is the franchise a novelty? If so, what will prevent it from fading away? Is the franchise business operating in a growing market? What makes this franchise business model special and different from others? What advantage does the franchise have over other businesses? Has the franchise been properly pilot tested? How many franchisees are there?

The second set of questions deals with the intellectual property protection. Is the trademark protected and registered by the franchisor? Does the franchisor have a patent and if so, how long is the patent protection in place? Has the franchisor taken steps to safeguard its intellectual property?

The final set of questions have to do with the franchisor’s supplier or manufacturer. What are the standards for the quality of goods and/or services? What is the cost of acquiring these supplies? Are there volume discounts? Are there alternative sources of suppliers that are approved by the franchisor? Does the franchisor receive a profit from the suppliers of purchases made by the franchisee? What form do rebates take if they exist?

Before entering into a long-term commitment with a franchisor, it is vital that a franchisee sees the big picture of what type of business he/she is committing to and asks the right questions. That is where a seasoned franchise attorney comes in handy. For a proper value assessment, please contact franchise attorney Mario L. Herman.