FRANCHISE LEGAL DUE DILIGENCE CHECKLIST – Part 2

In addition to the items discussed last week, here are additional items that should be reviewed as part of the due diligence checklist:

• All royalty relief agreements, forbearance agreements, settlement agreements, general releases, cancellation agreements, termination agreements and purchase agreements (for the reacquisition of franchised units) with franchisees and area developers, whether signed, unaccepted or otherwise unsigned since the date the franchisor first became registered to sell franchises;

• List of all persons who acted as franchise salespersons or brokers to offer or sell franchises and all salesman disclosure forms filed with each state’s agency that regulates franchise offers and sales for the last four years;

• All policy announcements, memos to franchisees, newsletters, reports, etc., issued to franchisees and area developers since the date the franchisor first became registered to sell franchises;

• All notices of breach, default and termination issued to franchisees and area developers since the date the franchisor first became registered to sell franchises;

• All claim and demand letters received from franchisees or area developers since the date the franchisor first became registered to sell franchises;

• All print advertising published to advertise the franchises;

• All flyers and brochures used to advertise the availability or offer or sale of franchises;

• All website advertising availability or offer or sale of franchises;

• List of all pending sales of franchises and area development rights

• List of all pending transfers of franchises and area development rights;

• List of all pending franchisee outlet openings and closures;

• List of all franchises and area developers not current in the payment of their obligations to the franchisor with the details of such defaults;

• List of all area developers not current under their development obligations with the details of such defaults;

• List of all franchisees and area developers whose franchises and area development rights were transferred, canceled, terminated, not renewed, reacquired or who otherwise left the system since the date the franchisor first became registered to sell franchises;

• List of all litigation and arbitration matters between the franchisor and franchisees and area developers filed, settled, adjudicated or otherwise resolved since the date the franchisor first became registered to sell franchises;

• Copy of all acknowledgments of receipt from each franchisee who received a UFOC since the date the franchisor first became registered to sell franchises;

• List of memberships in franchise organizations such as International Franchise Association.

In deals involving large numbers of franchisees, it becomes impractical to obtain and inspect every document on this checklist, of course. In such cases, the lawyer should sample a number judged reasonable by the client and shape the language of any representations and warranties accordingly.