Buying a Franchise Company: Do Your Due Diligence

While a pre-acquisition investigation (due diligence) should be part of every acquisition, there are special issues that potential purchasers of a franchise company should consider. Some of these special issues arise because of certain legal requirements applicable to franchisors. These include the obligation under US federal and state law to provide pre-sale disclosures in the form of a franchise disclosure document and the obligation to register in certain states before sales are made. The selling franchisor company should present the buyer with a written document with extensive information about itself. The buyer will want to be sure that the seller is in compliance with the US federal and applicable state franchise registration and disclosure requirements. Finally, the buyer will need to look to itself to confirm that it wants to run the seller's franchise system. The due-diligence process should reveal much about the seller, but the buyer must consider its own capabilities and flexibility as well.