How to Do Due Diligence on a Franchisor When Buying a Franchise
Are you thinking about buying a franchise? Well, you’re not alone. It is estimated that there are over 750,000 franchises in the U.S., comprising a large portion of all businesses. Franchising can be a great way to use a tested business model so that you don’t have to start from scratch. Before you sign on the dotted line, though, you should research your franchisor thoroughly. A franchise relationship is typically a 10-year contract – and the prudent thing is to research your franchisor before moving forward. Here are some of the ways our firm researches franchisors when representing a client in the purchase of a franchise.
When our firm represents a client in the purchase of a franchise, there are a number of ways that we research the franchisor. Here are a few of them.
The first place to start when researching your franchisor is with your Franchise Disclosure Document, or FDD. This is the disclosure of certain information about the franchisor that is mandated by the Federal Trade Commission to ensure that franchisees have at least basic information about the franchisor before buying the franchise. Items 1 through 4 of the FDD provide information about the franchisor.
Item 1 has information about the franchisor, the franchisor’s parents, predecessors, and affiliates, things like whether there is a parent company, or perhaps whether the franchisor you’re researching is also selling a competing franchise model. (Yes, many franchisors have multiple franchise models that compete with each other.)
Item 2 contains the franchisor’s business experience. This includes specific information about the managers, officers, and directors who run the franchise so that you can see what sort of backgrounds they have.
Item 3 discusses litigation. This includes pending lawsuits against the franchisor, or previous lawsuits with franchisees. Item 3 is important for getting a quick gauge of whether there are many dissatisfied franchisees out there.
Item 4 tells whether the franchisor, or any of its management team (like the people disclosed in Item 2) have filed for bankruptcy.
There is plenty of information in the FDD, but our firm never stops there. The Franchise Rule does not require all negative information to be disclosed, so we dig deeper to research the franchisor in additional areas.
We research the franchisor by looking at actual court records. Item 3 does not require that all lawsuits be disclosed, so we search PACER (federal court records) and relevant state court databases to see if there are other lawsuits against the franchise or its managers that may give an insight into other issues.
Not all issues show up in court records, though. That’s why we also do a general public records check on the franchise and its management team. This will reveal things like liens, criminal records, known associates, and other companies they are involved in.
Last but not least, it is important to search news, press releases, and other online resources for information about franchisees. There are a lot of franchise news sites, but one that consistently looks out for franchisees is Blue MauMau. For example, we found out that there had recently been a number of negative news stories about a franchisor’s alleged fraud just in time to stop the potential franchisee from moving forward. The allegations were recent and were not yet required to be part of the FDD.
If you are thinking about buying a franchise and need assistance researching your franchisor, let us help guide you through the purchase process. Our firm will help give you a clear picture of potential issues, we’ll negotiate the franchise agreement, and we’ll make sure that you feel confident your interests have been protected.
Dye Culik PC is a Charlotte, North Carolina business and franchise law firm. Our attorneys represent small-business owners in all aspects of business law, franchise disputes, and other corporate legal issues. We'd love to talk with you if you are thinking of buying a franchise and are here to help throughout the journey.