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Exercising due diligence when purchasing a franchise

On Behalf of | Jun 10, 2020 | Business & Commercial Law

When purchasing a franchise in Arizona, a potential buyer has a right to inspect the accounting records and business practices. Whether buying a unit from an independent franchisee or directly from the franchise corporation, due diligence helps the decision-making process. As noted by the U.S. Small Business Administration, franchise owners have less control over the operation and must follow the franchisor’s existing guidance.

An evaluation of the company’s business strategy can provide prospective buyers with an indication of how the franchise could fit in with their own business objectives. Learning as much as possible about the company’s products or services and its customer base may help determine if it is a good match.

Considering the financial aspects

The low start-up costs of buying a franchise attract many entrepreneurs. The franchise corporation, however, often requires paying regular licensing fees to operate a unit under its brand. A unit owner may also need to pay a fee for using a trademark or logo and contribute to the company’s marketing campaigns.

Entrepreneurs seeking a turnkey operation may have a primary interest in how the franchise generates revenue. Some franchises require providing the company with a portion of the income proceeds. The operating expenses, fees and relevant tax structures could act as important factors in deciding whether to purchase a unit.

Obtaining a disclosure document

The Federal Trade Commission requires sellers to provide potential buyers with a franchise disclosure document. As reported by Entrepreneur magazine, buyers must receive detailed information about the business, such as the franchisee’s obligations, fees and restrictions on products or territories. A potential buyer has the right to review the FDD’s contents for at least 10 days before signing a purchase agreement.