Buying a company that is the franchisor of a franchise network raises particular questions that must be considered during due diligence. These questions are unique to buying a franchisor rather than any other company.

Key areas

Questions to consider

IP rights

  • Who owns the brands, trademarks, profile programme, business system and operation instructions that franchisees have access to through the franchise agreement?
  • If the target company is a master franchisee, when will the licence to the IP rights expire?

Franchise agreements

  • Do all franchisees have the same version of the franchise agreement? If not:
    • What are the differences?
    • What are the fee rates?
    • What is the agreement term?
    • What is the right of extension?
    • What are the franchisor's obligations?
    • What are the franchisee's obligations?
    • When do the current franchise agreements expire?

Franchise system

  • Is the franchise system sufficiently documented?
  • Are the manuals updated?
  • Do the franchisees use the manuals?
  • Are there sufficiently structured training programmes in place?
  • How successful is ongoing support work?
  • Are development programmes for franchisees in place?

Legal disputes

  • Are there ongoing or upcoming legal disputes between the franchisor and franchisee? If so:
    • What is the issue in dispute?
    • At what stage is the legal dispute?
    • What is the probable outcome of the dispute?
    • What are the probable legal costs of the dispute?
    • Can a new owner of the franchisor facilitate a dispute settlement?

Franchisees' financial results

  • How are the financial results of franchisees compared to agreed targets?
  • How many of the franchisees fall below these targets?
    • Why are they below these targets?
  • How many franchisees want to transfer their franchised unit?
    • Why do they want to transfer it?
  • Do the present franchisees match the existing franchisee profile established for this network?
  • How mature is the franchise network – for example, have new franchisees been recruited in recent years only through transferring existing franchised units, or is there a potential to recruit new units and franchisees?

Franchisor/franchisee relationship

  • How good is the franchisor's relationship with the franchisees?
  • Is there an advisory council with representatives elected by the franchisees or a franchisee association?
  • What significant challenges face the franchise network according to franchisees?
  • How pleased are the franchisees with their respective operations and their contact with the franchisor?

Franchisor units

  • Are there units in the network that are owned by the franchisor? If so:
    • How many?
    • What are their financial results?
    • Are they still going to be owned by the franchisor or are they to be franchised to franchisees?

Growth potential

  • Is the network complete?
    • What opportunities to establish new units and recruit new franchisees into the network are available?
  • Do franchisees obtain sufficient market share in the respective territory or is the respective territory too large?
    • Can additional units be established within existing territories?
  • Can sales be increased by national marketing?
  • Can sales be increased by a change in product/service assortment?
  • Does the franchisor have a strategic plan?
    • How close is the franchisor to meeting the plan's targets?

Franchisor's financial results

  • Do the received ongoing fees from the franchisees sufficiently cover the franchisor's fixed overhead costs?
  • Does the franchisor have to establish and recruit more units and franchisees in order to break even? If so:
    • How many?
  • What are the sales statistics divided by the number of units and franchisees per year during the past five years?
  • Have the franchisor's profits from the franchised units been constant during the past five years?
  • Do these profits show an upward trend?
  • How are costs controlled?

Franchisor management

  • What qualifications and know-how do the management have regarding running a franchise network?
  • If the franchisor owner sells the franchisor, will there be a sufficient number of individuals left in management to ensure that the franchise network continues to operate in an effective manner?
  • Must there be a transition period that secures the transfer of know-how from the old owner to the new owner regarding the operation of the franchise network?


All of the above questions and their varying answers will have a significant impact on the final purchase price of a franchise network. Then, there are also the other issues to consider when planning a purchase of a company. The above checklist is not complete and additional factors must be considered in each case. However, the key factor in the purchase of any franchisor is having lawyers and consultants who know how franchise networks work as members of the due diligence team, as they will ensure that the right questions are asked and that the replies will be accurately understood.

For further information please contact Dan-Michael Sagell at Sagell and Co by telephone (+46 8 611 55 42) or email (dms@saglaw.se). The Sagell and Co website can be accessed at www.saglaw.se.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.