Franchise Due Diligence Checklist

FRANCHISE DUE DILIGENCE CHECKLIST

PROSPECT AND FRANCHISE INFORMATION

PHASE 1: PRELIMINARY RESEARCH

1.1 Initial Franchise System Research

☐ Company website reviewed

• Website URL: _________________________________
• Professional appearance? ☐ Yes ☐ No
• Information consistent with FDD? ☐ Yes ☐ No

☐ Business model understood

• Products/services: _________________________________
• Target customers: _________________________________
• Revenue model: _________________________________

☐ Industry research conducted

• Industry size: $______________
• Growth trend: ☐ Growing ☐ Stable ☐ Declining
• Competitive landscape: _________________________________

☐ Franchise rankings/reviews checked

• Franchise Times rankings: _________________________________
• Entrepreneur Franchise 500: _________________________________
• Franchise Business Review ratings: _________________________________
• Better Business Bureau: _________________________________

☐ News search conducted

• Recent news articles: _________________________________
• Any negative publicity? ☐ Yes ☐ No
• If yes, describe: _________________________________

☐ Social media presence reviewed

• Facebook: _________________________________
• Instagram: _________________________________
• LinkedIn: _________________________________
• Customer reviews: ☐ Positive ☐ Mixed ☐ Negative

1.2 Competitive Analysis

☐ Direct competitors identified

• Competitor 1: _________________________________
• Competitor 2: _________________________________
• Competitor 3: _________________________________

☐ Competitor franchise opportunities compared

☐ Competitive advantages identified

• _________________________________
• _________________________________

☐ Competitive disadvantages identified

• _________________________________
• _________________________________

PHASE 2: FDD ANALYSIS

2.1 FDD Receipt and Timing

☐ FDD received from franchisor

• Date received: _________________________________
• Format: ☐ Paper ☐ Electronic ☐ Both

☐ 14-day waiting period calculated

• Earliest signing date: _________________________________
• Earliest payment date: _________________________________

☐ State registration verified (if applicable)

• State: _________________________________
• Registration current? ☐ Yes ☐ No
• Registration number: _________________________________

2.2 FDD Review Completed

☐ FDD Review Checklist completed (see separate checklist)

☐ Key concerns identified from FDD review:

1. _________________________________
2. _________________________________
3. _________________________________

☐ Questions for franchisor:

1. _________________________________
2. _________________________________
3. _________________________________

PHASE 3: FINANCIAL ANALYSIS

3.1 Investment Analysis

☐ Total investment calculated

☐ Working capital realistically assessed

• Months to breakeven (estimate): _______
• Recommended working capital: $__________

3.2 Pro Forma Financial Projections

☐ Revenue projections developed

• Source of projections: ☐ FDD Item 19 ☐ Franchisee validation ☐ Industry data ☐ Own analysis

☐ Key assumptions documented

• Average ticket/transaction: $__________
• Transactions per day: __________
• Operating days per year: __________
• Labor cost %: __________%
• COGS %: __________%
• Rent %: __________%

☐ Break-even analysis completed

• Monthly break-even revenue: $__________
• Months to break-even: __________

☐ Return on investment calculated

• Payback period: __________ years
• 5-year ROI: __________%

3.3 Funding Analysis

☐ Personal capital available: $__________

☐ Financing options identified

• SBA loan: ☐ Exploring ☐ Pre-approved ☐ N/A
• Bank financing: ☐ Exploring ☐ Pre-approved ☐ N/A
• Franchisor financing: ☐ Available ☐ Not available
• Other: _________________________________

☐ Net worth after investment: $__________

☐ Liquidity after investment: $__________

☐ Personal financial risk acceptable? ☐ Yes ☐ No

PHASE 4: FRANCHISEE VALIDATION

4.1 Current Franchisee Interviews

Goal: Contact minimum 10 current franchisees in similar markets

☐ Contact list obtained from FDD Item 20

☐ Franchisees contacted and interviewed:

Current Franchisee Interview Questions

Investment and Startup:
☐ Did your actual investment match FDD estimates?
☐ Were there unexpected costs?
☐ How long did it take to open?
☐ Was the site selection process helpful?

Training and Support:
☐ Was initial training adequate?
☐ How is ongoing support?
☐ How responsive is the franchisor?
☐ Are field representatives helpful?

Operations:
☐ Is the operations manual complete and useful?
☐ Are the systems and technology effective?
☐ Are required suppliers competitive?
☐ How is the product/service quality?

Financial Performance:
☐ Are you meeting your financial goals?
☐ Is the business profitable?
☐ How long to break even?
☐ Is the royalty/ad fund worth it?

Relationship with Franchisor:
☐ How is communication with franchisor?
☐ Any disputes or issues?
☐ How are problems resolved?
☐ Do you feel valued as a franchisee?

Overall:
☐ What do you like most?
☐ What do you like least?
☐ Would you do it again?
☐ What advice for new franchisees?

Interview Summary

4.2 Former Franchisee Interviews

Goal: Contact 3-5 former franchisees

☐ Former franchisees contacted:

Former Franchisee Interview Questions

☐ Why did you leave the system?
☐ Were your expectations met?
☐ How was the franchisor relationship?
☐ Any legal disputes?
☐ What would you have done differently?
☐ Would you recommend this franchise?

4.3 Franchisee Association Research

☐ Independent franchisee association exists? ☐ Yes ☐ No

☐ If yes, contact made: _________________________________

☐ Franchisee advisory council exists? ☐ Yes ☐ No

☐ Key concerns raised by association/council:

• _________________________________
• _________________________________

PHASE 5: MARKET AND LOCATION ANALYSIS

5.1 Market Research

☐ Target market demographics analyzed

• Population: __________
• Household income: $__________
• Age distribution: __________
• Target customer density: __________

☐ Local competition analyzed

• Direct competitors within 5 miles: __________
• Existing franchise locations: __________
• Market saturation concerns? ☐ Yes ☐ No

☐ Local economic conditions assessed

• Unemployment rate: __________%
• Economic growth: ☐ Growing ☐ Stable ☐ Declining
• Major employers: _________________________________

☐ Demand validation

• Customer surveys conducted: ☐ Yes ☐ No
• Focus groups conducted: ☐ Yes ☐ No
• Results: _________________________________

5.2 Site Selection (if applicable)

☐ Site criteria from franchisor obtained

☐ Potential sites identified:

☐ Preferred site franchisor-approved? ☐ Yes ☐ No ☐ Pending

☐ Lease terms reviewed by attorney? ☐ Yes ☐ No

☐ Build-out costs estimated: $__________

☐ Zoning and permits verified? ☐ Yes ☐ No

PHASE 6: LEGAL REVIEW

6.1 Agreement Review

☐ Franchise Agreement reviewed by franchise attorney

☐ Key terms identified:

• Initial term: __________ years
• Renewal terms: __________
• Territory: _________________________________
• Non-compete: _________________________________
• Transfer restrictions: _________________________________
• Termination provisions: _________________________________

☐ Negotiable terms identified:

1. _________________________________
2. _________________________________
3. _________________________________

☐ Personal Guaranty reviewed

• Guarantors: _________________________________
• Scope: ☐ Full ☐ Limited
• Concerns: _________________________________

6.2 Entity Structure

☐ Business entity formed or planned

• Entity type: ☐ LLC ☐ Corporation ☐ Other
• State of formation: _________________________________
• Owners/members: _________________________________

☐ Operating agreement/bylaws drafted ☐ Yes ☐ No

☐ Tax structure reviewed with CPA ☐ Yes ☐ No

6.3 State Franchise Law Compliance

☐ Applicable state franchise law identified

• State: _________________________________
• Registration state? ☐ Yes ☐ No
• Relationship law protections? ☐ Yes ☐ No

☐ State addendum included in FDD? ☐ Yes ☐ No ☐ N/A

☐ State-specific protections explained:

• _________________________________
• _________________________________

PHASE 7: PROFESSIONAL CONSULTATIONS

7.1 Attorney Consultation

☐ Franchise attorney retained

• Name: _________________________________
• Firm: _________________________________
• Contact: _________________________________

☐ Services provided:
☐ FDD review
☐ Agreement negotiation
☐ Entity formation
☐ Lease review
☐ Other: _________________________________

☐ Attorney recommendations:

• _________________________________
• _________________________________

7.2 Accountant/CPA Consultation

☐ CPA retained

• Name: _________________________________
• Firm: _________________________________
• Contact: _________________________________

☐ Services provided:
☐ Financial projections review
☐ Tax planning
☐ Entity structure advice
☐ Financing assistance
☐ Other: _________________________________

☐ CPA recommendations:

• _________________________________
• _________________________________

7.3 Insurance Consultation

☐ Insurance broker/agent contacted

• Name: _________________________________
• Contact: _________________________________

☐ Required coverage quoted:

• General liability: $__________
• Property: $__________
• Workers' comp: $__________
• Business interruption: $__________
• Other: $__________
• Total annual premium: $__________

7.4 Banker/Lender Consultation

☐ Lender contacted

• Institution: _________________________________
• Contact: _________________________________

☐ Loan terms discussed:

• Loan amount: $__________
• Interest rate: __________%
• Term: __________ years
• Collateral: _________________________________
• Personal guarantee required? ☐ Yes ☐ No

☐ SBA loan eligibility confirmed? ☐ Yes ☐ No

PHASE 8: FRANCHISOR DISCOVERY DAY

8.1 Pre-Discovery Day Preparation

☐ Discovery Day scheduled

• Date: _________________________________
• Location: _________________________________

☐ Questions prepared:

1. _________________________________
2. _________________________________
3. _________________________________
4. _________________________________
5. _________________________________

☐ Documents/information to request:

• _________________________________
• _________________________________

8.2 Discovery Day Assessment

☐ Corporate headquarters visited

• First impressions: _________________________________

☐ Leadership team met:

• CEO/President: _________________________________
• Operations: _________________________________
• Training: _________________________________
• Support: _________________________________

☐ Training facilities toured

• Quality assessment: ☐ Excellent ☐ Good ☐ Fair ☐ Poor

☐ Support infrastructure observed

• Call center/support: _________________________________
• Technology systems: _________________________________

☐ Franchise location(s) visited

• Location: _________________________________
• Impressions: _________________________________

☐ Questions answered satisfactorily? ☐ Yes ☐ No ☐ Partial

☐ Overall impression: ☐ Very Positive ☐ Positive ☐ Neutral ☐ Negative

☐ Red flags observed:

• _________________________________
• _________________________________

PHASE 9: FINAL EVALUATION

9.1 SWOT Analysis

Strengths:

1. _________________________________
2. _________________________________
3. _________________________________

Weaknesses:

1. _________________________________
2. _________________________________
3. _________________________________

Opportunities:

1. _________________________________
2. _________________________________
3. _________________________________

Threats:

1. _________________________________
2. _________________________________
3. _________________________________

9.2 Risk Assessment

9.3 Go/No-Go Decision Criteria

PHASE 10: DECISION AND NEXT STEPS

10.1 Final Recommendation

☐ Proceed with franchise acquisition

• Recommended negotiation points: _________________________________
• Conditions precedent: _________________________________

☐ Defer decision pending:

• _________________________________

☐ Do not proceed

• Primary reasons: _________________________________

10.2 Pre-Signing Checklist

☐ All FDD items reviewed and understood
☐ 14-day waiting period observed
☐ 7-day agreement review period observed
☐ Franchise attorney has approved
☐ CPA has reviewed financials
☐ Financing in place
☐ Entity formed
☐ Insurance quotes obtained
☐ Site approved (if applicable)
☐ Family/partners in agreement
☐ Personal guaranty terms acceptable
☐ Exit strategy considered

10.3 Signing Logistics

☐ Signing date scheduled: _________________________________

☐ Documents to execute:
☐ Franchise Agreement
☐ Personal Guaranty
☐ State addenda (if applicable)
☐ FDD receipt
☐ Other: _________________________________

☐ Payment due at signing: $__________

• Payment method: _________________________________

DUE DILIGENCE COMPLETION CERTIFICATION

I have completed the due diligence process outlined in this checklist for the [FRANCHISE_NAME] franchise opportunity.

Prospective Franchisee: _________________________________

Signature: _____________________________________

Date: _________________________________________

Attorney Review: _________________________________

Date: _________________________________________

NOTICE: This checklist is provided for informational purposes only and does not constitute legal advice. Franchise due diligence should be conducted with the assistance of qualified franchise counsel and financial advisors. No checklist can substitute for professional judgment and thorough analysis of the specific franchise opportunity.