BUYING FRANCHISE COMPANIES: THE DUE DILIGENCE MINEFIELD

Franchise companies are hot properties these days, and no wonder. Apples to apples, they’re generally more profitable than non-franchise companies, so they present tempting targets for financial buyers with lots of cash – for example, your friendly neighborhood private equity group, which has been particularly active in buying up franchise companies in recent years.

But the due diligence involved in any deal involving a franchise company is a minefield far more hazardous than that involving a non-franchise company, and business lawyers who set out to lead their clients through it must follow a disciplined process designed to learn as much as they can about the intricate relationships between the franchisor and its franchisees – the key to the profitability of any franchise operation.

Indeed, those relationships are the heart of what the buyer of a franchise company acquires, along with intellectual property in the form of a brand and possibly other unique assets. What is more, those relationships consist of formal agreements governed by both federal and state law and informal practices unique to each franchise enterprise, and it is crucial that the legal due diligence probe and gauge all of these elements carefully.

What information do business lawyers need to dig up in any transaction involving a franchise company? Where will they find it? What troubles await the unwary in the due diligence minefield?

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