Due Diligence Checklist for Franchise Buyers
Essential questions and verification steps before signing any franchise agreement
Due diligence is the most critical phase of your franchise investment journey. This comprehensive checklist covers every aspect you need to investigate before committing to a franchise. Use it to ensure you're making an informed decision based on facts, not sales promises. Remember: the FDD provides the framework, but validation through current and former franchisees reveals the reality.
30-60
Days for thorough due diligence
10-15
Franchisees to interview
$3-5K
Legal & professional fees
23
FDD items to review
Comprehensive Due Diligence Checklist
Financial Due Diligence
- Review all 23 items in the FDD thoroughly
- Verify franchisor's audited financial statements
- Analyze Item 19 earnings claims (if provided)
- Calculate total investment including working capital
- Review royalty and fee structure
- Understand territory rights and restrictions
- Evaluate franchisor's financial health and growth
- Request P&L statements from existing franchisees
- Analyze break-even timeline projections
- Review financing options and requirements
Legal Due Diligence
- Hire an experienced franchise attorney
- Review franchise agreement terms and conditions
- Understand termination and renewal clauses
- Check litigation history (Item 3 in FDD)
- Verify trademark registrations and protections
- Review non-compete and confidentiality agreements
- Understand transfer and resale restrictions
- Analyze dispute resolution procedures
- Review insurance requirements
- Check state registration status
Operational Due Diligence
- Visit multiple franchise locations
- Evaluate training program comprehensiveness
- Review operations manual (if available)
- Understand technology requirements and costs
- Assess marketing support and requirements
- Review supply chain and vendor requirements
- Understand staffing needs and labor costs
- Evaluate site selection assistance
- Review grand opening support
- Assess ongoing operational support
Franchisee Validation
- Contact at least 10-15 current franchisees
- Speak with 3-5 former franchisees
- Visit top, middle, and struggling locations
- Ask about actual vs. projected earnings
- Understand biggest challenges faced
- Verify franchisor support quality
- Ask about hidden costs or fees
- Evaluate franchisee satisfaction levels
- Understand time to profitability
- Ask if they would invest again
Market Analysis
- Research local market demographics
- Analyze competition in your territory
- Evaluate market saturation levels
- Review industry growth trends
- Assess seasonal fluctuations
- Understand customer acquisition costs
- Evaluate pricing power in your market
- Research future development plans
- Analyze economic indicators
- Review market-specific regulations
Essential Franchisee Validation Questions
Pro Tip: Always call during off-peak hours when franchisees have more time to talk. Be respectful of their time and offer to schedule a call. Most are happy to share their experiences with serious prospective franchisees.
Financial Performance
- •What were your actual first-year revenues vs. projections?
- •How long did it take to reach break-even?
- •What is your current profit margin?
- •Were there any unexpected costs not disclosed in the FDD?
- •How accurate were the franchisor's financial projections?
- •What percentage of revenue goes to all fees combined?
- •Have royalty or marketing fees increased since you started?
- •What is your average transaction size and customer count?
Franchisor Support
- •How would you rate the initial training program?
- •How responsive is the franchisor to your needs?
- •What ongoing support do you actually receive?
- •How effective is the marketing support?
- •Have you had any disputes with the franchisor?
- •How often does your field consultant visit?
- •Are system updates and improvements regular?
- •How would you rate the technology provided?
Operations & Challenges
- •What are your biggest operational challenges?
- •How difficult is it to find and retain good employees?
- •What takes up most of your time day-to-day?
- •How many hours per week do you work?
- •What would you do differently if starting over?
- •What skills are most important for success?
- •How difficult is it to follow the franchise system?
- •What are the most common customer complaints?
Overall Satisfaction
- •Are you satisfied with your investment?
- •Would you buy this franchise again knowing what you know now?
- •Would you recommend this franchise to a friend?
- •How does reality compare to your expectations?
- •Do you plan to buy additional units?
- •What type of person succeeds in this franchise?
- •What type of person should avoid this franchise?
- •What's your best advice for a prospective franchisee?
Red Flags to Watch For
FDD Review Timeline
Day 1-3: Initial Review
Read the entire FDD, highlight key sections, create a list of questions and concerns. Focus on Items 1-7 (franchisor info, costs, fees) and Item 19 (financial performance).
Day 4-7: Professional Review
Share FDD with franchise attorney and CPA. Schedule consultations to review findings. Attorney should focus on legal terms, CPA on financial projections and viability.
Day 8-14: Franchisee Validation
Contact current and former franchisees from Item 20. Visit operating locations. Document all feedback and compare to FDD claims. This is your most important research.
Day 15+: Final Analysis
Compile all findings, create financial projections, make go/no-go decision. If moving forward, negotiate any possible terms and prepare for signing (after 14-day waiting period).
Professional Services You'll Need
Franchise Attorney
Essential for reviewing franchise agreement, understanding your rights, and identifying unfavorable terms. Cost: $2,000-$5,000
- • Review franchise agreement
- • Explain legal obligations
- • Negotiate terms (if possible)
- • Advise on entity structure
CPA/Accountant
Critical for analyzing financial projections, tax implications, and creating realistic budgets. Cost: $1,000-$3,000
- • Analyze Item 19 claims
- • Create financial projections
- • Review tax implications
- • Validate ROI calculations
Franchise Consultant
Optional but helpful for navigating options and understanding industry norms. Cost: Often free (paid by franchisor)
- • Match you with franchises
- • Explain industry standards
- • Facilitate introductions
- • Provide market insights
Due Diligence Tools & Resources
Research Tools
- FDD database searches
- State franchise registration databases
- Better Business Bureau reports
- Industry association resources
- SBA franchise directory
Financial Analysis Tools
- ROI calculators
- Break-even analysis templates
- Cash flow projection models
- Franchise comparison spreadsheets
- Territory analysis tools
Making Your Final Decision
Go/No-Go Decision Criteria
Green Lights (Proceed)
- • 80%+ positive franchisee validation
- • Clear path to profitability within 2-3 years
- • Strong franchisor financial health
- • Protected territory meets your needs
- • Comfortable with all legal terms
- • Sufficient capital including reserves
Yellow Lights (Proceed with Caution)
- • Mixed franchisee feedback (60-80% positive)
- • Longer break-even timeline (3-4 years)
- • Some concerning legal terms
- • Higher than expected ongoing fees
- • Limited franchisor track record
- • Competitive market conditions
Red Lights (Do Not Proceed)
- • Poor franchisee validation (<60% positive)
- • Unrealistic financial projections
- • Significant litigation history
- • Declining system performance
- • Unacceptable contract terms
- • Insufficient capital or financing
Your Next Steps
Immediate Actions
- Download and print this checklist
- Create a due diligence timeline
- Gather financial documents
- Contact professional advisors
- Begin FDD analysis
Remember: Thorough due diligence is your best investment protection. Take your time, ask tough questions, and never skip steps under pressure. The right franchise opportunity will still be there after proper investigation.
Browse Franchise Opportunities