What Due Diligence Do Buyers Perform Before Purchasing an Existing Franchise?

Buying an existing franchise can mean taking over a location with customers, employees and sales already in place. But those advantages are only worth paying for if the business performs as represented and the buyer understands what comes with the purchase. That is why due diligence should begin before the buyer commits to the deal.

Mike McCraw, managing director at FOCUS Investment Banking, has more than 30 years of experience in mergers and acquisitions and leads the firm's food and beverage team. FOCUS represents business owners who are selling, giving McCraw insight into the questions buyers ask during a transaction. He said buyers are “trying to assess and mitigate risk” before deciding whether to make an offer.

What Financial Records Should a Franchise Buyer Review?

Buyers need a clear picture of the business's finances before deciding what it is worth. That starts with tax filings, ownership documents, current HR records, financial statements and performance metrics.

“It is important to have tax filings current, ownership documents available, HR updated and current, growth plans, along with financial reporting and KPIs updated and all readily available,” McCraw said.

Buyers should compare those records with the seller's claims about the location's performance and continue monitoring results while the deal is in progress. McCraw said one of the most common problems that reduces a business's value is “not meeting financial expectations.” He added that sellers sometimes lose focus on operations as they prepare for life after the transaction.

A buyer should therefore request monthly financial statements and investigate changes in sales, expenses or profitability rather than relying solely on the results presented at the start of negotiations.

How Do Buyers Evaluate Staff and Management?

A franchise's financial records won't tell a buyer how much the business relies on the current owner. Buyers should find out who handles daily operations, whether managers can run the location without the seller and whether key employees plan to stay after the sale.

McCraw said a seller can make the transition easier by putting someone else in charge of the responsibilities the owner currently handles. That gives a buyer more confidence that the business can continue operating when the seller leaves.

Staffing deserves the same scrutiny. Buyers should ask about open positions, turnover and the difficulty of recruiting in the local market. A location that depends on a few key employees may face disruption if those people leave during or after the transition.

What Does the Franchisor Need to Approve?

Buying a franchise location usually requires the franchisor's involvement. The franchise agreement and the brand's transfer procedures determine what approvals are needed and whether the franchisor has a right of first refusal.

“Usually, there is a ‘first right of refusal’ provision and then a structured approval process,” McCraw said.

Buyers should review the transfer requirements early, including any conditions the new owner must meet. They should also confirm whether the lease can be assigned and whether the landlord must approve the transfer. If the seller fails to disclose a problem with the business, a buyer may walk away or seek different terms, McCraw said.

Due Diligence Tips for Franchise Buyers

Before agreeing on a price, buyers should:

• Check the numbers. Ask for several years of tax returns, monthly financial statements and performance reports. Make sure the records match what the seller says about the business, and ask questions when something doesn't add up.
• Check who runs the business. Identify the people responsible for daily operations, confirm whether key employees plan to stay and assess how much the location depends on the current owner.
• Confirm the transfer requirements. Ask the franchisor about approval steps, transfer fees and any right of first refusal. Check with the landlord about lease assignment and required consent.
• Keep reviewing performance until closing. Sales and expenses can change while a transaction is underway, so update the financial review before the deal is finalized.

A franchise resale should be evaluated on the records, the operating team and the terms of the transfer, not just the seller's asking price.

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