A Road Map to Due Diligence in the Acquisition of Franchise Companies

The last several years have witnessed a tremendous upswing in the buying and selling of franchise com? panies. Much of this activity has been spearheaded by private equity investment in the franchise industry. Because of the unique regulatory environment in which franchise companies operate and the peculiar nature of the franchise relationship, even sophisticated businesspeople con? sidering the acquisition of franchise companies are often ill equipped to gauge risk or measure the value of their targets. This article provides a road map to the due diligence that is appropriate in connection with the anticipated acquisition of franchise companies. It will also provide guidance on negoti? ating a purchase agreement that will offer the buyer the pro? tection necessary to minimize the inherent risks involved in acquiring a franchise company. In particular, this article will consider matters to be negotiated in the letter of intent, the pur? poses of due diligence, construction of a due diligence check? list, considerations in evaluating franchise agreements and disclosure documents, methods of assessing litigation risks, and strategies for negotiating definitive documents. Relevant questions addressed by this article include the following: ? What due diligence should be undertaken with respect to a franchisor targeted for acquisition? ? How is the risk associated with pending litigation evalu? ated? ? How are unasserted claims identified and then evaluated?