Due diligence
Questions to Ask Before Buying a Franchise
Franchise sales teams are trained to close deals. Your job is to slow down and ask the right questions before you commit capital. This guide organizes 50 due diligence questions by stage so you know what to research on your own, what to ask the franchisor directly, and what to verify with existing franchisees.
Before the discovery day
Before you ever speak to the franchisor, do your own homework using publicly available FDD filings and SBA loan records. These questions can be answered without the franchisor's help and will tell you whether the opportunity is worth pursuing further.
Investment and financial data
- What is the total estimated initial investment range (Item 7)?This is the full cost to open, not just the franchise fee.
- What is the initial franchise fee (Item 5)?The amount the franchisor keeps before you spend on build-out.
- What are the ongoing royalty and advertising fund rates (Item 6)?
- Does the FDD include financial performance representations (Item 19)?About 65% of franchisors disclose revenue data. A blank Item 19 is not necessarily a red flag, but it means you have less data to work with.
SBA loan performance
- What is the SBA 7(a) loan default rate for this brand?SBA lending records are public and reveal how franchisees with government-backed loans have performed.
- How does the default rate compare to other brands in the same category?
- What is the average SBA loan size for this franchise?
Unit growth and stability
- How many units have opened and closed in the last three years (Item 20)?A brand that consistently loses more units than it opens is a warning sign.
- What is the net unit growth trend?
- How many transfers have occurred?High transfer counts can indicate franchisees looking for the exit.
Litigation history
- Are there lawsuits between the franchisor and franchisees (Item 3)?
- Has the franchisor or any of its officers filed for bankruptcy?
- Are there government enforcement actions against the brand?
You can research all of these questions using FranchiseVerdict brand pages and the screener, which pull data directly from FDD filings and SBA records.
Financial questions for the franchisor
Once you have reviewed the public data, these are the financial questions to ask the franchisor directly. Push for specifics. Vague answers like "most owners do well" are not enough.
Revenue and profitability
- What is the median net revenue per unit?Ask for median, not average. Averages are skewed by outlier locations.
- What percentage of franchisees achieve breakeven within 18 months?
- What is the typical ramp period from opening to stabilized revenue?
- What is the range of outcomes between the top quartile and bottom quartile?
Fee structure
- What are the total ongoing fees (royalty + ad fund + technology)?Add up every recurring fee to understand the true cost of operating within the system.
- Are there any fees not listed in the FDD that I should expect?
- How are royalties calculated (percentage of gross sales, flat fee, or tiered)?
Performance requirements
- Are there minimum performance requirements that could trigger termination?
- What happens if I fail to meet revenue or operational benchmarks?
Territory and competition questions
Territory protection determines whether the franchisor can place competing locations near you. Weak territory terms are one of the most common sources of franchisee frustration.
Territory definition
- How is the territory defined (radius, population count, zip codes)?
- Is the territory exclusive, or does the franchisor reserve rights within it?
- Can the franchisor open company-owned units in my territory?
Market saturation
- What is the territory saturation in my target market?Ask how many existing units operate within and adjacent to the territory you are considering.
- Do I have a right of first refusal for adjacent territories?
- Can the franchisor sell products through alternative channels (online, grocery, third-party delivery) in my area?
Operations and support questions
The value of a franchise system comes from the training, support, and operational playbook the franchisor provides. Understand exactly what you are getting before you sign.
Training and onboarding
- What does the initial training program cover and how long is it?
- Is training conducted at headquarters, at my location, or both?
- What ongoing training or continuing education is available after opening?
Ongoing support
- What ongoing operational support exists after opening?Ask specifically about field support visits, marketing assistance, and technology help desk access.
- How often does a field consultant visit my location?
- What marketing support does the corporate team provide at the local level?
Suppliers and technology
- Who are the approved suppliers and can I negotiate pricing?Some franchisors receive rebates from approved suppliers, which can increase your costs.
- What technology platforms are required and what do they cost?
- Am I required to use the franchisor's POS system, and what are the monthly fees?
Questions for existing franchisees
This is the most important step in franchise due diligence. The FDD Item 20 includes a list of every current franchisee with their name and phone number. Call at least 10 to 15 of them. Choose a mix of new and experienced operators from different regions. Do not rely only on the references the franchisor provides.
Key questions for franchisees
- Knowing what you know now, would you do it again?This single question reveals more than any financial metric.
- What surprised you most about the costs after opening?
- Is the franchisor responsive when you need help?
- What is your actual annual revenue and take-home pay?
- How long did it take you to reach breakeven?
- What is the biggest challenge of operating this franchise?
- Does the franchisor follow through on its promises from the sales process?
For a step-by-step process for conducting validation calls, see our guide on how to validate a franchise. FranchiseVerdict provides franchisee contact lists extracted from FDD filings to make this process easier.
Exit and transfer questions
Before signing a franchise agreement, understand exactly what happens when you want to leave. These terms are locked in at signing and are difficult to renegotiate later.
Transfer and resale
- What is the transfer fee?Transfer fees typically range from $5,000 to $25,000 and are paid to the franchisor when you sell.
- Can I sell my franchise and to whom?Most franchise agreements give the franchisor the right to approve or reject any buyer.
- Does the franchisor have a right of first refusal on any sale?
Term and renewal
- What happens at the end of the franchise term?Some agreements renew automatically. Others require you to sign a new agreement at the then-current terms, which may include higher fees.
- Is renewal automatic, or are there conditions I must meet?
- Will I need to pay a renewal fee or make capital improvements to renew?
Non-compete restrictions
- What are the non-compete restrictions after I leave the system?Non-competes can prevent you from operating a similar business for one to two years within a defined geographic area.
- Do the non-compete terms apply if the franchisor terminates my agreement?