How do you verify the financial and operational performance of a franchise resale?

1 Review the FDD

The Franchise Disclosure Document (FDD) is a legal document that franchisors must provide to prospective franchisees at least 14 days before signing a franchise agreement. The FDD contains important information about the franchise system, such as the fees, obligations, support, litigation, financial performance, and other aspects of the franchise. You should review the FDD carefully and compare it with other similar franchises to understand the strengths and weaknesses of the franchise you are interested in. You should also consult a lawyer and an accountant to help you interpret the FDD and identify any red flags or potential issues.

2 Analyze the financial statements

The financial statements of the existing franchise are the best indicators of its profitability and performance. You should request and examine the income statements, balance sheets, cash flow statements, tax returns, and bank statements of the franchise for at least the past three years. You should look for trends, patterns, and anomalies in the revenue, expenses, assets, liabilities, and cash flow of the franchise. You should also compare the financial statements with the industry benchmarks and the projections in the FDD to see if the franchise is meeting or exceeding the expectations. You should also ask for a breakdown of the owner's salary, benefits, and personal expenses to determine the true net income of the franchise.

3 Conduct due diligence

Due diligence is the process of verifying the information and claims provided by the seller of the franchise. You should conduct due diligence on various aspects of the franchise, such as the legal status, the lease agreement, the inventory, the equipment, the contracts, the employees, the customers, the suppliers, the competitors, and the reputation of the franchise. You should also visit the franchise location and observe the operations, the quality, the service, and the customer satisfaction of the franchise. You should also interview the seller, the franchisor, and other franchisees to get their insights and feedback on the franchise. You should also check for any complaints, disputes, or lawsuits involving the franchise.

4 Hire a valuation expert

A valuation expert is a professional who can help you determine the fair market value of the franchise based on various factors, such as the financial performance, the growth potential, the goodwill, the risk, and the market conditions of the franchise. A valuation expert can use different methods and approaches to estimate the value of the franchise, such as the income approach, the asset approach, or the market approach. A valuation expert can also help you negotiate the price and terms of the deal with the seller and the franchisor.

5 Review the franchise agreement

The franchise agreement is the contract that governs the relationship between you and the franchisor. It outlines the rights and obligations of both parties, such as the fees, the royalties, the territory, the training, the support, the standards, the policies, and the termination clauses of the franchise. You should review the franchise agreement carefully and understand what you are getting into and what you are giving up. You should also compare the franchise agreement with the FDD and the current franchise agreement of the seller to see if there are any changes or differences. You should also consult a lawyer and an accountant to help you review and negotiate the franchise agreement.

6 Seek professional advice

Buying a franchise resale is a complex and risky decision that requires a lot of research and analysis. You should not rely on your own judgment or the seller's information alone. You should seek professional advice from experts who can help you verify the financial and operational performance of the franchise and guide you through the process. You should hire a lawyer, an accountant, a valuation expert, a business broker, and a franchise consultant to help you evaluate a franchise resale and make an informed decision.