Why Due Diligence Matters in Franchise Decisions
There’s inherent risk in everyday life — from the moment we wake up to the time we rest our head on the pillow at night. Yet we drive cars, invest in the stock market, ride roller coasters and go about our lives. Risk tolerance varies from person to person and often increases with age. Over time, we collect stories that shape how we perceive and respond to risk.
We’ve all seen businesses come and go — some small, others once-mighty giants. Red Lobster, once written off for dead, is now staging a comeback. Businesses fail for many reasons: poor location, weak leadership, oversaturation or shaky financials can all spell trouble.
Risks of Buying a Franchise
Leaving a corporate job or diversifying your portfolio to pursue business ownership is a bold — and risky — move. Franchising is no exception. From losing steady benefits and income, to navigating an unfamiliar industry or investing significant savings into an uncertain future, there’s plenty that can keep new entrepreneurs up at night.
Brand Metamorphosis
An emerging franchise is often seen as the riskiest bet. A young brand may have few, if any, franchisees and could still be ironing out the kinks as it evolves into a full-fledged system. You might wonder whether its early success was driven by hometown support and if that success can be replicated in a new market unfamiliar with the brand or its founders.
But for entrepreneurial-minded individuals, a younger franchise can offer unique advantages. Your experience and insights could help shape the system and propel it forward. If the brand gains traction and awareness, early adopters stand to benefit. Getting in on the ground floor also gives you the opportunity to secure prime territory before the concept takes off.
Conversely, an established franchise with nationwide saturation and global recognition carries its own set of risks. While brand awareness is built in, you’ll pay a premium for it. If the company is privately held, it may be considering a private equity deal — introducing uncertainty about the future of the brand and your individual business. In some cases, major changes at the top can trigger a mass exodus of franchisees, which could either open doors for new investors or allow existing owners to expand their footprint.
Too Much Knowledge can be a Bad Thing
There is no lack of information thanks to the internet. And yet, that can make decisions like this even more tricky. Some online portals can overwhelm you with options and trigger a flood of sales calls from people eager to sell you a franchise — often before you’ve had a chance to fully understand what you’re looking for. Beware! This should be an awarding process. If someone is trying to hustle you or pressure you, run — don’t walk — away.
Also, be careful not to overanalyze things. Try to find one item on Amazon that has a perfect 5-star review without negative comments. Impossible. Someone somewhere always has something bad to say but it is important to determine if it is a one-off or an overall issue.
Lessen the Risk
So how can you lessen the risk of buying a franchise? Build a sound structure around you as you embark on the endeavor of franchise business ownership.
Franchising continues to grow despite the risks. According to the International Franchise Association’s 2025 Economic Outlook, the number of franchise establishments in the U.S. is expected to increase by over 20,000 units this year, reaching a total of 851,000. This steady growth shows just how resilient and appealing the franchise model can be — even in unpredictable economic times.
To set yourself up for success, educate yourself and surround yourself with the right experts:
- Educate yourself. Listen to podcasts and read books
- Surround yourself with experts. Engage trusted advisors to help you on this complex journey
- A franchise consultant can help you navigate through hundreds of businesses and lock in on what is truly a good fit for you.
- A franchise attorney can review legal documents and flag areas of concern.n
- A strategic CPA can analyze your pro forma and ensure the numbers make sense.
- A financial advisor can assess your overall financial health and help you prepare, even if your savings need work.
- Compare multiple brands. Don’t settle on the first concept you see. Ask smart questions:
- What type of marketing do they provide?
- How much training is involved?
- Do the financials provided in Item 19 and 20 of the Franchise Disclosure Document look strong and healthy?
- Are the royalty requirements and associated fees reasonable?
Follow the process. Attend every meeting. Have thoughtful, organized conversations with current franchisees during the validation process.
And when you’re ready to take the leap — whether through franchising or another path — go in with eyes wide open. Don’t let excitement cloud your judgment. If something feels off, trust your gut and walk away. Your peace of mind is essential because as a new business owner, you’ll need clear eyes and good sleep to take on the challenges ahead.
“Take risks. Ask big questions. Don’t be afraid to make mistakes; if you don’t make mistakes, you’re not reaching far enough.” —David Packard
