HR Due Diligence when Buying a Franchise

franchise seminar For an increasing number of entrepreneurs, running a franchise can be seen as an attractive proposition. Simply put, franchising is the practice of using another firm’s successful business model. You may be coming into franchise ownership with a good business background. You may even be fortunate enough to understand the basics of hiring, management and even how to run payroll.

If you are interested in owning a franchise that has a reputation of being well run, before you buy is a good time to gain an understanding of all that is involved with launching this type of business. A franchise business is set up differently than a normal business. While this is attractive to many, there are also different factors to consider such as paying royalties to the franchisor and having the necessary capital up front to go into business. This blog will explore why doing your due diligence is important in regards to labor laws and other HR-related issues surrounding buying a franchise.

Before you buy a franchise, understand labor laws. If you want to protect your profit and loss from penalties, fines, complaints and lawsuits, here are some numbers to be aware of:

Failure to pay overtime can results in two to three years of back wages per affected employees, plus the cost of payroll taxes.
An incomplete I-9 can cost on average of $1,100 per form.
Punitive and compensatory damages for harassment, discrimination and Americans with Disabilities Act violations average between $50,000 to $300,000.

Other costs to consider:

A resigning or terminated employee will cost your business one to two times the position’s annual salary–statistically speaking.
Higher than necessary state unemployment tax costs. Every employee that successfully claims unemployment will increase your payroll costs. Do you know how to defend yourself during the claims process?

At minimum, every business–franchise or not–should have the following:

Labor law posters.
Employee handbook.
Labor law compliance plan and job descriptions.
Standard processes and forms for hiring, new hire orientation, annual reviews and employee counseling (also known as corrective or disciplinary action).

Far too often, a new franchise owner thinks they get human resource management support from the franchisor and are disappointed to find out (post purchase) that the corporate office has no intention of involving themselves in your daily operations. Other key questions to answer include:

What payroll service should you choose? Do they offer benefits administration and workers’ compensation insurance?
What time and attendance software is offered to keep accurate records of hours worked?
How will you orient and train new hires?
Who will keep you abreast of federal and state labor law obligations and changes?
Who can you turn to for help in answering questions and preventing you or your supervisors from making mistakes?

You would think the larger the franchise operation (or the more expensive the franchise), the more support you get. This is NOT always true. Even if the franchisor does not have internal human resources support, they may have strategic partnerships with preferred vendors who can offer you support at a discounted rate. Make sure you get all your human resources support questions and concerns answered before you buy.

We recommend making a comprehensive checklist of questions and interviewing other franchise owners of the organization.

Click the link to view our recent blog: Minimizing the Cost of Turnover Starts with Good Hiring Practice or check back next week for more on human resources, payroll, insurance and benefits.

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