Evaluating, Buying, and Exiting a Franchise: A Practical Checklist

Business > Franchising | Published 26 November 2024 - Updated 26 July 2026 | UpLaw - uplaw.us

If a termination notice has arrived, go to Phase 8 now. If you are still deciding whether to buy, Phase 2 is the phase that matters most and the one almost nobody does.

Use with Franchising: A Comprehensive Guide to Disclosure, the Agreement, Operations, Renewal, and Termination and The Franchise Purchase and Dispute Toolkit.

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Phase 1 — Read the disclosure document

☐ Get the FDD, and note the date you received it. No money and no signature until the required waiting period has run — 16 CFR Part 436.

☐ Read it twice, then read the agreement itself in Item 22. ⚠ The FDD summarizes the contract; the summary is not the contract.

Mark these items:

☐ Item 3 — Litigation. ⭐ Read every case. Repeated franchisee misrepresentation suits are the strongest single signal in the document. ☐ Item 4 — Bankruptcy of the franchisor or its principals. ☐ Item 6 — Other fees. Build the complete list. ☐ Item 7 — Initial investment. ⚠ Check the working capital line and how many months it covers. ☐ Item 8 — Sources. Required suppliers; whether the franchisor receives rebates and whether they are shared. ☐ Item 11 — Assistance and the advertising fund. What the royalty buys. ☐ Item 12 — Territory. ⭐ Exclusive or "protected," and every reservation. ☐ Item 13 — Trademarks. Registered or pending; oppositions; what happens if the mark is lost. ☐ Item 17 — Renewal, termination, transfer, dispute resolution. ⭐ The whole relationship in one table. ☐ Item 19 — Financial performance. ⭐⭐ Does it exist? What population does it describe? ☐ Item 20 — Outlets and contacts. ⭐⭐ Counts, and the phone numbers. ☐ Item 21 — Financial statements. Is the franchisor solvent?

☐ Note every place the agreement gives the franchisor unilateral discretion. That list is the real risk profile.

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Phase 2 — The reference calls

⭐ This phase predicts the outcome better than everything else combined, and almost nobody does it properly.

☐ Call twenty current franchisees, not the three the franchisor suggests.

☐ ⭐ Call every reachable franchisee who left in the past year. Item 20 lists them.

Ask everyone: ☐ What did you actually earn last year, before your own salary? ☐ What was your all-in investment, and how far off was Item 7? ☐ What did the last remodel cost, and how much notice did you get? ☐ Has a unit opened near you? Delivery from another store? Product in grocery? ☐ Do you get the advertising fund statement? Do you know what it is spent on? ☐ How responsive is field support? ☐ What did the franchisor promise during the sales process that did not happen? ☐ Would you do it again?

Ask those who left: ☐ Why did you leave — sold, terminated, walked away, or non-renewed? ☐ What did you net at the end? ☐ Was there a dispute? How did it resolve? ☐ ⭐ What do you wish you had known before signing?

☐ Write down every answer with the date and the person's name.

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Phase 3 — Build the model

☐ The fee stack, as a percentage of gross revenue:

• ☐ Royalty ___% · ☐ Brand fund ___% · ☐ Local marketing minimum % · ☐ Technology $/mo
• ☐ Total to the franchisor: ___%

☐ The operating model, at three revenue levels: cost of goods · labor · occupancy · other operating.

☐ Then subtract: debt service on the build-out · a market salary for the owner's own labor · a remodel reserve.

☐ ⭐ Ask the only question that matters: do you survive the low case? The franchisor's percentage comes off the top whether or not you do.

☐ Check Item 7 against reality: get contractor quotes for the specified build-out, and confirm working capital for at least twelve months.

☐ ⚠ If Item 19 exists, check the population it describes. Top-quartile units or company stores in prime locations are not a forecast for a new suburban unit.

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Phase 4 — The advisers, and the negotiation

☐ Retain a franchise lawyer. ⭐ Not a general business lawyer. This is a specialty and the questions worth asking are not visible from the text.

☐ An accountant reviews the model and the tax structure.

☐ A commercial real estate broker reviews the site and the lease. ⚠ If the franchisor holds the lease and subleases to you, or requires a collateral assignment, the location is not fully yours — see Negotiating and Exiting a Commercial Lease: A Practical Checklist.

☐ Ask what is negotiable, in writing and itemized, once. Franchisors most often move on:

• ☐ Territory definition — radius, population, or defined boundaries
• ☐ A right of first refusal on adjacent units
• ☐ Development schedule relief for site, permitting, or financing delay
• ☐ The scope of the personal guaranty — cap it, or burn it off
• ☐ Transfer conditions and the transfer fee
• ☐ Fee reductions for multi-unit commitments
• ☐ A cure period for grounds that carry none

☐ ⛔ Do not sign the acknowledgment questionnaire without reading it. It is designed to negate representations actually made during the sales process.

☐ ⭐ Preserve the entire sales file — emails, brochures, pro formas, spreadsheets, texts, and dated notes of every conversation. If there is ever a claim, this file is the claim.

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Phase 5 — Before signing: the twelve-line screen

#	Question	Where	Red flag
1	Total fee load as % of revenue	Item 6	Above ~11% in a low-margin business
2	Realistic all-in investment with 12 months' working capital	Item 7 + your math	No working capital line
3	Does Item 19 exist?	Item 19	Absent entirely
4	Transfer, termination, non-renewal counts	Item 20	High turnover vs. system size
5	What the departed franchisees said	Item 20 contacts	You reached none of them
6	Litigation pattern	Item 3	Repeated franchisee suits
7	Territory exclusivity and reservations	Item 12	"Protected," broad reservations
8	Supplier rebates, and whether shared	Item 8	Taken, not shared
9	Remodel obligation and frequency	Agreement	No cap, no notice
10	What renewal requires	Item 17	Then-current agreement + full remodel
11	Post-term non-compete	Agreement	Broad radius, long term, whole trade
12	Dispute forum	Item 17	Distant arbitration, class waiver, short limitations

☐ ⭐ Four or more red flags is a purchase most people should not make.

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Phase 6 — Opening and the first year

☐ Calendar the development or opening deadline. ⚠ Missing it is typically a default. ☐ Document every franchisor promise about support, training, and marketing, in writing at the time. ☐ Set up the required systems, and confirm what the technology fee actually covers. ☐ Confirm your employer obligations are yours — minimum wage, overtime, classification, and recordkeeping under 29 U.S.C. § 203. ⚠ A franchisor labor-cost target does not shift that liability. ☐ Confirm accessibility compliance of the build-out — 42 U.S.C. § 12183, 42 U.S.C. § 12182, 28 CFR Part 36. ☐ Track actual results against the model monthly, and act on variance in month three, not month twelve.

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Phase 7 — Operating: the calendar and the file

☐ ⭐ Calendar in three places: the renewal notice window (commonly 6–12 months before expiration) · the remodel deadline · any development deadlines · insurance renewals · the lease option window.

☐ Keep permanently: the FDD as received, with the receipt · the signed agreement and every amendment · all franchisor communications · inspection reports and responses · all fee statements and payments · the advertising fund statements · every notice, with its envelope.

☐ Request the advertising fund statement annually, in writing. Ask the five questions:

1. ☐ Is the fund audited?
2. ☐ Do company-owned units contribute at the same rate?
3. ☐ What percentage goes to administration?
4. ☐ ⭐ Is any of it spent on franchise sales?
5. ☐ Who decides the spend, and is there franchisee input?

☐ Report sales accurately. ⚠ Underreporting is a no-cure default in many agreements and triggers audit fees.

☐ Respond to every inspection deficiency in writing, with the correction and its date.

☐ Join or form a franchisee association. ⭐ Individually a franchisee has almost no leverage; collectively, associations have changed remodel schedules, ad fund transparency, and encroachment policies across entire brands.

☐ Read the transfer clause now, years before you intend to sell.

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Phase 8 — A default or termination notice

☐ ⭐ Check the state franchise relationship statute first. Many states require good cause, written notice, and a real opportunity to cure — and a choice-of-law clause selecting the franchisor's home state generally does not avoid them.

☐ Check the agreement's own notice mechanics — address, method, content, timing. A notice that does not identify the specific breach and the cure required is defective.

☐ Identify whether the cited ground carries a cure period. Some do not.

☐ Respond in writing within the cure period, curing what can be cured and expressly reserving all rights.

☐ Assemble the comparative record. ⭐ Selective enforcement is the defense: inspection scores, deficiency notices, and outcomes for comparable units in the region.

☐ Build the retaliation timeline — did the notice follow a complaint, an association activity, or a refusal to remodel?

☐ ⛔ Do not de-identify, close, or abandon before advice. It converts a defensible position into an admission.

☐ ⛔ Issue a litigation hold immediately — see Issuing a Litigation Hold and Preserving ESI: A Practical Checklist.

☐ Understand the exposure: liquidated damages measured by future royalties · the post-term non-compete · de-identification costs · trademark claims after termination under 15 U.S.C. § 1114 and 15 U.S.C. § 1125 · enforcement against your personal guaranty · the lease.

☐ Check the forum. Arbitration is generally enforced — 9 U.S.C. § 2, 9 U.S.C. § 3, AT&T Mobility v. Concepcion, Epic Systems v. Lewis; on waiver by conduct, Morgan v. Sundance.

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Phase 9 — Claims worth screening

☐ Misrepresentation — oral earnings claims inconsistent with Item 19; omitted material facts. State franchise sales statutes, state deceptive practices acts, common-law fraud; federal enforcement of the rule runs through 15 U.S.C. § 45. ⚠ There is no private right of action under the federal rule itself.

☐ Breach of the implied covenant — encroachment, supply pricing, ad fund misuse.

☐ Relationship statute violation — termination or non-renewal without good cause.

☐ Accounting for the advertising fund.

☐ Antitrust — tying under 15 U.S.C. § 1 and 15 U.S.C. § 14, with treble damages at 15 U.S.C. § 15. ⚠ Hard claims: Jefferson Parish requires market power; Illinois Tool Works removed the IP presumption; lock-in under Eastman Kodak usually meets the answer that terms were disclosed. Vertical restraints are rule-of-reason — Continental T.V. v. GTE Sylvania, Leegin; see also Ohio v. American Express and Trinko, and monopolization at 15 U.S.C. § 2.

☐ Anti-poaching provisions among franchisees — 15 U.S.C. § 1.

☐ Trademark status — if the mark is contested or abandoned, the license's value is at issue: 15 U.S.C. § 1051, 15 U.S.C. § 1064, 15 U.S.C. § 1127.

☐ Trade secret exposure on exit — 18 U.S.C. § 1836, 18 U.S.C. § 1839.

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Phase 10 — The exit

Exit 1 — Sell the unit ⭐ the intended path; start eighteen months out ☐ Read the transfer clause and list every condition ☐ Bring the unit to current standards before marketing it ☐ Clean up the books; resolve supplier and lease issues ☐ Open the franchisor conversation eighteen months ahead — it surfaces buyer training windows and right-of-first-refusal timing ☐ Confirm the lease can be assigned, and who controls it ☐ Prepare a data room: financials, FDD, agreement, lease, compliance records ☐ At closing: transfer fee · buyer signs the then-current agreement · seller's release · ⭐ release of every personal guaranty — franchise, lease, equipment

Exit 2 — Let the term expire ☐ ⚠ Model the post-term non-compete first. It may bar the only trade you know ☐ Complete de-identification: signage, trade dress, paint, manuals, phone number, domain, social accounts ☐ Confirm the lease disposition

Exit 3 — Terminate early ☐ ⚠ The expensive door: liquidated damages, non-compete, de-identification, lease, and the guaranty ☐ Negotiate a mutual termination and release rather than defaulting into it

If the franchisor fails ☐ Franchise agreements are executory contracts subject to assumption and assignment — 11 U.S.C. § 365 — with the automatic stay at 11 U.S.C. § 362. ⚠ You may end up franchised to a buyer you did not choose.

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The deadline table

Item	Timing	Consequence
Disclosure waiting period	Before payment or signature	A rule violation, and a claim
Development / opening deadline	As stated	Default; forfeiture of development rights
Renewal notice window	6–12 months before expiration	The renewal is lost by silence
Remodel deadline	As stated	Default
Cure period on a default notice	Days to weeks	Termination
Transfer approval process	Months	A failed closing
Arbitration limitations period	⚠ Frequently shortened by contract	The claim
State sales statute limitations	Varies	The rescission remedy
Post-term non-compete	1–3 years	Your next business

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Who does what

The buyer, before signing. Read the FDD twice; call twenty franchisees and everyone who left; build the model at three revenue levels. The franchise lawyer. The FDD, the agreement, the state statutes, and what is negotiable. The accountant. The model, the tax structure, and the remodel reserve. The real estate broker. The site and the lease structure. The franchisee, every year. The calendar, the ad fund statement request, and the file. The franchisee association. The only structural counterweight in the relationship. Counsel, on a default notice. The relationship statute, the notice mechanics, and the comparative record.

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Failure modes, ranked

1. Never calling the franchisees who left.
2. Modeling only the good revenue case.
3. Ignoring the absence of Item 19.
4. Not reading the agreement itself, only the FDD summary.
5. No reserve for the remodel.
6. Assuming "protected territory" means exclusive.
7. Not writing down oral earnings claims the day they are made.
8. Signing the acknowledgment questionnaire without reading it.
9. Reading the transfer clause the month you decide to sell.
10. Missing the renewal notice window.
11. Underreporting sales.
12. De-identifying or closing before advice on a termination notice.
13. Not checking the state relationship statute.
14. Accepting cross-default across multiple units.
15. Using a general business lawyer instead of a franchise lawyer.

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Appendix A — The unit model worksheet

Line	% of revenue	Low case	Base case	High case
Gross revenue	100%
Royalty	___%
Brand / advertising fund	___%
Local marketing minimum	___%
Technology fee	flat
Subtotal to franchisor	___%
Cost of goods sold	___%
Labor, including payroll taxes and benefits	___%
Rent and occupancy	___%
Utilities	___%
Insurance	___%
Repairs and supplies	___%
Credit card and delivery platform fees	___%
Other operating	___%
Total costs
Operating profit
Debt service
Remodel reserve (annualized)
Market salary for owner's labor
= TRUE OWNER RETURN

☐ ⭐ The low case is the whole exercise. Set it at 75–80% of the base case. If the true owner return is negative there, the deal is a bet that nothing goes wrong for a decade.

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Appendix B — The reference call script

Fifteen minutes each. Twenty calls. This is the highest-value week of the entire process.

"Hi — I'm evaluating a [brand] franchise and your name is in Item 20 of the disclosure document. Do you have fifteen minutes?"

1. How long have you been in the system, and how many units?
2. What was your all-in investment, and how close was Item 7?
3. What did you net last year before your own salary?
4. How long did it take to reach break-even?
5. What did the last remodel cost, and how much notice did you get?
6. Has anything opened near you? Delivery from another unit? Product in retail?
7. Do you receive the advertising fund statement? Do you know what it funds?
8. How good is field support, honestly?
9. What did the sales process promise that did not happen?
10. Have you had a dispute? How did it go?
11. What are the required suppliers costing you versus the open market?
12. Would you buy this franchise again today?
13. Is there a franchisee association? Are you in it?
14. What would you negotiate if you were signing now?
15. Who else should I call?

☐ For those who left, add: Why did you leave? What did you net at the end? What do you wish you had known?

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Appendix C — Four scenarios and the first move

"They want a signature and a deposit this week." → ⛔ Confirm the disclosure waiting period has run — 16 CFR Part 436. Urgency in franchise sales is a technique, not a fact. A franchise that will not exist in three weeks was not a franchise worth buying.

"The development agent gave me projections but Item 19 is blank." → ⭐ Write down what was said, by whom, on what date, in front of whom — today. Keep the spreadsheet and every email. Then ask, in writing: "Please confirm in writing the financial performance figures discussed on [date]." The answer, or the silence, is the record.

"A new unit opened two miles away." → Read Item 12 and the territory clause together. Most encroachment is expressly reserved. Check whether you hold a right of first refusal on adjacent units — many franchisees hold one and never use it.

"I want to retire in four years." → ⭐ Read the transfer clause this month. Bring the unit to current standards ahead of the remodel deadline, clean the books, and open the franchisor conversation eighteen months before the intended closing.

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Appendix D — The five things to do this week

☐ 1. Read the FDD twice, and the agreement in Item 22 once.

☐ 2. Call five franchisees who left. Not five who stayed. Five who left.

☐ 3. Build the low case with the full fee stack, a market salary, and a remodel reserve.

☐ 4. Retain a franchise lawyer and send them Items 3, 6, 7, 8, 12, 17, 19, 20 and the agreement.

☐ 5. Write down everything the sales process has told you, with dates and names, and file it.

⭐ Every one of those is free or nearly free, and together they separate the people who build wealth in franchising from the people who lose their savings in it. The information is already in a document the franchisor is required to hand you. The only question is whether anyone reads it before the check clears.

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Checklists

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Toolkits

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