Due diligence for absentee owner franchises

April 07, 2023

by a searcher from Harvard University - Harvard Business School in Boston, MA, USA

How does your due diligence of a business change when its of a franchise managed by an absentee owner vs other search fund businesses? For context, I'm looking to buy a few franchises that are run by an absentee owner to generate add'l income as I continue my full time job.

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Reply by an investor
from Columbia University in Seattle, WA, USA

I'm looking into this as well. My understanding so far is that the additional step is really understanding the relationship between the franchisor and the franchisee. Starting with reading FDD for the particular franchisor, but more importantly doing validation calls with other franchisees. If it's an established franchise with good reputation, the due diligence should be relatively straight forward as the franchisor usually does good job of collecting important financial and operational data and all those will be shared. If it's a relatively small franchise, I would do a ton of research on that franchisor to make sure the business model is sound and their franchisees have been doing well. I would also hire a lawyer who specialize in franchise businesses for the legal part of the due diligence.

Reply by a searcher
from New York University in Chicago, IL, USA

I've recently been in due diligence on a franchise where the franchisor was very difficult and borderline unprofessional. It's a reputable brand and I kept moving forward with the understanding that the main point of contact during acquisition from the franchisor would not be the main point of contact during operations. I ended up backing out because of the behavior. I assume this is a huge red flag, but curious if you have experienced this to date?

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