Franchise Due Diligence Checklist: 50 Questions Before You Sign

HOW TO USE THIS CHECKLIST

Franchise due diligence takes 60 to 90 days if done properly. This checklist is organized into five phases: FDD review, franchisee interviews, financial modeling, legal review, and the final decision. Complete each phase before moving to the next. The goal is not to check boxes — it is to develop enough conviction (or concern) to make a confident, informed decision.

PHASE 1 — FDD REVIEW (Questions 1-15): (1) Is Item 19 present? If not, ask the franchisor why. (2) Does Item 19 show median revenue, or only mean? Request the full distribution. (3) What is the effective total fee burden? Add royalty + marketing fund + technology fees. (4) Does Item 12 provide meaningful territorial exclusivity, or are there significant carve-outs? (5) How many franchisor-initiated terminations occurred in each of the last three years? What is the trend? (6) What is the net unit growth rate (openings minus closures) for each of the last three years? (7) Does Item 3 disclose any franchisee class-action lawsuits, regulatory enforcement actions, or executive criminal history? (8) What are the post-termination non-compete restrictions in Item 17? Duration, geographic scope, and activities restricted? (9) Does the franchisor have the right of first refusal on any sale of your franchise? (10) What grounds for termination are listed in Item 17? Can the franchisor terminate without cause? (11) What is the renewal process and fee — is renewal guaranteed or at the franchisor's discretion? (12) What venue and governing law apply to dispute resolution? Is arbitration required in the franchisor's home state? (13) Are there minimum sales requirements? What happens if you miss them? (14) What does Item 21 say about the franchisor's financial health? (15) What does Item 11 commit the franchisor to provide in terms of ongoing training and support?

PHASE 2 — FRANCHISEE INTERVIEWS (Questions 16-30): Call a minimum of 10 current franchisees (selected randomly from the Item 20 list, not suggested by the franchisor) and 5 former franchisees. (16) How long have you been with the system? (17) What was your gross revenue in year one? Year two? Year three? (18) What are your biggest operating costs? Which ones surprised you? (19) Does the franchisor's Item 19 disclosure reflect your experience? (20) Have you experienced encroachment from other franchisees or from the franchisor? (21) How responsive is your franchise support representative? (22) Is the marketing fund being spent effectively? (23) Are required purchases through approved suppliers priced above market? (24) Have you received any default notices from the franchisor? (25) What do you know now that you wish you had known before buying? (26) Would you do it again? (27) Are there active franchisee associations that represent franchisee interests? (28) Is the franchisor considering system-wide changes that would affect your costs? (29) To former franchisees: why did you leave the system? Was it voluntary? (30) To former franchisees: what happened to your customers and investment after you left?

PHASE 3 — FINANCIAL MODELING (Questions 31-40): Build a financial model before hiring an attorney, so you know whether the numbers can ever work. (31) What is the median gross revenue from Item 19 or franchisee interviews? Use this as your base case. (32) What is the 25th percentile revenue? This is your downside scenario. (33) What are the realistic COGS for your market? Get competitive quotes, not estimates. (34) What are the realistic labor costs for your market? (35) What are your fixed costs: lease, insurance, utilities, required subscriptions? (36) After all costs and total franchisor fees, what does your net income look like in the base and downside scenarios? (37) What is the total capital required (Item 7 plus a 20-30% working capital buffer)? (38) If financing a portion, what is the annual debt service, and can the business cover it in the base scenario? (39) How many years until you recover your total cash investment? (40) What is your exit strategy, and what would a buyer reasonably pay for your unit?

PHASE 4 — LEGAL REVIEW (Questions 41-47): Hire a franchise attorney — not one referred by the franchisor, not a general business attorney. (41) Has your attorney reviewed the franchise agreement, not just the FDD? (42) Has your attorney flagged the most dangerous terms in Item 17? (43) Are there terms your attorney recommends attempting to negotiate? (44) Has your attorney reviewed the lease and confirmed that the lease term aligns with the franchise term? (45) Has your attorney confirmed that all required state registrations are current? (46) Are there any pending legal actions your attorney found that were not fully disclosed? (47) Has your attorney reviewed the personal guarantee provisions — what assets are exposed?

PHASE 5 — FINAL DECISION FRAMEWORK (Questions 48-50): (48) Do the financials work in a downside scenario, or only in an optimistic one? If the business only works when everything goes right, the margin of safety is insufficient. (49) Is this the right business for your skills, lifestyle, and risk tolerance? (50) If everything you learned about this franchise was made public in a newspaper article, would a reasonable person say you made a smart, well-informed decision? If yes, proceed. If not, keep asking questions until you can answer yes, or walk away.