The Ultimate Due Diligence Checklist for Future Franchisees - Franchise Fame (2023)

The Ultimate Due Diligence Checklist for Future Franchisees - Franchise Fame (1)7 minutes to readThe Ultimate Due Diligence Checklist for Future Franchisees - Franchise Fame (2)15th May, 2023

The process and prospect of buying into a franchise is an exciting one. However, prospective franchisees are advised to carry out a due diligence process to avoid letting their emotions cloud their judgement. If you’ve heard about due diligence as a necessary step in your research process but aren’t sure what it means, you’ve come to the right place.

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In this article, we cover what due diligence is and the consequences of failing to follow this process. We also provide a due diligence checklist for purchasing a franchise business so that you can make a more thorough and informed decision. Let’s get started.

What is due diligence?

Although due diligence is a concept that is often used in business relations, typically in the case of mergers and acquisitions, franchise due diligence follows a similar process.

As such, due diligence for franchisees is a process of thoroughly investigating every aspect of the franchisor’s business so that you know whether or not the franchise opportunity is right for you. While it is a long, complex and arduous process, it is necessary to help you avoid some common pitfalls.

The consequences of not doing your due diligence

Some of the most common mistakes that prospective franchisees make include making uninformed decisions and not being a good fit for the franchise.

Others include underestimating the ongoing investment as you would not have spent enough time with the franchise owner or current franchisees to study the business and the market it operates in well enough.

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This is why some frequently encountered consequences of failing to do your due diligence include:

  • Making purchasing mistakes
  • Not verifying details could be costly
  • Making an unsound financial investment
  • Loss of money and savings
  • Potential lawsuits
  • Personal dissatisfaction and stress

To avoid these costly mistakes and consequences, you want to be as prepared as possible. This is where a due diligence checklist comes in handy.

What is a due diligence checklist?

A due diligence franchise checklist is a list of items/documents/evidence that you will require from the franchise owner to help you reach a thorough conclusion about the business.

Often, such checklists involve certain questions to ask a franchise owner when completing due diligence. These questions are aimed to give you a lot more clarity and to ensure you go into the business as prepared as possible.

Franchise due diligence checklist

Having said everything above, it’s time to provide you with your ultimate due diligence checklist as you embark on your franchise purchasing journey.

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The checklist below is divided into six sections, with some of these containing sub-sections for better understanding and organisation. Let’s take a closer look.

1. Legal due diligence

Legal due diligence refers to exploring and examining the franchisor’s business from a legal standpoint. Some of the aspects you will want to look at include:

  • Articles of incorporation
  • The franchisor’s business registration documents and amendments thereto
  • The franchisor’s company bylaws, amendments thereto and written standards of conduct
  • Minute book (with ownership and board meeting minutes)
  • A list of all the current investors and shareholders
  • A list of all subsidiaries and entities in which the franchisor has an equity interest
  • A list of all the franchisors’ names and trademarked names
  • All the locations where the franchisor has operations
  • A list of all the products and/or services offered by the franchisor
  • Assurance of business compliance
  • A list of all the non-disclosure or non-compete agreements
  • Letters of intent and contracts
  • Distribution, sales and subscription agreements
  • Contracts between all the officers, directors or principals of the franchise
  • Certificate of Good Standing
  • Documents related to reincorporation and restructuring
  • Government licences, permits and consents
  • Any documents related to proceedings initiated by a regulatory agency
  • Material reports to government entities
  • Documents and analysis of possible antitrust issues
  • Pending or threatened litigation against the franchisor/by the franchisor
  • All settled litigation against or initiated by the franchisor
  • All active litigation files
  • Any judgments, settlements and court orders
  • Copies of attorney correspondence with auditors
  • Any past/present government investigation
  • All guarantees to which the franchisor may be a party to
  • A list of the attorneys/solicitors with which the franchisor deals

2. Financial due diligence

With the financial aspect of your due diligence checklist, you will be looking primarily at the franchisor’s financial standing, income levels, profit and loss statements, etc. Below is what you need to consider:

  • Income statements
  • Cash flow statements
  • Balance sheets
  • General ledger
  • Accounts payable and receivable
  • Credit report and/or loan and bank financing agreements/lines of credit
  • Tax returns for a period of three years or audited financial statements (inclusive of the auditor’s report)
  • Debts and liabilities
  • An analysis of gross profit margins and gross profits
  • An inventory of all assets and their full value including equipment and real estate
  • Purchase orders, quotes, invoices and/or warranties
  • Future financial projections
  • Budget and budget plans
  • All auditor communication with management for the period of the last five years
  • Depreciation and amortisation methods
  • Changes in accounting methods over the past five years
  • Any equity financing documents
  • Deferred revenue
  • Employment tax filings for a period of the last three years

3. Operational due diligence

Operational due diligence is a broad term that encompasses the franchisor’s operations. These are related not only to customers and employees but also to technological and physical assets. Here is a breakdown of each one in more detail:


  • Sales records
  • Customer databases
  • Subscriber list
  • Customer research data
  • Purchasing policies
  • Refund policies
  • Pending litigation/threatened litigation
  • Unsatisfied judgement
  • Insurance policies and coverage


  • A list of employees and an organisational chart
  • Employment contracts and agreements with freelancers/independent contractors
  • Payroll information and employee tax forms
  • Human resources policies and procedures
  • Employee benefits, retirement plan and insurance
  • Disputes related to employment matters
  • Employee non-disclosure and non-compete agreements
  • Resumes of key figures in the franchise organisation
  • Recruiting and onboarding process
  • Copies of payroll documents
  • Labour or employment contracts


  • What software is used by the franchisor and copies of licensing agreements?
  • Are there any outstanding IT outsourcing agreements?
  • Current system age and usage
  • Which interfaces link internal systems together?
  • What processes are in place in the event of a disaster?
  • What budget has been set aside for IT security and cost management?
  • Have there been any previous data breaches in the past?

Physical assets

  • All immovable property owned and leased (including the amount of rent, location, and dates)
  • Sales and purchase of major capital equipment over the past three years
  • Lease agreements for the equipment
  • Real estate deeds, mortgages, leases, surveys, title policies, use permits
  • A schedule of owned and leased fixed assets
  • Equipment appraisals
  • Practices regarding inventory ageing

4. Commercial/Product due diligence

With commercial or product due diligence, we now get to the heart of the franchisor’s business and what makes them competitive. In this regard, you should pay attention to the following:

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  • A list of products and/or services offered and in the development stage
  • Market research
  • Competitor profiling
  • Top customers
  • Customer analysis and segmentation
  • Top suppliers
  • Any barriers to entry
  • Warranty claims
  • A list of complaints
  • Agreements with suppliers

5. Intellectual property due diligence

Intellectual property is one of the franchisors’ greatest assets. They have spent years refining and developing it. Therefore, it needs to be protected through the right channels and you need assurance in respect of the following:

  • A list of all of the franchisor’s patents, trademarks and copyrights
  • Pending applications and current registrations
  • IP-related agreements
  • Technical know-how
  • All rights the franchisor owns
  • All consulting agreements
  • Active websites and social media accounts
  • Custom software and IT systems the franchisor uses
  • A list of all licencing revenue and expenses
  • Trade secrets
  • IP claims and litigation

6. Cultural due diligence

The final aspect of your due diligence process but by no means least important is cultural due diligence. This is something that has a more intangible nature but is critical to the success and strength of the franchisor’s brand. As such, you need to consider:

  • The franchisor’s vision, mission, and values
  • Interviews with external stakeholders
  • Interviews with internal stakeholders/focus groups (e.g. current franchisees)
  • On-site visits
  • Internal and external questionnaires and surveys

Additional tips when conducting franchise due diligence

Of course, the list above is not exhaustive and it’s meant as a suggestion to help you get started when you begin your in-depth research process. There are several other aspects you should consider when conducting franchise due diligence. These include:

  • Consulting with current franchisees
  • Hiring a professional consultant/legal team
  • Visiting on discovery day and asking the franchisor important questions
  • Attending franchise fairs to gather more information
  • Exploring the history of any possible franchisee failures, etc.

In conclusion

Doing your due diligence before you sign on the dotted line is possibly one of the smartest and most important things you can do to assure yourself of more peace of mind as you embark on your business journey.

And to make this process even easier for you, we’ve created a downloadable PDF with all the points mentioned above for easy access and use. Don’t hesitate to get your copy now!

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And remember if you need any assistance with franchising, we are just a few clicks away. Get in touch with our team of professionals and we can help you make a strong and impactful decision that will benefit you and your business over the long term.


What is a due diligence checklist? ›

A due diligence checklist is an organized way to analyze a company that you are acquiring through sale, merger, or another method. By following this checklist, you can learn about a company's assets, liabilities, contracts, benefits, and potential problems.

How to do due diligence on a franchise? ›

Franchise Due Diligence: 10 Steps
  1. Talk to Current Franchisees. ...
  2. Talk to Former Franchisees. ...
  3. Visit the Franchisor's Headquarters or Company-Owned Location. ...
  4. Review the Franchisor's Franchise Agreement and FDD. ...
  5. Compare the Franchise Agreement and FDD to Others. ...
  6. Ask Questions. ...
  7. Research Online.
Nov 1, 2016

What are good due diligence questions? ›

Due Diligence Checklist
  • Who owns the company?
  • What is the company's organizational structure?
  • Who are the company's shareholders? ...
  • What are the company's articles of incorporation?
  • Where is the company's certificate of good standing from the state in which the business is registered?
  • What are the company bylaws?

What would be five important things to consider before becoming a franchisee? ›

These are the different aspects you would have to keep in view before you become a franchisee:
  • #1 The model. ...
  • #2 Risk tolerance. ...
  • #3 Familiarise yourself with the rules. ...
  • #4 Understand your personality type. ...
  • #5 Finances are important. ...
  • #6 Action the franchise search the right way. ...
  • #7 Create a business plan.
May 31, 2022

What are the 4 due diligence requirements? ›

The Four Due Diligence Requirements
  • Complete and Submit Form 8867. (Treas. Reg. section 1.6695-2(b)(1)) ...
  • Compute the Credits. (Treas. Reg. section 1.6695-2(b)(2)) ...
  • Knowledge. (Treas. Reg. section 1.6695-2(b)(3)) ...
  • Keep Records for Three Years.
Jan 20, 2023

What are the three 3 types of diligence? ›

Types of due diligence

Due diligence falls into three main categories: legal due diligence. financial due diligence. commercial due diligence.

What is a good example of due diligence? ›

Due Diligence Examples

Conducting thorough inspections on a property before buying it in order to make sure that it is a good investment. An underwriter auditing an issuer's business and operations prior to selling it.

What are five things you would want to perform due diligence on a company? ›

Key Takeaways

You should consider a variety of factors when performing due diligence on a stock, including company capitalization, revenue, valuations, competitors, management, and risks.

What are the 3 principles of due diligence? ›

Human rights due diligence should include assessments of internal procedures and systems, as well as external engagement with groups potentially affected by its operations. The Guiding Principles contain three chapters, or pillars: protect, respect and remedy.

What are the three P's of due diligence? ›

Many wealth advisory firms talk about “the three P's” of manager due diligence: people, process, and performance. It is important to note that performance is only one of the three categories.

What is an example of a due diligence document? ›

Due diligence documents include any paperwork, research, or information needed for the due diligence process. For example, stockholder agreements, government audits, trademarks, customer contracts, and license agreements are all different types of due diligence documents.

What are the four big factors to consider when selecting a franchise? ›

Factors to Consider When Choosing a Franchise Include:
  • The franchise should have a good sales record. ...
  • The marketability of your product or service is key. ...
  • Look into the competition in your area. ...
  • Invest in a franchise that has a lot of repeat business. ...
  • You should be interested and invested in the franchise.

What is the most important factor of success for a franchise? ›

One of the most important factors to consider is the reputation and track record of the franchisor. You want to choose a franchisor that has a strong brand, a loyal customer base, a proven business model, and a supportive network of franchisees.

What 3 factors need to be considered before franchising or buying a business? ›

Before choosing a franchise, take the time to consider these 10 vital signs that the company is the right fit for you.
  • Proven sales record. ...
  • Growing market. ...
  • Competition. ...
  • Repeat business. ...
  • Healthy living. ...
  • Upsell opportunities. ...
  • Profitable business model. ...
  • Personal interest.
Nov 18, 2014

What is standard due diligence requirements? ›

Standard due diligence requires you to identify your customer and verify their identity. There is also a requirement to gather information to enable you to understand the nature of the business relationship.

What are the key roles in due diligence? ›

The Role of Due Diligence

The process validates the accuracy of the information presented, ensures that the transaction complies with the criteria laid out in the purchase agreement, verifies that the parties consider all benefits and risks, and allows the buyer to know what they are buying.

What is the standard of due diligence? ›

Standard due diligence is the most common level of check. It involves not only identifying the customer, but also verifying their details. If your customer is acting on someone else's behalf, then you must also verify this individual's identity before doing any business with them.

What is the most important of conducting due diligence? ›

It's important not just to verify the ownership, status, and control of the assets but also to determine both the strength and economic value of those assets and the potential liability for infringement.

What is the primary objective of due diligence process? ›

The Objectives of Due Diligence is as follows:

To identify the strong point and to discover threats and weaknesses. To take a good quality decision about an investment. To make a smooth decision. To develop confidence in shareholders.

What is due diligence for dummies? ›

Due Diligence Meaning: Due Diligence is a process that involves risk and compliance check, conducting an investigation, review, or audit to verify facts and information about a particular subject.

What is due diligence in simple terms? ›

Due diligence is a process or effort to collect and analyze information before making a decision. It is a process often used by investors to assess risk.

What is due diligence in your own words? ›

Due diligence most generally means reasonable care and caution or the proper actions that a situation calls for, especially those that help to avoid harm or risk.

How do you conduct a financial due diligence checklist? ›

  1. Audited financial statements of the company for the historical period.
  2. Reconciliation of the management accounts for the historical period.
  3. Investment agreements executed by the company.
  4. Copy of TAN, VAT, and other registration certificates.
  5. Cash flow statement.
  6. Details of any changes made in accounting policies.

What is the strategy of due diligence? ›

Strategic due diligence is a critical process for assessing the value and risks of a potential merger or acquisition (M&A). It involves analyzing the strategic fit, market dynamics, competitive position, and financial performance of the target company and the combined entity.

What are the two types of due diligence? ›

Hard due diligence is all about the numbers. The soft due diligence process focuses on people: employees, customers, partners.
Financial/accounting, tax and operational due diligence are all examples of hard due diligenceCulture and human resources due diligence are the main examples of a soft approach
4 more rows
Aug 24, 2022

What are due diligence docs? ›

Due diligence documents are the research and analysis of a company or organization done in preparation for a business transaction (such as a corporate merger or purchase of securities). Due diligence documents typically include the following categories; legal, financial, sales and marketing, and human resources.

What are 5 characteristics of a franchise? ›

7 Major Characteristics of a Franchise
  • Solid Concept.
  • Effective Franchise Business Model.
  • A Good Franchise Training Program.
  • Established Brand Image.
  • Franchises with Larger System Size.
  • Clear Communication With Franchisees.

What are the four R's of franchising? ›

By following these “four Rs” – research, reach out, reflect, and react – eager franchisees looking to expand will know if they are fully ready to take this next step in their franchising journey.

What are the eight criteria you should use when evaluating a franchise opportunity? ›

How do you evaluate franchising opportunities?
  • The market.
  • Company history.
  • Financial statements.
  • Level of investment.
  • Training and support.
  • Territory.
  • Royalties.
  • Restrictions.
May 18, 2023

What are the key components of a successful franchise system? ›

The key elements of a franchise system and business include:
  • Franchise Application. ...
  • Franchise Disclosure Document (FDD) ...
  • Franchise Agreement. ...
  • Operations Manual. ...
  • Training Program. ...
  • Marketing and Promotion Program.
Dec 15, 2021

What are the six leading success factors? ›

“six success factors” — focused, directed, nurtured, engaged, connected, and valued (see sidebar, Six Success Factors Defined).

How do you measure success in a franchise? ›

5 Key Indicators of Franchisor Success
  1. Unique products and services. The business model has to offer their target market something different, better, and more valuable than other comparable businesses. ...
  2. Profitability. ...
  3. Defensibility. ...
  4. Value to the customer. ...
  5. Sustainability.
Feb 10, 2021

What are the three elements of a franchise? ›

In short, a business arrangement meets the FTC Rule definition of a franchise if the business arrangement involves: (i) the grant of a trademark, (ii) the franchisor exerts or has the authority to exert significant control or assistance over the operation of the business, and (iii) the franchisee pays the franchisor or ...

Which is the most important criterion for franchising a business? ›

Return on investment

A franchised business must, of course, be profitable. But more than that, a franchised business must allow enough profit after a royalty for the franchisees to earn an adequate return on their investment of time and money. Profitability is always relative.

What are 3 factors that you will need to consider when opening a business? ›

7 important factors to consider before starting a business
  • A great idea. “No business can develop in the absence of a great idea. ...
  • Funding and budget. ...
  • What is your business plan? ...
  • Legal documentation. ...
  • Passion. ...
  • Find the right equipment. ...
  • Know when you need help.
Nov 9, 2022

What is a due diligence checklist real estate? ›

Investors rely on real estate investment due diligence checklists to ensure that they've identified all potential risks a new deal holds. Throughout this process, the goal is to identify and understand any red flags or concerns that could threaten the deal's projected ROI.

What are the 5 Ps of due diligence? ›

The Due Diligence Framework offers a comprehensive framework for approaching violence against women based on the international legal principle of due diligence through its designation of the “5Ps” – prevention, protection, prosecution, punishment, and provision of redress.

What is an example of due diligence in real estate? ›

An example of the due diligence process in real estate would be a survey of a property for a sale by a professional and registered agent. The findings from the survey would then be given to the buyer so that they can make a fully informed decision as to whether to pursue purchasing the property.

What kind of due diligence is required? ›

Due diligence is an investigation, audit, or review performed to confirm facts or details of a matter under consideration. In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party.

What is considered due diligence? ›

Due diligence is defined as an investigation of a potential investment (such as a stock) or product to confirm all facts. These facts can include such items as reviewing all financial records, past company performance, plus anything else deemed material.

What is the key objective of due diligence? ›

The Objectives of Due Diligence is as follows:

To identify the strong point and to discover threats and weaknesses. To take a good quality decision about an investment. To make a smooth decision. To develop confidence in shareholders.

What is a simple sentence for diligence? ›

Examples of 'diligence' in a sentence
  • There was no evidence of any due diligence about the people who received the cash. ...
  • The shortlisted bidders are being given access to due diligence and management meetings. ...
  • They have not told me or the police that this owner can verify the purchase was carried out in due diligence.


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