Interactive Checklist65 Items

The 65-Point Franchise Due Diligence Checklist

The most comprehensive franchise due diligence checklist available - covering pre-FDD research, all 23 FDD items, franchisee validation calls, financial modeling, legal review, existing-unit acquisition, and your final decision framework. Used by franchise attorneys, consultants, and serious buyers.

Analyze Your FDD →

Franchisee Validation Calls

The most underrated step. Talk to the people who actually operate this franchise.

Call at least 8-10 current franchisees from Item 20

Don't rely on the 'recommended' list the franchisor gives you - use the full Item 20 directory.

Ask: 'Knowing what you know now, would you do it again?'

This single question reveals more than any financial disclosure.

Ask: 'How long until you broke even?'

Compare against Item 7 working capital allowance. If breakeven took longer, the FDD understates costs.

Ask: 'What does the franchisor do well? What do they do poorly?'

Look for consistency in complaints - if 4 of 8 mention the same issue, it's systemic.

Ask: 'What were your actual first-year revenues and expenses?'

Some franchisees will share. This is your best real-world data point.

Ask: 'How responsive is corporate support when you have a problem?'

The quality of ongoing support is the #1 differentiator between good and bad franchise systems.

Contact at least 2 former franchisees (from Item 20 'ceased operations' list)

Why did they leave? Were they bought out, terminated, or did they walk away?

Ask former franchisees: 'What would you have done differently?'

Survivorship bias is real. The franchisees who left know things the current ones don't.

Financial Modeling

Build your own financial model - don't rely on the franchisor's projections.

Calculate Cash-on-Cash Return (CoC%)

Annual pre-tax cash flow ÷ total cash invested. Target: >20% by year 3 for most franchise models.

Build a break-even analysis (months to positive cash flow)

Include all Item 7 costs, ongoing royalties (Item 6), and realistic ramp-up timeline.

Model 3 scenarios: base case, downside (-25%), and upside (+15%)

The downside scenario should still be survivable without additional capital injection.

Calculate your total all-in cost (Item 7 + working capital + opportunity cost)

Include 6 months of personal living expenses as working capital buffer.

Model the royalty and ad fund burden as % of gross revenue

A 6% royalty + 2% ad fund = 8% off the top. On thin margins, this can be the difference between profit and loss.

Stress-test: What happens if revenue is 30% below Item 19 median?

Can you service debt, pay royalties, cover rent, and still pay yourself?

Calculate the payback period on your total investment

How many years to recoup your initial investment? >5 years is aggressive for most franchise models.

Legal Review

Hire a franchise attorney. This is not optional.

Hire a franchise-specialized attorney (not a general business lawyer)

Franchise law is highly specialized. Ask: 'How many FDDs have you reviewed in the past year?'

Review termination provisions in the franchise agreement

What constitutes a default? How many days to cure? Can the franchisor terminate without cause?

Understand the non-compete clause

Duration, geographic scope, and what happens if you're terminated vs. choosing not to renew.

Review transfer restrictions and right of first refusal

Can you sell the franchise freely? Does the franchisor get first right to buy at your price?

Confirm personal guaranty scope and limitations

Are you personally liable for the full term? Does your spouse need to sign? Is it capped?

Verify state-specific franchise registration and disclosure compliance

14 states require franchise registration. Verify the franchisor is properly registered in yours.

Buying an Existing Franchise Unit

Use this lane when you are buying a resale unit instead of opening a new location.

Reconcile seller P&L to source documents

Tie revenue and expenses to POS exports, payroll reports, bank deposits, merchant statements, and tax returns before trusting broker recasts.

Normalize SDE and add-backs conservatively

Separate true one-time expenses from owner salary, family payroll, deferred maintenance, manager replacement cost, and royalty/marketing fees.

Set a normalized working-capital target

Define inventory, payroll, gift cards, prepaid expenses, deposits, and opening cash so the business is not starved on day one.

Model seller financing, holdbacks, and debt service

A seller note can help alignment, but only if DSCR still clears after owner salary, capex, transfer fees, and transition costs.

Confirm landlord and franchisor transfer consent

Review assignment rights, lease term, renewal options, franchisor approval standards, transfer training, upgrade requirements, and right of first refusal.

Keep a post-close cash cushion

Do not close unless the plan leaves enough liquidity for payroll, rent, inventory, repair surprises, and a slow handoff from the seller.

Start with source-document quality of earnings: POS, payroll, bank deposits, tax returns, normalized working capital, seller note or holdback terms, franchisor consent, landlord consent, and post-close cash cushion.

Deepen this lane with franchise resale valuation, transfer friction red flags, franchise financing options, Item 7 startup costs, Item 19 financial performance, and Item 20 validation calls.