LEGAL DUE DILIGENCE FRANCHISE CHECKLIST

The business lawyer doing due diligence in the purchase of a franchise company must track down a great many documents to gain an accurate picture of the relationships between the franchisor and its franchisees.

Then the real work begins, since it is also necessary to inspect the documents in detail and draw up representations and warranties holding the seller of the franchise company responsible for any agreements or information contrary to or inconsistent with the documents inspected or information provided during due diligence.

Here are just some of the documents and information the lawyer should obtain and review:

  • Each UFOC used by the franchisor in all states in which the franchisor has done business for the last four years, including all state-specific addenda;
  • Each signed franchise agreement and area development agreement, if applicable, and all ancillary agreements and attachments used in the last four years;
  • All signed amendments to franchise agreements and area development agreements used in the last four years;
  • Drafts, proposals, unaccepted or otherwise unsigned amendments to franchise agreements and area development agreements used in the last four years;
  • All correspondence to or from any state agency regulating franchise offers and sales in any state in which the franchisor has done business for the last four years, including registration orders and exemption filings;
  • All orders and correspondence issued by or received from all such state agencies for the last four years and a list of all pending franchise registration and exemption filings;
  • All consent orders, assurances of discontinuance, notices of violation, offers of settlement, settlement orders or other orders or rulings in effect or, to the knowledge of the seller, threatened that would prohibit or impede the buyer’s ability to offer or sell franchises or enter into franchise agreements.
  • All communications to or from the Federal Trade Commission, if any, or any agency of any state in which the franchisor has done business, or has attempted to do business, for the past four years, whether in the nature of an inquiry or otherwise – for example, communications to or from agencies that regulate offers or sales of business opportunities.

Next week, we’ll talk about additional documents and items that are important.

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