Why a Prospective Hawaii Franchisee Should Do Its Own Due Diligence and Not Rely Upon the Franchise Disclosure Document

Under Hawaii law, a franchisor who sells a business in Hawaii is required to provide the prospective franchisee with a franchise disclosure document or offering circular at least seven (7) days prior to the sale of the franchise.

The prospective franchisee should therefore ask for the franchise disclosure document as soon as possible because (1) this document contains information that the prospective franchisee should know about the franchisor’s business and (2) getting this document only seven days prior to the purchase of the franchise is not a lot of time to do your own due diligence of the franchise.

Besides just reading the franchise disclosure document, the Hawaii franchisee should conduct its own due diligence. The prospective Hawaii franchisee should consider the following:

• The franchisor is required to provide the prospective franchisee with names and addresses of all franchisees of the franchisor. The prospective franchisee should contact as many current and former franchisees as possible. The prospective franchisee may want to ask those franchisees the following questions:
  • How was the franchisor’s training?
  • How helpful is the franchisor’s ongoing support system?
  • Where there any significant surprises or significant difference between the franchise disclosure document and reality?
• The franchisor is required to provide the prospective franchisee with audited financial statements for the franchisor. These figures are based on mainland rates and may not be applicable to Hawaii’s market. In addition, the information may be stale. Therefore, the prospective franchisee should consult with an accountant to see if those numbers are realistic for Hawaii.
• The prospective franchisee should ask the franchisor if he/she can observe franchisor’s training sessions and visit the franchise headquarters.

As you can see, there are additional steps that a prospective franchisee should take in order to make an informed decision on whether to purchase a franchise. Relying solely on information provided in the franchise disclosure document may not give you a complete picture of a franchise.