What to Look for When Buying a Franchise

Buying a franchise can be an excellent path to business ownership, but it is not without risk. The franchise model provides a proven system, brand recognition, and operational support, but the legal and financial commitments are significant. Before you invest, you need to understand exactly what you are buying, what you are agreeing to, and what risks you are taking on.

Start with the Franchise Disclosure Document (FDD)

The FDD is a comprehensive document that franchisors must provide to prospective franchisees at least 14 days before you sign anything or pay any money. It contains 23 items of required disclosure, and reading it thoroughly is non-negotiable. Key items to focus on include:

Item 3 (Litigation History) reveals any pending or past lawsuits involving the franchisor. A pattern of franchisee lawsuits is a red flag. Item 7 (Estimated Initial Investment) gives you the range of costs to open and operate the franchise for the first three months. Pay close attention to the low and high estimates. Item 19 (Financial Performance Representations) is where the franchisor may disclose actual earnings data. Not all franchisors provide this, but if they do, analyze it carefully. Item 20 (Outlets and Franchisee Information) shows the number of units opened, closed, and transferred. High closure or transfer rates warrant investigation.

Evaluate the Franchise Agreement

The franchise agreement is where the real obligations live. Unlike the FDD, which is a disclosure document, the franchise agreement is the binding contract that governs your relationship with the franchisor. Key provisions to evaluate include territory exclusivity, renewal terms and conditions, transfer and assignment rights, termination provisions and post-termination obligations, and required purchases and approved suppliers. Many franchise agreements are presented as non-negotiable, but an experienced franchise attorney can often negotiate improvements to key terms.

Talk to Existing Franchisees

Item 20 of the FDD includes contact information for current and former franchisees. Use it. Call multiple franchisees and ask about their actual experience: initial investment accuracy, ongoing support quality, profitability timeline, and relationship with the franchisor. Former franchisees can provide particularly valuable insights about why they left the system.

Understand Your Total Financial Commitment

The initial franchise fee is just the beginning. Factor in ongoing royalties (typically 4-8% of gross revenue), advertising fund contributions (typically 1-3%), required equipment and technology purchases, build-out costs, working capital needs, and insurance requirements. Our M&A practice helps franchise buyers conduct thorough financial due diligence before committing.

Get Legal Counsel Before You Sign

A franchise is a major investment that comes with long-term legal obligations. Having a franchise law attorney review the FDD and franchise agreement before you sign is one of the best investments you can make. Contact Zara Business Law to schedule your franchise review consultation.