Due diligence
What it means
Due diligence is the buyer's own homework. It means independently verifying what the franchisor tells you rather than relying on the sales process, covering the franchise system's track record, its financial health, the terms of the agreement, the realistic economics of a unit, and your own suitability for the business.
The Franchising Code supports due diligence through mandatory disclosure. The franchisor must give you the ACCC's information statement, then the disclosure document, a copy of the Code and the franchise agreement in the form it will be signed, and it cannot sign with you until 14 days after you receive them. Any payment you make in that window must be refunded within 14 days if you ask in writing, and a new agreement carries a further 14-day cooling-off period after you enter into it. Before a new agreement is signed, the franchisor must also hold a signed statement for each of legal, business and accounting advice, confirming you either obtained that advice or chose not to.
Good due diligence combines documents with people. Alongside the disclosure document and Franchise Disclosure Register listing, it involves speaking to current and former franchisees, having an accountant test the numbers, and having a franchise-experienced lawyer review the agreement. The cooling-off and disclosure periods exist precisely to give you time to do this.
In practice
Work through a structured checklist: read the disclosure document and its financial details, check the Franchise Disclosure Register, review the agreement with a lawyer, have an accountant stress-test any earnings information, and contact a wide sample of current and former franchisees rather than only those the franchisor selects.
Use the mandatory 14-day disclosure period and cooling-off period deliberately, not as a formality. If the franchisor resists reasonable questions, cannot substantiate figures, or pressures you to sign quickly, treat that as a warning sign in itself.
A real example
Before buying a cleaning franchise, a prospective franchisee obtains the disclosure document, checks the franchisor on the Franchise Disclosure Register, and phones eight current and two former franchisees from the list. Two former franchisees describe higher-than-projected supply costs, so the buyer's accountant rebuilds the budget, which reveals thin margins and prompts a renegotiation of the ongoing fees.
Due diligence, FAQs
How long do I have to do due diligence?
The Code requires the disclosure document and agreement at least 14 days before you sign, plus a 14-day cooling-off period afterwards. Use both periods to investigate thoroughly.
What advisers should I use?
At minimum a franchise-experienced lawyer and an accountant, and ideally a business adviser. The Code itself requires franchisors to recommend independent legal, accounting, and business advice.
Should I talk to existing franchisees?
Yes, and to former ones too. Franchisee validation is one of the most revealing steps; contact a broad sample rather than only names the franchisor supplies.
What are red flags during due diligence?
Pressure to sign quickly, refusal to answer reasonable questions, earnings figures that cannot be substantiated, and a history of disputes or franchisee departures all warrant caution.
See the full franchise glossary, the Fee Index or our buyer guides.