Franchise Due Diligence Checklist

How long has this franchisor been in business vs. franchising?

A brand that has operated company stores for 10+ years before franchising has proven unit economics. A brand that went straight to franchising is using franchisees to test the model.

Who owns the franchisor? Has it changed hands recently?

Private equity acquisitions are a significant risk factor. PE firms often cut support costs and increase fees to improve exit multiples.

Does the franchisor or its principals have a bankruptcy in the last 10 years?

Item 1 discloses this. A CEO who went bankrupt running a prior franchise system is a material risk.

What is the franchisor's primary revenue source?

If the franchisor makes most of its money from selling franchises rather than royalties, they have an incentive to sell units even in saturated territories.

What is the initial franchise fee? Is any portion refundable?

Most franchise fees are non-refundable. Understand exactly what you lose if you sign and change your mind.

Does the FDD include an Item 19 financial performance representation?

About 60% of franchisors include one. If they don't, ask directly why — franchisors with strong unit economics typically include Item 19 because it helps sell franchises.

What is the median gross revenue in Item 19? What is the bottom quartile?

The median matters more than the average when a few high performers skew the mean. The bottom quartile is what you need to underwrite — can you survive on those numbers?

Does Item 19 report net profit, or only gross revenue?

Gross revenue minus all your costs (royalties, rent, labor, COGS, local marketing) is what you actually earn. A $1.5M gross revenue franchise can still lose money.

How many years of audited financial statements does the FDD include?

Franchisors must provide 3 years of audited financials. Review them for declining royalty revenue, which signals franchisee performance, and any large undisclosed liabilities.

What is the total estimated investment range (Item 7)? What drives the high end?

Get a quote for actual build-out costs in your target market — Item 7 ranges are national estimates and can understate local construction costs significantly.

Is your territory exclusive? What triggers protect it?

Some franchisors grant 'protected territory' but reserve the right to operate company stores, online sales, or non-traditional locations within it. Read Item 12 carefully.

How does the franchisor define territory boundaries?

Zip code vs. drive-time radius vs. population count all produce very different competitive dynamics. Zip-based territories are often the weakest.

How many franchise units are already within 10 miles of your target location?

Even with 'exclusive' territory, brand saturation in a metro area affects your customer pool. Look at the density of existing units vs. the population you'll serve.

Has any franchisee sued the franchisor over territory encroachment?

Item 3 lists litigation. Territory disputes are one of the most common sources of franchisee-franchisor litigation and signal that the territory protections are weaker than they appear.

What happens to your territory if you don't hit performance minimums?

Some agreements allow the franchisor to award adjacent territory to another franchisee if you miss development milestones — even if you are profitable.

Have you called at least 10 current franchisees — not the ones the franchisor suggested?

Franchisors curate their validation list. Pull a random sample from Item 20 directly. The un-curated ones give you the real picture.

Have you called franchisees who left the system in the last 3 years?

Item 20 must list all departed franchisees with contact information. Most buyers skip this. Most bad franchise purchases would have been avoided if the buyer had made these calls.

Did the actual ramp-up time match what was in the FDD?

FDDs report averages. Ask franchisees how long it actually took to hit profitability — and whether they needed additional capital to bridge the gap.

How responsive is the franchisor's support team?

The quality of ongoing support varies enormously. Ask for the support line's response time in practice, not what the franchise agreement says it should be.

Would you buy this franchise again, knowing what you know now?

The only question that cuts through everything else. Phrase it exactly this way — 'Would you buy again?' — and listen carefully to the hesitation before the answer.

Have you hired a franchise attorney (not a general business attorney) to review the FDD?

Franchise agreements are non-negotiable in most cases — but a franchise attorney can tell you whether the terms are standard or unusually unfavorable. They also spot clauses that general attorneys miss.

What are the renewal terms? What can change at renewal?

Some franchisors require you to sign the 'then-current' franchise agreement at renewal — which may have materially different fee structures than your original agreement.

Under what conditions can the franchisor terminate your agreement?

Item 17 lists termination conditions. Some agreements can be terminated for 'convenience' with notice — meaning the franchisor can end your agreement even if you are performing.

What are your obligations when the agreement ends?

Post-term non-compete clauses can prevent you from operating a competing business for 2+ years in your territory after you exit. Some apply even to indirect involvement.

What are your transfer rights if you want to sell?

Transfer fees are typically $10,000–$25,000. More importantly, the franchisor has the right of first refusal in most agreements — they can match any offer you receive, which can suppress what buyers will bid.

Have you built a full P&L model using Item 19 bottom-quartile revenue?

Use the bottom 25% of Item 19 as your base case. If the unit is not viable at bottom-quartile revenue, you are betting on above-average performance — most franchisees do not achieve it.

Do you have 6 months of working capital beyond the Item 7 estimate?

The most common failure mode is not a bad brand — it is a good brand where the franchisee runs out of cash before the unit reaches breakeven.

Have you stress-tested what a royalty increase of 1–2% would do to your P&L?

Royalty rates can change at renewal. If a 1-point royalty increase erases your profit margin, your business is too dependent on franchisor pricing restraint.

What is your exit strategy if the business underperforms for 18 months?

Model the exit cost explicitly: transfer fees, non-compete obligations, lease break penalty, equipment disposal. Know your worst-case exit cost before you sign.