Franchise due diligence for an acquisition requires a systematic review of the Franchise Disclosure Document, the franchise agreement, financial records, territory rights, litigation history, and state compliance requirements. Skipping any of these steps can cost buyers hundreds of thousands of dollars. At Lopes Law LLC, we have guided buyers through franchise acquisitions ranging from single-unit purchases at $150,000 to multi-unit portfolio transactions exceeding $5 million, and the due diligence process is where deals are either validated or killed for good reason.

This checklist walks through every legal step a buyer should complete before closing a franchise acquisition, whether you are purchasing individual franchise units from an existing owner or acquiring an entire franchise system.

Why Is Franchise Due Diligence Different from Standard Business Due Diligence?

Buying a franchise is not the same as buying an independent business. In a standard business acquisition, you are purchasing assets, customer relationships, and goodwill. In a franchise acquisition, you are also stepping into a contractual relationship with a third party (the franchisor) that controls your brand, your suppliers, your territory, your operating standards, and your ability to sell the business in the future.

This third-party relationship creates layers of risk that do not exist in non-franchise transactions. The franchisor must approve the transfer. The franchisor may impose new agreement terms on the buyer. The franchisor may exercise a right of first refusal and block the sale entirely. And the franchise agreement governs what you can and cannot do with the business for the next 10 to 20 years.

Standard business due diligence (financials, leases, employee contracts) is necessary but not sufficient for a franchise acquisition. You also need franchise-specific legal analysis.

Step 1: Review the Franchise Disclosure Document

The FDD is a 23-item document required by the FTC Franchise Rule (16 C.F.R. Part 436). Even if you are buying from an existing franchisee rather than the franchisor directly, you should obtain and review the current FDD. Here is what to focus on:

• Item 1 (The Franchisor): Confirm the legal entity, corporate structure, and any parent company or affiliate relationships. Understand who you are actually doing business with.
• Item 2 (Business Experience): Review the backgrounds of the franchisor’s leadership team. Look for franchise operations experience, tenure, and any recent turnover that may signal instability.
• Item 3 (Litigation): This is one of the most important sections. Review all pending and resolved litigation for patterns: franchisee lawsuits, regulatory actions, encroachment claims, and termination disputes. A brand with 50 pending franchisee lawsuits presents a fundamentally different risk profile than one with two.
• Items 5 and 6 (Fees): Understand the complete fee structure: initial fees, ongoing royalties, advertising contributions, technology fees, transfer fees, and any other mandatory payments. Model these fees against the unit’s projected revenue.
• Item 7 (Estimated Initial Investment): Compare the FDD’s initial investment range against your actual acquisition cost plus any required capital expenditures (remodel, equipment upgrades).
• Item 19 (Financial Performance Representations): If the franchisor provides Item 19 data, use it as a benchmark against the seller’s reported financials. If the franchisor does not provide Item 19, that itself is a data point worth considering.
• Item 20 (Outlets and Franchisee Information): Review the system’s growth trajectory. How many units have opened and closed in the past three years? What is the net unit growth rate? A high closure rate is a significant red flag.

For a complete guide on what each FDD item covers, see our resource on the franchise validation process.

Step 2: Analyze the Franchise Agreement

The franchise agreement is the contract that will govern your business for the next 10 to 20 years. Every clause matters, but these sections are critical during an acquisition:

• Transfer provisions: What conditions must be met for the franchisor to approve the transfer? Will you be required to sign a new (potentially less favorable) franchise agreement? What fees are triggered by the transfer?
• Right of first refusal: Does the franchisor have the right to match the purchase price and acquire the franchise itself? How much time does the franchisor have to exercise this right? For a deep dive, see our guide on ROFR clauses in franchise agreements.
• Term and renewal: How many years remain on the current agreement? What are the renewal conditions? Will you be required to sign a new agreement at renewal with different terms?
• Territory: What territory protections exist? Are they exclusive? Are there carve-outs for online sales, catering, or non-traditional locations?
• Termination and default: Under what circumstances can the franchisor terminate the agreement? What cure periods exist? What happens to your investment if the agreement is terminated?
• Non-compete: What post-termination non-compete restrictions apply? These can limit your ability to operate a similar business for 1 to 2 years within a defined geographic area.

At Lopes Law LLC, our franchise agreement review for acquisition transactions is $3,000 flat fee for single-unit deals and scales based on complexity for multi-unit portfolios. For more on franchise agreement red flags, see our dedicated guide.

Step 3: Conduct Territory Analysis

Territory analysis goes beyond reading the territory clause in the franchise agreement. You need to understand:

• The exact boundaries: Is the territory defined by zip codes, radius, population, or street boundaries? Map it precisely.
• Exclusivity limitations: Many “exclusive” territories contain exceptions for online sales, delivery, non-traditional venues (airports, military bases), or specific product categories.
• Nearby development: Are there pending franchise applications or company-owned locations planned near your territory? Item 20 of the FDD can provide some of this information, but direct inquiry with the franchisor is also necessary.
• Market saturation: How many units of the same brand operate within a 5, 10, and 20 mile radius? Even if your territory is technically protected, market saturation can affect your customer traffic.

Step 4: Verify Financial Performance

Financial due diligence in a franchise acquisition requires comparing three data sources:

1. Seller-provided financials: Request at least 3 years of profit and loss statements, tax returns, and bank statements. Verify that the reported revenue is supported by POS data and bank deposits.
2. FDD Item 19 data: If available, compare the seller’s reported performance against the system average. Significant outperformance should be verified; significant underperformance needs explanation.
3. Franchisee validation: Talk to other franchisees in the system. Ask about their revenue, expenses, and experience with the franchisor. This is often the most valuable source of information in the entire due diligence process.

Key financial metrics to analyze:

• Revenue trends: Is revenue growing, flat, or declining? Compare year-over-year growth rates.
• EBITDA and owner cash flow: Calculate the true owner benefit after all franchise fees, rent, and normalized expenses. This is the number that determines the value of the acquisition.
• Capex requirements: Identify all upcoming capital expenditure obligations: remodels, equipment upgrades, lease renewals. Factor these into your total investment calculation.

For more on franchise valuation methods, see our guide on franchise business valuation.

Step 5: Review Litigation History

Beyond FDD Item 3, conduct independent research on the franchisor’s litigation history. Search federal and state court records for lawsuits involving the franchisor entity, its officers, and its parent company. Look for:

• Patterns of franchisee claims (encroachment, misrepresentation, wrongful termination)
• Regulatory enforcement actions by state franchise regulators
• FTC investigations or consent orders
• Class action lawsuits or multi-party disputes

Also check the litigation history of the seller. Pending personal litigation, tax liens, or judgments against the seller can complicate or delay the transfer process. For more on resolving franchise conflicts, see our guide on franchise dispute resolution.

Step 6: Confirm State Registration Compliance

Fourteen states require franchise registration before a franchisor can offer or sell franchises within the state: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin. Several additional states require franchise filing or notice.

For franchise resales (buying from an existing franchisee), state requirements vary. Some states require the franchisor to file an amended FDD reflecting the transfer. Others exempt resales from registration requirements. Confirm with your franchise attorney that all applicable state requirements are met before closing.

Step 7: Evaluate SBA Loan Eligibility

If you are financing the acquisition with an SBA loan (SBA 7(a) is the most common program for franchise acquisitions), the lender will review the franchise agreement for SBA compatibility. Key requirements include:

• The franchise agreement must not give the franchisor excessive control over day-to-day operations
• The agreement must include reasonable default notice and cure provisions
• The franchisor must be listed on the SBA Franchise Directory or provide an addendum addressing SBA requirements
• The borrower must maintain reasonable autonomy in hiring, pricing (to the extent permitted by the franchise system), and financial management

SBA loans typically cover 75% to 90% of the total project cost, with interest rates based on the prime rate plus 1.5% to 2.75% and repayment terms of 10 to 25 years. The SBA loan process typically adds 45 to 90 days to the acquisition timeline.

A Client Scenario: When Due Diligence Saved $200,000

A buyer engaged our firm to review a two-unit franchise acquisition with a purchase price of $850,000. The seller reported combined annual revenue of $1.6 million and EBITDA of $210,000. At first glance, the deal appeared reasonable at approximately 4x EBITDA.

During our due diligence, we discovered three issues the buyer had not identified. First, the franchise agreement required the buyer to sign a new agreement at transfer, and the new agreement included a royalty increase from 5% to 7%, which would reduce annual cash flow by approximately $32,000. Second, the franchisor had mandated a $90,000-per-unit remodel due within 18 months of the transfer date, adding $180,000 to the buyer’s total investment. Third, Item 3 of the FDD disclosed that the franchisor was the defendant in eight franchisee lawsuits alleging encroachment, and three of those lawsuits involved locations within 15 miles of the subject units.

When we recalculated the investment using the higher royalty rate and factored in the remodel cost, the effective multiple jumped from 4x to over 6x, and the projected cash-on-cash return dropped below 10%. The buyer renegotiated the purchase price to $650,000, saving $200,000 and structuring the deal to account for the pending remodel obligations.

Frequently Asked Questions About Franchise M&A Due Diligence

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Last updated: March 13, 2026