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Markus Winkler, Unsplash

You chose the brand. You studied its leadership. You spoke with its franchisees. You invested your savings, signed a long-term lease, and built a business around the system the founder described.

Then someone else bought the franchisor.

The franchise agreement may remain in place. The name on the building may not change. Customers may never know that anything happened. Inside the system, however, the priorities, decision-makers, and financial pressures can change quickly.

Private equity has become a major force in franchising. Well-known brands have attracted private investment because franchise systems can offer recurring royalty revenue, relatively low corporate capital requirements, and opportunities for expansion. For investors, those qualities can make a successful franchisor an appealing asset.

For franchisees, new capital and professional management can create real opportunities. It can also create a new question that deserves careful attention:

Is the new owner building a stronger franchise system, or merely extracting more value from the system that franchisees already built?

A Founder and a Private Equity Firm May Measure Success Differently

This is not a story in which every founder is benevolent and every private equity firm is harmful. Some founders make poor decisions, resist needed change, or operate without the capital and expertise necessary to compete. Some private equity owners improve technology, recruit experienced leadership, strengthen purchasing power, and help a good brand reach its potential.

The difference often begins with incentives.

A founder may view the franchise as a life’s work. The brand can carry the founder’s name, history, identity, and reputation. A founder may care deeply about profit, but also about the product, franchisee relationships, customer loyalty, and the condition in which the business will be left for the next generation.

A private equity firm usually acquires the franchisor as an investment. It has investors who expect a return, a financial model supporting the purchase price, and a plan for increasing the company’s value. The firm may expect to sell the business, recapitalize it, or take it public within a defined investment horizon.

That does not make the investor wrong. Profit is necessary in every healthy franchise system. But a hyper-focus on financial performance can produce decisions that improve the franchisor’s short-term numbers while placing additional pressure on franchisees.

The franchisor and its franchisees both earn money from the same customer transaction, but they do not always experience the economics in the same way. The franchisor generally receives royalties based on gross sales. The franchisee must pay rent, labor, inventory, debt, insurance, and other operating costs before determining whether any profit remains.

Growth in systemwide sales may therefore look successful at the franchisor level even when unit-level margins are deteriorating.

The Purchase Price Has to Be Justified

Private equity firms do not ordinarily buy a franchise system with the goal of leaving it unchanged. They acquire it because they see opportunities to increase its value.

Those opportunities may include opening more locations, selling more franchises, improving technology, reducing corporate expenses, increasing fees, changing suppliers, expanding internationally, or acquiring related brands. Some of those changes may strengthen the entire system. Others may transfer costs or risk to franchisees.

The pressure can become greater when the acquisition involves substantial debt. Debt can magnify returns when the investment performs well, but principal and interest obligations also create demands on the franchisor’s cash flow. A highly leveraged owner may have less patience for investments that produce long-term benefits but do not improve near-term financial results.

Franchisees should not assume that the amount paid for the franchisor has no relationship to them. The new owner must find value somewhere. In a franchise system, much of that value ultimately comes from franchisee sales, franchisee payments, new unit development, and the strength of the brand created through local operations.

Fees May Receive New Attention

One of the most direct ways to increase franchisor revenue is to collect more from the existing system.

The royalty rate may be fixed under current agreements, but other charges may provide greater flexibility. Franchisees may see changes involving:

  • Technology fees
  • Marketing contributions
  • Training and conference expenses
  • Renewal and transfer fees
  • Required software or service platforms
  • Vendor programs
  • Administrative charges
  • New products or operational programs

The operating manual can become especially important. Many franchise agreements permit the franchisor to revise system standards through the manual without formally amending the agreement. A new owner may use that authority to implement technology, vendor, equipment, or remodeling requirements that create substantial franchisee expense.

Franchisees should compare each new charge against the franchise agreement and disclosure document. They should ask what contractual provision authorizes the charge, whether the franchisor or an affiliate receives compensation from the program, and how the change is expected to improve unit-level performance.

The most useful question is not whether the program benefits the brand in some general sense. It is whether the projected benefit to the franchisee reasonably justifies the franchisee’s cost.

Rapid Growth Can Create Its Own Problems

Private equity owners often see expansion as a path to increased value. More locations can mean more initial franchise fees, more royalty revenue, more purchasing volume, and a larger platform for a future sale.

Disciplined growth can benefit everyone. Poorly managed growth can weaken the system.

The franchisor may lower its standards for approving new franchisees or locations. New units may be placed close to existing locations. Corporate resources may be directed toward selling franchises rather than supporting the owners already operating. Field support, training, site selection, and supply infrastructure may fail to keep pace with development.

The result can be a larger system with weaker unit economics.

Existing franchisees should monitor whether the franchisor is growing because consumer demand supports additional locations or because the new owner needs a particular development story. Those are not always the same thing.

Territory and encroachment provisions deserve renewed attention. A franchisee with a protected territory may have meaningful contractual rights. A franchisee with only a location and no express protection may have far less control over nearby development, alternative channels, delivery sales, or affiliated brands.

Cost Cutting Can Reach Franchisee Support

A new owner may identify corporate expenses that can be reduced without harming the system. That is good management.

The risk arises when support functions are viewed only as costs.

Experienced field representatives, training personnel, operations specialists, and long-serving executives may carry institutional knowledge that does not appear on a balance sheet. When those people leave, franchisees may lose relationships and practical assistance that influenced their original decision to join the brand.

Centralized call centers, automated systems, and fewer field visits may reduce the franchisor’s expenses while making it harder for franchisees to solve operational problems. A leaner corporate office can improve the franchisor’s margin, but it may leave franchisees paying the same royalties for less support.

Ask whether the system’s resources are increasing along with its demands. New reporting requirements, technology mandates, and operating standards should be accompanied by the training and support necessary to implement them.

Required Vendors Can Become Revenue Sources

Private equity ownership may bring sophisticated purchasing programs and better vendor negotiations. Scale can lower costs, improve consistency, and give franchisees access to products or technology they could not obtain independently.

It can also make the supply chain a source of additional franchisor revenue.

The franchisor or its affiliates may receive rebates, commissions, markups, or other benefits from approved suppliers. A new owner may consolidate vendors, introduce proprietary products, or require franchisees to use affiliated services. Even when these arrangements are properly disclosed and contractually permitted, franchisees should evaluate their effect on unit-level costs.

The relevant comparison is not simply whether the franchisor negotiated a discount. It is whether the franchisee receives competitive pricing after every rebate, commission, and markup is considered.

Enforcement May Become More Aggressive

Founder-led systems sometimes manage franchisee relationships informally. Longstanding owners may receive patience, direct access to leadership, or flexibility based on years of history.

A new owner may replace those practices with standardized enforcement. Defaults that were once handled through a conversation may produce formal notices. Renewal decisions may become more closely tied to compliance, remodeling, or execution of the franchisor’s current agreement. Transfer requests may be evaluated with greater attention to fees, releases, and required upgrades.

Consistent enforcement can be appropriate and may strengthen a brand. Selective enforcement, sudden changes in expectations, or the use of technical defaults to gain negotiating leverage creates a different concern.

Franchisees should document communications, respond promptly to default notices, and avoid relying on historic practices that are not reflected in the written agreement. A relationship that once operated on trust may now operate much more strictly by contract.

The Next Sale May Already Be Part of the Plan

When private equity acquires a franchisor, the acquisition is often one stage in a larger investment strategy. The owner may eventually sell to another private equity firm, recapitalize the company, combine it with other brands, or pursue a public offering.

Each transaction can introduce new leadership, additional debt, different performance targets, and another round of strategic changes. Franchisees, meanwhile, remain committed to their locations, employees, leases, and personal guarantees.

This difference in time horizon matters. The investor may have several ways to exit its investment. The franchisee often has one business, one local market, and a franchise agreement that may be difficult to transfer or terminate.

That imbalance is why unit-level profitability must remain central to every proposed system change. A franchisor can be sold at an impressive valuation while individual franchisees struggle to earn an acceptable return.

Private Equity Can Make a Good System Better

Private equity investment should not be treated as an automatic warning that the system will decline. A well-managed investment can provide:

  • Capital for technology and product development
  • Experienced executive leadership
  • Improved data and financial discipline
  • Greater purchasing power
  • Better marketing capabilities
  • Expansion into new markets
  • Resources to acquire complementary brands
  • A more professional approach to franchisee support

Founders sometimes preserve traditions that no longer serve the business. A disciplined investor may identify weak practices, improve accountability, and make changes that should have occurred years earlier.

The real issue is whether value is being created or merely transferred. Sustainable value comes from stronger stores, healthier franchisees, better products, and customers who return. Extracted value may improve the franchisor’s financial statements temporarily while weakening the operators responsible for delivering the brand.

What Franchisees Should Do After a Sale

A franchisee may not have the legal right to approve or prevent the sale of the franchisor. That does not mean the franchisee should remain passive.

After an ownership change, consider taking the following steps:

  1. Review the franchise agreement. Identify provisions addressing assignment by the franchisor, fees, required vendors, technology, system standards, remodeling, territory, renewal, and default.
  2. Preserve the existing record. Keep copies of the current operating manual, fee schedules, policies, correspondence, and representations concerning support or planned investments.
  3. Request the new owner’s plan. Ask how the acquisition will affect leadership, franchisee support, development targets, technology, marketing, vendors, and required capital expenditures.
  4. Track unit-level economics. Compare sales, costs, fees, and profit margins before and after major changes. General claims of system growth should not replace location-specific analysis.
  5. Communicate with other franchisees. Franchisee associations and advisory councils can identify systemwide patterns and present concerns more effectively than isolated owners.
  6. Evaluate each new requirement. Determine the contractual authority, financial cost, expected benefit, implementation period, and whether the franchisor receives related compensation.
  7. Plan for renewal or exit early. Do not wait until the end of the term to evaluate new agreement terms, transfer options, required renovations, or potential claims.

Follow the Money, but Also Follow the Incentives

When a private equity firm buys a franchisor, franchisees should look beyond the announcement describing new capital, accelerated growth, and an exciting next chapter.

Ask how the new owner plans to earn its return.

Will it invest in the brand and improve unit-level profitability? Will it increase the number of locations faster than the market can support? Will it reduce corporate support, increase fees, monetize vendor relationships, or require expensive new programs? Will decisions be measured over the life of the franchise system or over the investor’s expected holding period?

The answers will not always be obvious on the closing date. They will appear over time in budgets, leadership changes, development goals, vendor programs, fee schedules, operating requirements, and the way the franchisor responds when franchisees raise concerns.

Private equity can bring valuable capital and discipline to a franchise system. It can also bring financial pressure that reaches franchisees who had no voice in the transaction.

The name on the building may remain the same. The bargain behind it may begin to change.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney based in West Des Moines, Iowa with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

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Sasun Bughdaryan, Unsplash

The franchise fee gets your attention because it is usually the largest check you write on signing day. It may not be the fee that ultimately costs you the most.

I once worked with a franchisee who learned this lesson after the business was already operating. The franchise system had the usual collection of charges beyond the initial franchise fee, including royalties, marketing obligations, technology expenses, and other required costs. But the problem did not stop with the number of fees.

During the term of the franchise agreement, the franchisor attempted to increase certain fees multiple times.

Each increase may have appeared manageable when viewed by itself. Together, however, the increases changed the economics of the relationship. The franchisee had made the investment, signed the lease, hired employees, and built a business around one set of financial assumptions. The franchisor retained contractual flexibility to impose higher costs after the franchisee was committed and had far fewer practical options.

That experience illustrates one of the most overlooked risks in buying a franchise. Prospective franchisees understandably focus on how much it costs to open. The better question is how much the franchisor can require them to pay over the entire life of the agreement.

A Franchise Can Have Strong Sales and Still Be a Poor Investment

Gross sales are easy to celebrate. Profit is what pays the owner.

Suppose a franchise location produces $1 million in annual sales. That number may sound impressive. But revenue must cover labor, rent, inventory, utilities, insurance, debt payments, taxes, and the full collection of fees imposed by the franchise system. A royalty of 6 percent removes $60,000 before many of the franchisee’s other expenses are paid. Add a marketing contribution, local advertising requirement, technology charges, required software, training expenses, delivery commissions, and supplier costs, and the margin can narrow quickly.

This is why a financial performance representation based primarily on gross sales can provide an incomplete picture. A prospective franchisee needs to understand not only what a typical location may generate, but what remains after the cost of generating it.

The franchise fee is the price of admission. The continuing charges determine whether the business can provide an acceptable return.

Read Item 6 as a Whole

Item 6 of the Franchise Disclosure Document identifies other fees a franchisee may be required to pay. Many prospective franchisees review the table one line at a time. That is a mistake.

The fees need to be examined together because they are paid from the same business. A 6 percent royalty, 2 percent marketing contribution, 1 percent local advertising obligation, and several smaller technology and administrative charges do not operate independently. Collectively, they may consume a significant percentage of revenue before ordinary operating expenses are considered.

The review should also extend beyond the amounts listed in the fee column. Pay attention to:

  • Whether a fee is fixed or can be increased
  • Whether the agreement establishes a maximum increase
  • How frequently an increase may occur
  • Whether the franchisor has discretion to create additional fees
  • Whether costs may be imposed through the operating manual
  • Whether the franchisee must pay the franchisor’s then-current rates
  • Whether a third-party vendor can change its pricing without limitation

A fee disclosed at $250 per month may look insignificant in a spreadsheet. If the franchisor can increase it without a meaningful cap, its present amount does not reveal the franchisee’s long-term exposure.

Technology Fees Can Become a Moving Target

Technology is necessary in modern franchise systems. Point-of-sale platforms, customer apps, loyalty programs, cybersecurity services, scheduling systems, data analytics, online ordering, and artificial intelligence tools can help a franchise remain competitive.

The question is not whether the system should evolve. The question is who decides what technology is required, who selects the vendor, who benefits from the arrangement, and who bears the cost.

Many franchise agreements give the franchisor broad authority to require new technology throughout the term. The operating manual may provide additional requirements that can be changed without amending the franchise agreement. As a result, the technology package described when the franchise is purchased may bear little resemblance to the package required five or ten years later.

Before signing, determine whether technology charges are capped, whether major replacements are anticipated, and whether the franchisor may require additional platforms at the franchisee’s expense. Ask existing franchisees how often the system has changed and what those changes actually cost.

Required Vendors May Carry Costs You Cannot Control

Consistency is a legitimate part of franchising. A franchisor needs the ability to establish quality standards and protect the brand. That does not mean the economics of required purchasing should escape scrutiny.

A franchisee may be required to buy inventory, equipment, uniforms, ingredients, insurance, software, or services from the franchisor or an approved supplier. Even when the direct fee appears reasonable, the required product or service may cost more than a comparable alternative.

The FDD should be reviewed to determine whether the franchisor or its affiliates receive rebates, commissions, or other revenue from required purchases. Prospective franchisees should also ask:

  • Can additional approved suppliers be proposed?
  • What happens if the required supplier raises its prices?
  • Does the franchisor have an obligation to consider comparable alternatives?
  • Is the franchisee responsible for freight, installation, support, or replacement costs?
  • Does the franchisor profit from the required purchasing arrangement?

A payment does not need to be labeled a franchise fee to reduce the franchisee’s return.

Marketing Charges Deserve More Than a Percentage Review

Franchisees often assume that a national marketing contribution will directly promote their location. The agreement may promise much less.

The franchisor may retain broad discretion over how the marketing fund is spent. Money may be used for brand development, administrative expenses, agency fees, creative work, or campaigns that provide little measurable benefit in the franchisee’s market. The agreement may not require the franchisor to spend contributions in proportion to where they were collected.

Local advertising obligations can add another layer. A franchisee may be required to contribute to the national fund, spend an additional percentage locally, participate in regional cooperatives, and fund promotions or discounts mandated by the franchisor.

The right question is not simply, “What is the marketing fee?” It is, “What is my total required marketing expenditure, how can it change, and what control or reporting will I receive?”

Remodeling and System Changes Can Arrive Before the Investment Is Recovered

A franchise location that looks current today may not remain acceptable to the franchisor throughout a ten-year term. Franchise agreements commonly allow the franchisor to require remodeling, new signage, updated equipment, revised décor, or an entirely new brand image.

These requirements may cost tens or hundreds of thousands of dollars. They may also arrive before the franchisee has recovered the original investment or shortly before renewal, when the owner must decide whether to invest more money to remain in the system.

Review the agreement for spending caps, frequency limitations, advance notice, and exceptions for locations that recently opened or remodeled. If the agreement contains no meaningful limitations, include reasonable future capital expenditures in the financial model.

Delivery Platforms and Discounts Can Increase Sales While Reducing Profit

Systemwide promotions and third-party delivery platforms may produce additional revenue. They do not necessarily produce additional profit.

A franchisee may pay delivery commissions, credit card charges, technology expenses, and royalties on the full sale while also absorbing part of a customer discount. A promotion that drives traffic can still harm the franchisee if the unit-level economics do not work.

Prospective franchisees should determine who controls pricing, whether participation in promotions is mandatory, how royalties are calculated on discounted transactions, and whether the franchisor receives any separate benefit from a platform or vendor.

More sales do not solve a margin problem when the franchisee loses money on each additional transaction.

Model the Business Under Less Favorable Assumptions

The financial model should not assume that every fee remains at its opening-day amount.

Prepare alternative projections that account for higher technology charges, increased labor and product costs, required remodeling, additional marketing obligations, and slower-than-expected sales. Determine what happens if system fees increase by one or two percentage points in the aggregate. A small percentage of gross sales can represent a substantial portion of the owner’s remaining profit.

An accountant experienced with franchise businesses can help test the unit economics. Existing and former franchisees can provide equally valuable context. Ask them not only about revenue, but about unexpected costs, recent fee increases, required vendors, technology changes, and whether their profit margins have improved or declined.

Negotiate the Ability to Increase Fees

Franchisors are often reluctant to reduce royalties or eliminate standard fees. There may still be room to negotiate protections against future increases.

Depending on the system and the franchisee’s leverage, possible protections include:

  • A fixed dollar or percentage cap
  • A limit tied to the Consumer Price Index
  • Restrictions on how frequently a fee may increase
  • Advance written notice of an increase
  • A cap on required capital improvements during the initial term
  • Protection against new categories of fees
  • A right to review material changes before they take effect
  • Grandfathering negotiated fee terms through renewal

Even if the franchisor rejects a proposed change, the discussion reveals how it views its authority. A franchisor that insists on unlimited flexibility to increase charges is providing information a prospective franchisee should consider before investing.

The Question to Ask Before Signing

Prospective franchisees often ask, “How much does this franchise cost?”

Another question needs to be asked:

How much can the franchisor require me to spend after I have committed my capital and no longer have an easy way to leave?

The initial franchise fee matters. So do royalties, advertising contributions, technology expenses, supplier costs, remodeling requirements, mandatory promotions, and every provision that allows those obligations to change.

The franchisee I described did not face a single surprising charge. The larger problem was a contract that gave the franchisor repeated opportunities to change the financial bargain after the investment had been made.

A franchise agreement cannot eliminate every future expense. It should allow a prospective owner to understand the risk, measure the likely return, and decide whether the franchisor’s flexibility is commercially reasonable.

The best time to examine that flexibility is before the agreement is signed, the lease is executed, and the franchisee’s bargaining power has shifted.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney based in West Des Moines, Iowa with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

Annoyed man yelling at unhappy wife in kitchen fighting gesturing
Vitaly Gariev, Unsplash

The next $50,000 rarely feels like a business decision.

It feels like a rescue.

Sales have fallen short. Payroll is due Friday. Royalties, rent, loan payments, and vendors are competing for cash. You have already contributed more than planned, and the franchisor says the next promotion or season may turn things around.

So you face the question that keeps troubled franchise owners awake at night:

Do I put in more money, try to sell, or find a way out?

For an Iowa franchisee, the answer should come from a clear review of the numbers, agreements, Iowa law, and remaining options.

The first goal is not to save the franchise at any cost.

The first goal is to stop making expensive decisions without a reliable diagnosis.

Stop Measuring the Business by the Bank Balance

Your bank balance tells you how much cash remains. It does not tell you whether the business is fixable.

Prepare a thirteen week cash flow forecast and update it weekly. Include payroll, taxes, rent, royalties, advertising, loans, vendors, insurance, and required capital spending.

Then determine the location’s true break even sales, including reasonable compensation for the owner’s work. A franchise that breaks even only because the owner works without pay is not truly breaking even.

Gather the information needed to answer four questions:

  • How much cash is the business losing each week?
  • What specific changes could reverse those losses?
  • How much additional money and time will those changes require?
  • What evidence supports the belief that they will work?

“We just need more time” is not a recovery plan. A recovery plan identifies the problem, correction, cost, person responsible, and deadline for measurable improvement.

Separate a Temporary Problem From a Broken Model

Some franchise problems are operational. Labor scheduling may be poor. Local marketing may be inconsistent. Pricing may be outdated. The location may need stronger management or better sales discipline.

Other problems are structural. Rent may be too high. The territory may lack customers. Required products may leave inadequate margins. The model may require more sales than the market can support.

Operational problems can sometimes be corrected. Structural problems usually require a renegotiation, sale, relocation, or exit.

Ask the franchisor for specific assistance. What do comparable locations do differently? Will it review staffing, pricing, marketing, and unit economics? Is temporary royalty relief available? Can other obligations be adjusted?

Document what you request and how the franchisor responds. The response may affect both the recovery plan and the legal evaluation.

Read the Agreements Before Taking Drastic Action

Review more than the franchise agreement. Examine the lease, loans, guarantees, equipment leases, vendor contracts, and any development agreement.

Identify:

  • Current and potential defaults
  • Notice and cure provisions
  • Personal guarantees
  • Cross default provisions
  • Transfer requirements and fees
  • Post termination noncompetition and confidentiality obligations
  • Amounts that may become immediately due

Closing the doors does not necessarily end any of these obligations. It may create new defaults under several agreements at once.

This is why abandoning the business is usually the most dangerous form of decision making. It surrenders control at the moment control matters most.

Iowa Franchise Law May Provide Important Rights

Many franchise agreements are drafted as though the franchisor’s contractual rights provide the complete answer. For an Iowa franchise, that may not be true.

Iowa has franchise relationship protections affecting termination, transfers, encroachment, forum selection, choice of law, and other issues. Applicability depends partly on the agreement date and statutory definitions and exclusions.

For most covered agreements entered into on or after July 1, 2000, Iowa Code section 537A.10 is particularly important. It generally applies when the franchise operates from premises physically located in Iowa, subject to definitions and exclusions.

Under section 537A.10, a franchisor generally may not terminate a franchise before its term ends without good cause. The franchisor ordinarily must provide written notice stating the basis and a reasonable opportunity to cure. The statutory cure period is at least thirty and no more than ninety days, although a nonpayment cure period need not exceed thirty days. Certain circumstances permit termination without an opportunity to cure.

Do not assume the cure period printed in the franchise agreement provides the final answer. Do not assume every default is curable either. The agreement, statute, notice, and facts must be considered together.

Iowa law also imposes a duty of good faith in performing and enforcing a covered agreement. It restricts certain waivers and may invalidate out of state forum or choice of law provisions for qualifying Iowa claims. Section 537A.10 also authorizes private remedies for violations.

These protections do not make an unprofitable business profitable. They may, however, affect your time, leverage, defenses, and available remedies.

Option One: Fix the Business

Continuing may be reasonable when the location has a credible path to positive cash flow and the owner has sufficient capital to reach it.

Set a defined recovery period. Track sales, labor, cost of goods, customer counts, average ticket, marketing results, and cash use. Decide in advance what must occur and how much more you will risk.

Do not allow the recovery period to become an endless series of extensions. Additional capital should purchase a measurable improvement, not merely postpone the next crisis.

Option Two: Sell the Franchise

A troubled franchise may still have value. A buyer may see opportunity in the location, employees, equipment, customer base, or below market lease.

Start early. A sale may require franchisor approval, buyer qualification, training, landlord consent, lender cooperation, and due diligence. Waiting until cash is nearly gone can eliminate the time needed to close.

Section 537A.10 also contains transfer protections for covered franchises. A buyer generally must satisfy the franchisor’s reasonable current qualifications, and the statute addresses notice, transfer conditions, and the franchisor’s response.

Even a sale below your original investment may be better than additional losses followed by closure. Compare the probable result of selling now with the probable result of continuing.

Option Three: Negotiate an Orderly Exit

Many franchise agreements give the franchisee no convenient right to terminate early. That does not mean a negotiated exit is impossible.

The franchisor may prefer an orderly transition over an abrupt closure, unpaid royalties, litigation, and brand damage. Possible terms include mutual termination, a release, reduced payment, transfer, deidentification, and post termination restrictions.

Leverage rarely comes from anger. It comes from understanding the agreement, Iowa law, the franchisor’s risks, and what each side needs to avoid.

Begin the conversation while you can still operate, communicate, and perform part of a negotiated resolution.

Option Four: Close With a Plan

Sometimes the business cannot be saved or sold. Closure may be the least damaging option, but it should be planned carefully.

Determine how closure affects employees, taxes, lenders, the landlord, vendors, equipment, licenses, guarantees, and the franchise agreement. Preserve records, protect collateral, and identify obligations that survive termination.

Do not simply lock the doors and stop answering messages. Silence allows other parties to control the sequence of events.

Make the Decision Before the Decision Is Made for You

Troubled Iowa franchisees often wait too long because they fear that seeking advice means admitting failure.

It does not.

Early advice creates choices. Delay eliminates them.

Build the cash flow forecast. Calculate the real break even point. Review every agreement and guarantee. Identify applicable Iowa protections. Then compare fixing, selling, negotiating, and closing.

Return to the next $50,000.

Before investing it, require the business to prove what that money will accomplish. Require a recovery plan with numbers, responsibilities, and deadlines. Compare the expected return with the cost of using that money to fund an orderly exit or protect your family.

The hardest franchise decision is rarely whether you can find more money.

It is deciding whether more money will change the outcome.

For an Iowa franchisee in trouble, that decision should be made while time, leverage, and options still remain.

This article provides general information and is not legal advice. Iowa franchise law is fact specific, and statutory coverage, contractual obligations, and available remedies must be evaluated individually.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney based in West Des Moines, Iowa with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

Placing red push pins into city street map.
GeoJango Maps, Unsplash

The franchise salesperson points to a map covered with colored dots.

Each dot represents a location. More dots are coming. The brand is entering new states, signing new franchisees, and projecting record growth.

Every dot looks like proof that the franchise is succeeding.

It may also represent another promise the franchisor must have the money and people to keep.

Prospective franchisees usually ask whether their location can make money. They study sales, rent, labor, royalties, debt, and opening costs. Those questions are essential.

But there is another business you need to evaluate before investing in your own.

The franchisor.

A strong concept can struggle under a franchisor that grows too quickly, lacks sufficient capital, or depends on selling new franchises to fund existing operations. Training may deteriorate. Field support may become difficult to reach. Marketing promises may exceed available resources.

You are entering a long term relationship with the company responsible for protecting and developing the brand.

Before you ask how quickly the system is growing, ask whether the franchisor is strong enough to support that growth.

Growth Is Not the Same as Health

Growth is easy to promote. Support capacity is harder to see.

A franchisor can award dozens of new territories and describe the demand as momentum. Yet every new franchisee needs training, site assistance, technology, marketing guidance, and operational support.

If franchisees multiply faster than support resources, the system may become less valuable to each owner even as the brand grows.

The Federal Trade Commission warns prospective franchisees that rapid growth does not guarantee franchisee success. A franchisor that expands too quickly may lack the financial resources or experience to provide the services it has promised.

Ask what has grown besides the number of locations. Has the training team expanded? How many field support employees serve the system? How long does it take to receive help with an operational problem?

The number of new locations tells you how effectively the franchisor sells franchises. It does not tell you how effectively the franchisor supports them.

Start With Item 21, But Do Not Stop at the Bottom Line

Item 21 of the Franchise Disclosure Document contains the franchisor’s financial statements. Established franchisors generally provide three years of audited financial statements, while certain newer franchisors may qualify for phased in requirements.

Many buyers flip past these difficult pages. That is a mistake. You may rely on the franchisor’s system for years. Its financial condition matters.

An audit does not mean the franchisor is financially strong. It means an independent accountant examined the statements and issued a report. Read the auditor’s opinion and footnotes, not merely the income statement.

Ask an accountant to help you evaluate:

  • How much cash does the franchisor have?
  • Can it meet its current obligations?
  • Has it produced recurring profits or recurring losses?
  • Is operating cash flow improving or deteriorating?
  • Does the balance sheet show positive equity or an accumulated deficit?
  • Is debt increasing?
  • Are there significant obligations to affiliated companies?
  • Do the footnotes identify uncertainty, unusual transactions, or dependence on related parties?

One bad year does not necessarily mean the franchise is unstable. A young franchisor may be investing heavily in people or technology. The goal is to understand why a loss occurred, how the company is funding it, and whether its explanation is credible.

How Does the Franchisor Make Its Money?

This may be the most revealing question in this article.

Healthy systems generally benefit when franchisees generate sustainable sales because ongoing royalties grow with franchisee revenue. The parties’ interests are not identical, but they are connected.

Concern increases when a franchisor depends heavily on initial fees, equipment sales, vendor payments, or other revenue collected before a location demonstrates success.

Initial franchise fees are not automatically problematic. But buyers should understand whether the franchisor has enough recurring revenue to support existing owners if franchise sales slow.

Ask the franchisor what percentage of its revenue comes from continuing royalties compared with initial fees and other sources. The answer may not be obvious from the financial statements. An accountant can help identify the right follow up questions.

Then ask something even more direct:

If the franchisor stopped selling new franchises for twelve months, could it still support the franchisees it already has?

Item 20 Shows What Is Happening to the Locations

Financial statements tell you about the franchisor. Item 20 helps you examine what is happening across the system.

Item 20 reports three years of openings, transfers, terminations, nonrenewals, reacquisitions, and other closures. It also identifies signed locations that have not opened and projected openings for the coming year.

Do not focus only on the total number of locations at year end. Study the movement underneath that number.

A system may open thirty locations while twenty others close, transfer, or leave the brand. The headline is growth. The more important story may be turnover.

Compare annual departures with the number of locations operating at the beginning of each year. Are closures increasing? Is the franchisor reacquiring troubled locations? Are many signed locations failing to open?

No fact provides an answer by itself. Transfers may reflect successful sales, while a closure may result from poor management. Several departures across different markets, however, deserve investigation.

Use the Item 20 tables to decide whom to call and what to ask.

Talk With the People Behind the Numbers

Current and former franchisees can explain what the documents cannot. Ask whether support has improved or declined as the system has grown. Find out how quickly the franchisor responds when sales fall, technology fails, or local marketing does not work.

Former franchisees may provide context for terminations, closures, and transfers. Ask what caused them to leave and how the franchisor responded when problems emerged.

Compare those conversations with Items 3 and 4 of the FDD. Item 3 discloses certain litigation involving the franchisor and other covered persons. Item 4 addresses bankruptcy history. Litigation is not unusual in business, and a lawsuit does not prove wrongdoing. Repeated disputes involving similar complaints may reveal a pattern worth examining.

You are not searching for a perfect franchisor. You are looking for consistency between its promises, financial capacity, system data, and franchisee experiences.

Ask the Franchisor to Explain Specifics

Bring specific questions to the franchisor rather than asking whether the company is financially healthy.

Ask:

  • What investments are being made in training and field support?
  • How many franchisees does each support employee serve?
  • Why did terminations, closures, or transfers increase in a particular year?
  • What happened to signed locations that never opened?
  • Which services would be reduced if franchise sales slowed?
  • What has leadership learned from locations that failed?

Strong franchisors should be able to discuss setbacks without becoming defensive. Evasive answers do not prove a serious problem, but they do not reduce the risk either.

Discovery Day is designed to help you become comfortable with the franchise. Use part of that day to become comfortable asking uncomfortable questions.

Investigate the Business Behind Your Business

An appealing product and enthusiastic owners do not eliminate the need for a financially stable and operationally capable franchisor.

Read Item 21 with an accountant. Trace the changes reported in Item 20. Review Items 3 and 4 for context. Speak with current and former franchisees. Ask whether the support organization has kept pace with franchise sales.

Most importantly, determine whether the franchisor’s financial success depends on helping franchisees succeed or simply on continuing to sell franchises.

Return to the map covered with colored dots.

Each dot represents more than growth. It represents a franchisee who invested money, accepted risk, and trusted the franchisor to deliver a system worth following.

Before adding your own dot to that map, make sure the company behind it is strong enough to keep its promises.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

to Infinity and beyond
Simon Maage, Unsplash

The franchise salesperson circles an area on a map and slides it across the table.

“This will be your protected territory.”

You see neighborhoods, customers, and room to grow. You assume the franchisor cannot place another location nearby. You begin calculating sales based on the number of people, businesses, or households inside that circle.

But before you treat the circle as protection, ask a more important question:

What does the franchise agreement actually prevent the franchisor from doing inside it?

The answer may be far less than you expect.

Many franchise agreements give franchisees a defined territory while reserving broad rights for the franchisor. The franchisor may be prohibited from opening another traditional location using the same brand within your territory, yet remain free to reach your customers through online sales, delivery apps, grocery stores, kiosks, alternative venues, or even another brand it owns.

The map shows where your business will operate. The contract determines what the map is worth.

“Protected” Does Not Always Mean “Exclusive”

Franchise buyers naturally hear the phrase “protected territory” and translate it into “these customers belong to me.” That is rarely what the agreement says.

Some franchise agreements grant an exclusive territory. Others provide a protected area, an area of primary responsibility, or merely a designated territory. Those phrases may sound similar during a sales presentation, but their legal effect depends entirely on the contract language.

A designated territory may simply identify where you are authorized to operate. It may not restrict the franchisor at all. A protected territory may prevent the franchisor from establishing another franchised or company owned location under the same name, but only if you remain in full compliance with the agreement. Even an exclusive territory is usually subject to exceptions.

Do not begin with the label. Begin with the restriction.

Ask who is prohibited from doing what, where, for how long, and subject to which exceptions.

Look Beyond Another Traditional Location

The most obvious territorial threat is another unit opening nearby. It is not the only one.

Modern franchise systems reach customers through many channels. A franchisor may reserve the right to sell products or services inside your territory through:

  • Websites and mobile applications
  • Third party delivery platforms
  • Grocery stores and other retail outlets
  • Airports, hospitals, universities, stadiums, and military bases
  • Food trucks, carts, kiosks, and vending machines
  • Ghost kitchens and shared commercial kitchens
  • National or regional customer accounts
  • Catalog, wholesale, or direct marketing programs

Together, these exceptions can significantly reduce the practical value of your territory. A food franchisee may have the only traditional storefront in the area while competing against the brand through grocery stores, a nearby ghost kitchen, and a national delivery program.

The right question is not simply, “Can another location open near me?”

Ask, “In how many ways can the franchise system reach customers inside my territory without compensating me?”

Online Sales Have Changed the Meaning of Territory

Geographic protection is easier to understand when a customer walks through a physical door. It becomes more complicated when the customer orders through a website or app.

Who receives the revenue when someone inside your territory makes an online purchase? Who performs the service? Who handles the delivery? Does the franchisor keep the sale, assign it to the nearest franchisee, or distribute revenue according to another formula?

Do not assume the system will send the business to you simply because the customer lives within your territory.

The agreement may give the franchisor complete control over internet activity and future distribution channels. Evaluate the territory not only for how the business operates today, but also for how customers may buy from the brand five or ten years from now.

Watch for Competing Brands

Another risk receives far too little attention.

The franchisor may promise not to establish another location using your franchise brand inside the territory. But does the agreement prevent the franchisor or its affiliates from operating or acquiring a competing concept under a different name?

Franchise companies are bought, sold, and consolidated. A franchisor that owns one concept today may acquire another concept serving similar customers tomorrow. If the territorial restriction applies only to your particular trademark, the franchisor may be free to develop the competing brand near your location.

Review how the agreement defines the franchisor, its affiliates, the marks, and the protected business. A narrow definition can create a large opening.

Protection May Depend on Your Performance

Territorial rights are sometimes conditional.

Your protection may shrink or disappear if you fail to meet a sales quota, development schedule, customer service standard, or minimum purchase requirement. A multiunit developer may lose territory rights by missing the deadline for opening the next location, even if the first location is performing well.

Ask what you must do to preserve the territory and how much discretion the franchisor has to decide whether you have satisfied that obligation.

Pay particular attention to standards that the franchisor may change unilaterally. A performance requirement that appears achievable today may become more demanding after you have invested substantial money.

Test the Map Against the Market

A territory containing 100,000 residents may look attractive, but population alone says little about traffic patterns, customer demographics, natural barriers, or competitors. A river, interstate, or municipal boundary can make part of the territory far less accessible than it appears. On the other hand, the ease of traveling throughout a market like Des Moines may make your territory far less protective than you believe.

The definition must also be objective. ZIP codes change and population grows. Ask whether the franchisor can divide the territory, modify its boundaries, or offer adjacent development to someone else. Study where customers are and how they travel. Make sure the boundaries reflect the market you believe you are buying.

Speak With Franchisees About Encroachment

The franchise agreement tells you what the franchisor may do. Existing franchisees can tell you what the franchisor actually does.

Ask them:

  • Has the franchisor opened locations near existing franchisees?
  • Have online sales or delivery programs affected local revenue?
  • How are customer leads assigned if territories overlap?
  • Has the franchisor introduced products through other channels?
  • Have territorial boundaries ever been reduced or redefined?
  • How does the franchisor resolve disputes between neighboring franchisees?
  • Has the system acquired or developed a competing brand?

Do not speak only with franchisees suggested by the sales team. Item 20 of the Franchise Disclosure Document identifies current franchisees and certain former franchisees. Listen for patterns. The same concern repeated across several markets deserves closer examination.

What Should You Try to Negotiate?

Not every franchisor will revise its territory provisions. You should still understand which protections matter most to your investment and ask whether they can be improved.

Depending on the franchise system, possible requests may include:

  • A clearly defined exclusive or protected territory
  • Limits on company owned and franchised locations
  • Protection from affiliated or substantially similar brands
  • A right to receive or participate in online sales originating in the territory
  • Clear rules for delivery, customer leads, and national accounts
  • Notice before the franchisor establishes an alternative channel nearby
  • A right of first opportunity for adjacent development
  • Reasonable performance standards and an opportunity to cure a shortfall
  • Protection against unilateral boundary changes

The franchisor may say no. That answer is still useful. It tells you which rights the franchisor considers important to retain and which risks you will be expected to accept.

Make the Contract Prove the Promise

A territory can be one of the most valuable parts of a franchise investment. It can also create a false sense of security.

Before signing, place the map next to the franchise agreement. Identify every reserved channel, exception, performance condition, and modification right. Ask how online sales, delivery, alternative venues, national accounts, and affiliated brands are handled. Then compare those answers with the experiences of current and former franchisees.

Do not ask only whether your territory is protected.

Ask what it is protected from.

Ask what it is not protected from.

Most importantly, ask whether the protection that remains is strong enough to support the investment you are about to make.

The circle on the map may help sell the opportunity. Only the words in the agreement will tell you whether that circle protects your business.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

1787429927-3298-5298-lxb_photow3eFhqXjkZElxb_photo-
Jason Dent, Unsplash

I recently watched considerable footage from the publicly released deposition testimony in the lawsuit against Cardone Capital. As an attorney and someone who loves studying persuasion techniques, I found it to be great theatre.

For those unfamiliar with him, Grant Cardone is a prominent entrepreneur, real estate investor, sales trainer, author, and social media personality with millions of followers. He founded Cardone Capital, a real estate investment firm that raises money from investors to acquire and operate multifamily and commercial properties. Cardone has built an enormous following around his high energy “10X” approach to business, sales, and wealth creation.

His deposition reflected that public persona.

Grant Cardone also did almost everything I would tell a deposition witness not to do.

He argued with the lawyers. He challenged the premises of questions. He gave speeches. He displayed frustration. He appeared determined to control the room rather than simply answer what was asked.

It was aggressive, entertaining, and entirely consistent with his public persona.

It is also a terrible model for almost every other witness.

You are not Grant Cardone. More importantly, your deposition is probably not part of a larger media strategy designed to energize millions of followers.

Your testimony will likely have a simpler purpose: create a truthful and accurate record without giving the other side unnecessary evidence to use against you.

The Deposition Behind the Videos

Cardone recently released hours of his own deposition testimony in litigation involving Cardone Capital. The pending lawsuit concerns allegations about statements made while promoting real estate investment funds, including statements about potential investor returns. Cardone Capital disputes the claims, and the questions asked during a deposition are not evidence that the allegations are true.

But Cardone’s decision to publish the videos changed the audience.

Most witnesses testify for the parties and perhaps a future judge or jury. Cardone was also speaking to followers, customers, investors, and critics.

He may have been playing two games at once.

One involved the legal record. The other involved his public brand.

That distinction matters because conduct that produces a compelling video clip may create a damaging deposition transcript.

A Deposition Is Not an Audience to Persuade

Cardone is a skilled professional salesperson and promoter. His success has been built partly on confidence, repetition, energy, and control of the conversation. Those skills can be valuable on a stage or during a sales presentation.

A deposition is different.

The opposing lawyer is not a prospect. The lawyer does not need to agree with you or admit that you won the exchange. The purpose is to obtain testimony, evaluate credibility, preserve admissions, and create material for later use.

Trying to persuade the questioner often gives the questioner more testimony.

Cardone appeared at times to treat the deposition as an audience to persuade. Most witnesses should treat it as a record they will have to defend.

Aggressiveness Can Feel Better Than It Reads

A witness may leave a deposition believing he stood his ground. He challenged the lawyer. He refused to be pushed around. He made sure his side of the story was heard.

Then, months later, someone reads the transcript.

The witness’s voice, gestures, timing, and charisma are gone. The transcript contains only questions and answers.

What felt forceful may read as evasive. What sounded passionate may look defensive. What seemed like a clever response may appear sarcastic or unwilling to answer a straightforward question.

The witness remembers the battle. The judge or jury sees the words.

A witness should correct inaccuracies, reject a false premise, and explain when necessary. But strength in a deposition comes from precision, not combativeness.

You Do Not Need to Win the Argument

Business owners solve problems. When they hear an inaccurate statement, their instinct is to correct it immediately and completely.

That instinct can cause trouble in a deposition.

A question may contain an assumption you reject. Say so, but you do not need to dismantle every part of opposing counsel’s theory. Your lawyer will have other opportunities to present the case.

The deposition witness has a narrower job:

Listen to the question. Make sure you understand it. Tell the truth. Answer only what was asked. Stop when the answer is complete.

Silence after an answer can feel uncomfortable. Let it.

Silence encourages witnesses to keep talking. Many fill it with qualifications, guesses, or details no one requested.

You are responsible for your answer. You are not responsible for keeping the conversation moving.

Long Answers Create More Risk

Every unnecessary sentence creates another opportunity for a problem.

The witness may speculate, contradict a document, volunteer a new subject, or create an inconsistency. The additional information may generate new questions.

This does not mean every answer should be “yes” or “no.” Some questions cannot be answered fairly that way. A witness should provide the explanation necessary to make the answer accurate.

But there is a difference between a complete answer and a speech.

Before expanding, ask yourself whether the additional information is needed to answer the question truthfully. If not, stop.

The shortest truthful answer is often the safest truthful answer.

“I Do Not Know” Can Be a Strong Answer

Confident businesspeople often dislike acknowledging that they do not know or remember something. They believe uncertainty makes them appear unprepared or weak.

Guessing is worse.

Depositions may address events from years earlier. No honest witness remembers everything. If you do not know or remember, say so. If a document might refresh your memory, ask to see it.

Appropriate answers may include:

  • “I do not know.”
  • “I do not remember.”
  • “I would need to review the document.”
  • “I do not understand the question.”
  • “That is not how I would characterize it.”

Those answers are not tactics. They are proper when true.

A witness who guesses may sound confident for ten seconds and spend the rest of the case explaining why the answer was wrong.

Listen to Your Lawyer

The lawyer defending a deposition cannot testify for the witness. But the lawyer’s objections may identify a problem with the form, wording, or subject of the question. In limited circumstances, the lawyer may instruct the witness not to answer.

A witness who is focused on battling opposing counsel may stop listening to his own lawyer.

Pause after every question. That pause gives you time to understand the question and gives your lawyer time to object. Listen to the objection. Follow any proper instruction. Then answer the question unless directed otherwise.

Preparation is not designed to create rehearsed testimony. It helps the witness understand the process, review important facts, and practice listening before answering.

Ignoring that preparation because you believe you can control the room is an unnecessary risk.

Calm Is Not Weakness

Some lawyers ask questions aggressively, repeat questions, or use a tone intended to provoke a reaction.

The witness does not need to match that energy.

A deliberate pause is not defeat. Asking for clarification is not weakness. Correcting a false premise calmly is often more effective than arguing about it. The witness who remains composed usually appears more credible than the witness who treats every question as a personal attack.

The goal is not to show that opposing counsel cannot intimidate you.

The goal is to give testimony that remains accurate under pressure.

Your Deposition May Become Public Too

Cardone voluntarily turned his deposition into online content. Most witnesses will never do that.

Every witness should testify as though important parts may someday be displayed in court, quoted in a brief, shown to a regulator, or reported by the press.

The casual joke, angry comment, exaggerated answer, or sarcastic exchange may become the only portion someone sees.

Never assume an embarrassing answer will remain buried in hundreds of transcript pages. The more quotable the answer, the more likely it is to reappear.

You Are Not Grant Cardone

Grant Cardone built a public identity around going 10X. His deposition reflected that identity. He pushed back, challenged the lawyers, gave expansive answers, and later turned his testimony into content for his audience.

Perhaps the performance appealed to his followers. Whether it helped Cardone Capital’s legal position will be decided somewhere other than YouTube.

Your deposition will probably never receive millions of views. That is good news.

You do not need to entertain an audience, defend a public persona, or win an argument with opposing counsel. You need to listen carefully, tell the truth, answer the question asked, and avoid creating unnecessary problems.

A deposition is not won by dominating the room. It is won by creating a truthful record that remains defensible months later.

The most effective witness is rarely the loudest person in the room.

It is the person whose testimony remains accurate, credible, and defensible after everyone has gone home.

This article discusses general deposition principles and deposition testimony in the pending litigation involving Cardone Capital. Allegations in a lawsuit and questions asked during a deposition are not findings of fact. The article is not legal advice and involves the personal observations and opinions of the author.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

Open shop
Mike Petrucci, Unsplash

The location is open. The employees are trained. Customers already know the business, and revenue begins on the first day.

Buying an existing franchise may appear safer than opening a new location. But an operating history does not eliminate risk. It simply gives you more information to investigate. You may be acquiring an established customer base and immediate cash flow, but you could also be inheriting an unfavorable lease, outdated equipment, dissatisfied employees, deferred expenses, or problems that caused the seller to leave.

The central question is not whether the business succeeded under the current owner. It is whether the business can produce an acceptable return under your ownership, your financing, and the franchise and lease terms that will apply to you.

Here are seven issues to consider before purchasing an existing franchise.

1. Why Is the Franchisee Selling?

Most sellers will offer a reasonable explanation. The owner may be retiring, relocating, dealing with health concerns, or pursuing another opportunity. A multi-unit franchisee may be selling one location to concentrate on other markets.

Those explanations may be accurate, but they may not tell the entire story. The owner could also be exhausted, dissatisfied with the franchisor, or concerned about declining sales, rising expenses, an upcoming remodel, or a difficult lease.

Ask how long the owner has operated the location, how revenue and profitability have changed, and whether the franchisor has issued any default notices. Find out whether the owner has tried to sell before and whether significant expenses are approaching. Then compare the seller’s answers with the financial records, the FDD, information from the franchisor, and conversations with other franchisees.

An unsuccessful owner does not necessarily prove the franchise is a poor investment. Management, capitalization, and personal circumstances can affect any business. Repeated ownership changes, however, may reveal a problem with the location, the economics, or the support provided by the franchisor.

2. Do the Financial Records Support the Purchase Price?

An existing franchise offers something a new location cannot: actual financial results. Do not rely on a summary prepared for the sale. Request complete tax and financial records for at least the past three years, together with current year-to-date information.

Your accountant should compare tax returns, profit and loss statements, bank records, point-of-sale reports, payroll records, sales tax filings, and royalty reports submitted to the franchisor. Revenue should generally reconcile across those records. Material inconsistencies require an explanation.

The next step is determining the business’s sustainable earnings. If the seller works full time but does not include a market salary as an expense, the reported profit may overstate the return available to you. The same concern arises when family members work for little or no compensation. Determine what it will cost to replace the labor the seller and the seller’s family currently provide.

You should also account for expenses that may change after closing. Rent, wages, insurance, interest, technology fees, and vendor costs may be different for you. The value of the business lies in the cash flow remaining after paying all expenses, fairly compensating the people who operate it, and maintaining the assets needed for continued operation.

For more on evaluating franchise economics, see Can You Really Make Money With This Franchise? How to Test the Financial Model.

3. What Are You Actually Buying?

The phrase “buying the business” can create a false sense of clarity. You need to identify exactly which assets are included and which liabilities may follow the transaction.

In an asset purchase, the buyer may acquire equipment, inventory, furniture, customer information, telephone numbers, contracts, permits, deposits, and goodwill. Do not assume an asset is included simply because the business uses it. Equipment may be leased, software licenses may not be transferable, and the franchisor may control customer data, websites, or telephone numbers.

An equity purchase involves acquiring ownership of the entity that operates the business. The entity continues to own its assets, but it may also retain taxes, employee claims, vendor obligations, litigation, contract defaults, and other liabilities. An asset purchase may reduce some of those risks, but it does not eliminate every potential liability.

The purchase agreement should identify what is included, what is excluded, and who is responsible for obligations arising before and after closing. It should also address liens, unpaid taxes, customer deposits, gift cards, employee obligations, vendor contracts, and pending claims.

Do not limit the investigation to what the business owns. Determine what the business owes.

4. What Will the Franchisor Require?

The seller usually cannot transfer the franchise without the franchisor’s approval. You may need to satisfy financial qualifications, submit an application, complete training, and obtain formal approval before the transaction can close.

The franchisor may also require a transfer fee, renovations, new equipment, updated signage, or the cure of existing defaults. Most importantly, you may be required to sign the franchisor’s current franchise agreement rather than assume the seller’s agreement.

The new agreement may contain higher fees, different territory protections, broader personal guarantees, additional technology obligations, or more restrictive renewal and transfer provisions. It may also provide a new franchise term rather than the remaining term under the seller’s agreement.

Request the current FDD and proposed franchise agreement early. Do not base the purchase price on rights enjoyed by the seller that you will not receive. The purchase agreement should also protect you if the franchisor does not approve the transfer or the franchise terms are unacceptable.

5. Will the Lease Work for You?

For a location-based franchise, the lease may be as important as the franchise agreement. The business may have performed well because it operated from a favorable site with reasonable rent. If those terms do not continue after the sale, the historical results may not predict your performance.

Confirm whether the lease can be assigned and whether the landlord must consent. The landlord may require financial information, a new security deposit, a personal guarantee, or changes to the existing lease.

Review the remaining term, renewal options, scheduled rent increases, common area charges, repair obligations, assignment restrictions, and default history. The lease term should also align with the franchise term. A ten-year franchise agreement offers limited comfort if the lease expires in three years and the landlord has no obligation to renew it.

You should also evaluate the location itself. Changes in traffic patterns, nearby development, competition, parking, or access may affect future performance even when the historical financial statements appear strong.

6. What Costs Are Waiting After Closing?

A business may appear profitable because the current owner has postponed necessary expenses. Equipment may still operate but be approaching replacement. The location may look acceptable today even though the franchisor plans to require a remodel, new signage, or updated technology.

Ask both the seller and franchisor about upcoming capital requirements. Inspect the equipment, review maintenance records, and determine whether the location complies with current brand standards. Find out whether renovations or upgrades will be required at the time of transfer or renewal.

You must also calculate the working capital needed after closing. The purchase price is not the total investment. Cash may be needed for payroll, inventory, insurance, repairs, marketing, professional fees, and debt payments. Revenue may decline during the transition, employees may leave, and the buyer may need time to learn the business.

Prepare both an expected case and a downside case. A business can be profitable on paper and still run out of cash. Do not spend every available dollar on the purchase price and begin ownership without a reasonable reserve.

7. Can the Business Succeed Under Your Ownership?

Historical results reflect the seller’s ownership. They do not guarantee what will happen under yours.

Determine how dependent the business is on the seller. Does the owner maintain key customer relationships, manage employees, lead local marketing, or perform work that would otherwise require another employee? If the seller leaves, what value leaves with the seller?

Key employees also matter. Find out whether they plan to remain, what responsibilities they perform, and whether their compensation is likely to change. The transaction should include a practical plan for introducing the new owner to employees, customers, vendors, and the franchisor.

Finally, decide whether the business fits your skills, finances, and expectations. Consider how many hours you will work, whether you will hire a manager, and whether the expected return fairly compensates you for your time, investment, and risk. Then test what happens if sales decline, labor costs rise, or an unexpected repair occurs.

A strong operator may improve an underperforming location. But effort cannot overcome every unfavorable lease, weak territory, damaged reputation, or flawed financial model.

An Existing Franchise Requires Two Investigations

Buying an existing franchise involves two overlapping transactions. You are purchasing an operating business from the seller, and you are entering a franchise relationship with the franchisor.

The business investigation should address the financial history, assets, liabilities, employees, lease, customers, and purchase price. The franchise investigation should address the agreement, fees, territory, supplier requirements, operating restrictions, default provisions, and future capital obligations.

A buyer can investigate the business carefully and still overlook an unfavorable franchise agreement. A buyer can thoroughly review the franchise documents and still overpay for a weak location. Both reviews matter.

Your accountant should test the sustainable earnings, purchase price, debt service, working capital, and expected return. Your franchise attorney should review the purchase agreement, FDD, franchise agreement, lease, transfer requirements, liabilities, and closing conditions.

For a broader framework, see Franchise Due Diligence: The Questions Every Buyer Should Ask Before Signing.

Investigate the Operating History Thoroughly

An existing franchise gives you valuable evidence. You can review actual revenue, expenses, customer activity, employee history, lease costs, and operating performance. That evidence is useful only if you verify it and understand how the business may change after closing.

Find out why the seller is leaving. Confirm the financial results. Identify the assets and liabilities. Understand what the franchisor will require. Make sure the lease works. Account for the costs waiting after closing. Determine whether the business can succeed under your ownership.

Buy a business that can create value in your future.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

Artistic Indecision 1.
Buddha Elemental 3D, Unsplash

The franchisor has told you how the franchise is supposed to work.

Existing franchisees can tell you how it actually works.

That distinction matters.

A franchise salesperson may show you polished marketing materials, impressive revenue numbers, and stories from successful owners. The Franchise Disclosure Document (FDD) may provide hundreds of pages of information about the system. Your accountant may prepare a detailed financial model.

All of that information is valuable. But none of it replaces a candid conversation with someone who has already invested the money, opened the business, hired the employees, paid the royalties, and worked with the franchisor when problems arose.

Existing and former franchisees may be your best source of real-world information about a franchise opportunity. The Federal Trade Commission advises prospective buyers to use the contact information in Item 20 of the Franchise Disclosure Document and speak with as many franchisees as possible. The FTC describes those conversations as potentially the most reliable way to get the straight story about the franchisor’s claims.

Do not settle for asking whether franchisees are happy.

Ask questions that help you understand the economics, demands, risks, and reality of owning the business.

Do Not Speak Only With the Franchisor’s Preferred Franchisees

The franchisor may provide a short list of owners who are willing to speak with prospective buyers. Those franchisees may be successful, supportive of the system, and helpful.

Speak with them.

But do not stop there.

Item 20 of the FDD should provide contact information for current franchisees and certain former franchisees. Select some of those owners independently. Try to speak with franchisees in different markets and at different stages of development.

Your conversations should include:

  1. A relatively new franchisee who recently completed training and opened a location
  2. An established franchisee who has operated for several years
  3. A franchisee in a market similar to yours
  4. A franchisee who owns only one location
  5. A multi-unit franchisee, if you are considering developing several locations
  6. A former franchisee who left the system

The goal is not to find one franchisee who confirms what you already want to believe. The goal is to identify patterns.

Here are 11 questions that can help you do that.

1. Why Did You Choose This Franchise?

Begin with the franchisee’s original decision.

What attracted the owner to the brand? Did the franchisee compare several concepts? Was the decision based on the business model, the industry, the franchisor’s leadership, the expected financial return, or the strength of the sales presentation?

Then ask whether the reasons that persuaded the franchisee to buy proved accurate.

This question helps you understand the franchisee’s expectations and whether those expectations were fulfilled. It may also reveal whether the franchisee performed meaningful due diligence or simply fell in love with the concept.

Listen carefully if the franchisee says:

“I trusted the salesperson.”

“I thought the brand would generate customers automatically.”

“I did not speak with many franchisees before signing.”

Those answers do not necessarily mean the franchise is a poor investment. They may, however, show you where another buyer made assumptions that should have been tested.

2. What Was Your Actual Cost to Open?

Item 7 of the FDD provides the franchisor’s estimate of the initial investment. It may include the franchise fee, equipment, leasehold improvements, deposits, opening inventory, training expenses, professional fees, and additional funds for the initial operating period.

Those numbers are estimates.

Ask the franchisee whether the actual cost fell within the Item 7 range. If not, find out why.

Were construction costs higher than expected? Did permitting take longer? Did the landlord require additional improvements? Did the franchisor change equipment specifications? Were training and travel expenses underestimated? Did the franchisee need more working capital than the FDD projected?

Opening overruns are particularly important because they affect the business before it generates meaningful revenue. A buyer who expects to invest $500,000 but ultimately needs $650,000 may begin operations with more debt and less available cash than planned.

Ask for categories and ranges if the franchisee is uncomfortable providing exact numbers. You are trying to understand where the surprises occurred, not audit the owner’s financial records.

3. How Long Did It Take to Reach Break Even?

This question sounds simple, but you must define what break even means.

Some owners mean the business could pay its operating expenses. Others mean it produced enough cash to cover operating expenses and loan payments. Still others may consider the business profitable even though the owner works full time without receiving a market salary.

Ask the franchisee to explain the definition being used.

Then ask:

How long did it take for monthly revenue to cover operating expenses?

When did the business begin covering debt service?

When could the owner begin taking reasonable compensation or distributions?

How much additional working capital was needed before that happened?

A business may technically reach operating break even while the owner continues funding loan payments, taxes, equipment purchases, and personal living expenses from other sources.

Compare these answers with the assumptions in the franchisor’s Item 19 disclosures and your own financial model. If several franchisees took much longer to reach break even than the model projects, the model needs to be reconsidered.

4. What Expenses Were Higher Than You Expected?

Revenue attracts attention. Expenses determine whether the owner makes money.

Ask which costs surprised the franchisee after opening. Common examples may include labor, insurance, rent, utilities, local marketing, technology fees, repairs, supplies, credit card charges, delivery costs, waste, and required vendor purchases.

Pay particular attention to expenses that are difficult for the franchisee to control.

A franchisee may be required to purchase products from the franchisor, an affiliate, or an approved supplier. The franchise agreement may allow the franchisor to change operating standards, introduce new technology, or require additional products and services.

Ask whether those costs have increased and whether the franchisee believes the value received justifies the expense.

One unexpected cost may be manageable. A pattern of increasing mandatory expenses can materially alter the financial model.

5. Does the Business Generate a Fair Return After Accounting for Your Time?

Do not ask only, “Are you profitable?”

Profitability can mean different things to different owners.

A franchisee may report a $120,000 annual profit while working 60 hours each week managing the location. If hiring a qualified manager would cost $80,000, the owner may be receiving only $40,000 as a return on the capital invested and risk assumed.

Ask:

How many hours do you work each week?

What responsibilities do you personally perform?

Could the business afford to hire someone to replace you?

Would the location remain profitable after paying that person a market salary?

Does the business provide a return on your investment in addition to compensation for your labor?

There is nothing inherently wrong with buying a business that provides the owner with meaningful employment. But a buyer should understand whether the franchise is creating an investment return or primarily buying the owner a demanding job.

For a deeper financial analysis, see Can You Really Make Money With This Franchise? How to Test the Financial Model.

6. How Effective Were the Training and Opening Support?

The FDD describes the training and assistance the franchisor is contractually obligated to provide. The franchisees can tell you whether that support was useful in practice.

Ask whether the training prepared the owner to operate the business. Was enough time spent on hiring, scheduling, financial management, marketing, technology, customer service, and compliance? Did the franchisee leave training with a working understanding of the business?

Then ask about opening support.

Did representatives from the franchisor arrive when promised? Were they experienced? Did they help solve problems? Did the franchisor remain engaged after the initial opening period ended?

New franchisees are especially helpful on this issue because they have recently completed the current training program. An owner who opened ten years ago may have experienced a very different program and management team.

Training cannot eliminate every challenge. It should, however, prepare an attentive owner to handle the foreseeable demands of the business.

7. What Ongoing Support Does the Franchisor Actually Provide?

Many franchisors promise ongoing support. That phrase can mean almost anything.

Ask franchisees what happens when they call with an operational problem. Does the franchisor respond promptly? Does the field representative understand the business? Does the franchisee receive practical assistance or simply a reminder to follow the operating manual?

Ask about the franchisor’s communication style.

Does leadership listen to franchisee concerns? Are changes explained before they are implemented? Does the franchisor seek franchisee input? Are high-performing and struggling franchisees treated fairly? Does the franchisor help diagnose problems, or does it immediately blame the operator?

The quality of the relationship may become most important when the business is struggling. Almost every franchisor is supportive during the sales process. The better question is how the franchisor behaves after the agreement has been signed and the initial franchise fee has been paid.

8. Does the Marketing Produce Customers?

Franchisees often pay both a national advertising contribution and a required amount for local marketing. Those payments reduce the money available to the owner, so determine whether they generate value.

Ask:

What marketing does the franchisor provide?

Does national advertising generate measurable customer demand?

How much must the franchisee spend locally?

Which local marketing strategies actually work?

Does the franchisor provide useful materials and guidance?

Are franchisees allowed to develop their own local campaigns?

Does the franchisee believe the advertising fund is being used effectively?

A recognizable brand does not guarantee that customers will appear at a new location. In some systems, franchisees must build local demand through networking, community involvement, digital advertising, sales calls, or direct outreach.

You need to understand who is responsible for generating customers and how much additional time and money that requires.

9. What Are the Biggest Operational and Employee Challenges?

Every business has difficulties. You are trying to determine whether the challenges are manageable and whether they fit your skills and temperament.

Ask franchisees about hiring, turnover, scheduling, inventory, vendors, customer complaints, technology, seasonality, and regulatory requirements.

If the business depends on hourly employees, ask how difficult it is to recruit and retain them. If it relies on skilled technicians or licensed professionals, ask whether qualified workers are available in the franchisee’s market.

Ask what the franchisee spends the most time worrying about.

The answer may reveal more than a broad question about satisfaction. It helps you see the daily reality of operating the franchise.

A business may be financially attractive but still be a poor personal fit. A buyer who dislikes managing employees should think carefully before purchasing a labor-intensive concept. A buyer who expects passive ownership should be cautious if every successful franchisee works inside the business full time.

10. How Has the Franchise Changed Since You Joined?

The franchise agreement usually gives the franchisor significant control over operating standards. Those standards may change during a long-term relationship.

Ask established franchisees what has changed since they joined the system.

Have required products or vendors changed? Have technology fees increased? Has the franchisor imposed new remodeling requirements? Has the quality of support improved or declined? Has ownership or senior leadership changed? Has the franchisor continued selling locations in markets where existing franchisees are struggling?

Change is not necessarily bad. Strong franchise systems must adapt to customer preferences, competition, technology, and economic conditions.

The issue is how changes are made, who bears the cost, and whether those changes improve the franchisee’s business.

Ask whether the franchisee believes the franchisor’s interests remain aligned with the success of existing owners. A system that depends primarily on healthy royalty revenue from successful franchisees may behave differently from one focused mainly on selling new franchises.

11. Knowing What You Know Now, Would You Buy This Franchise Again?

This is the question that brings everything together.

Do not accept a one-word answer.

If the franchisee says yes, ask why. What has made the investment worthwhile? What would the owner do differently? What traits does a successful franchisee need?

If the answer is no, ask what changed the owner’s view. Was the problem financial performance, workload, franchisor support, required expenses, market conditions, or a mismatch between the business and the owner?

Some franchisees may say they would buy again, but only at a lower investment, with more working capital, in a different location, or with a different understanding of the time commitment.

Those qualifications matter.

This question does not produce a final verdict on the franchise. Even a strong system will have dissatisfied owners, and even a weak system may have exceptional performers. But when several franchisees independently give you the same warning, pay attention.

Speak With Former Franchisees Too

Current franchisees may be reluctant to criticize the franchisor. They remain dependent on the system and may be concerned about damaging the relationship.

Former franchisees may be more candid.

Item 20 should identify certain franchisees who recently left the system. Ask why they left. Did they sell successfully, retire, close the business, lose the franchise, or reach an agreement with the franchisor?

Ask whether the business was profitable, whether the franchisor provided adequate support, and what the former owner wishes had been understood before signing.

A former franchisee may have left because of poor management, insufficient capital, or personal circumstances unrelated to the franchise system. Do not assume every failed location proves the concept is flawed.

But do not dismiss former owners as merely disgruntled either.

Listen for facts. Compare their experiences with the FDD, the franchise agreement, and what current franchisees tell you.

Look for Patterns, Not Perfect Agreement

You are unlikely to receive identical answers.

One owner may praise the training while another considers it inadequate. One may be highly profitable while another struggles. Markets, locations, financing, management ability, and owner involvement can produce very different outcomes within the same system.

Your job is to determine why the results differ.

After each conversation, record the answers while they are fresh. Then compare what you heard across the system.

Look for recurring themes involving:

  1. Opening costs
  2. Time to break even
  3. Working capital
  4. Labor requirements
  5. Mandatory expenses
  6. Marketing effectiveness
  7. Franchisor responsiveness
  8. Owner workload
  9. Profitability
  10. Franchisee satisfaction

If several owners identify the same issue, incorporate it into your decision and financial model.

If the franchisor’s representatives made an oral statement that appears inconsistent with what franchisees report, return to the FDD and ask for clarification in writing. Do not rely on oral promises that are not supported by the written documents.

Make Franchise Validation Part of a Larger Review

Franchisee interviews are essential, but they are only one part of the investigation.

You should also review the FDD, analyze the franchise agreement, test the financial model, investigate the local market, understand the financing, and determine whether the business fits your skills and goals.

Your franchise attorney and accountant have different roles in that process.

The attorney can identify the legal obligations and risks involving fees, territory, suppliers, defaults, termination, renewal, transfer restrictions, personal guarantees, and post-termination obligations.

The accountant can test the projected revenue, expenses, working capital, debt service, taxes, and return on investment.

Existing and former franchisees provide the operating experience that helps both professionals test the assumptions behind the opportunity.

For a broader framework, see Franchise Due Diligence: The Questions Every Buyer Should Ask Before Signing.

Do Not Ask Whether They Like It. Find Out Why.

A prospective franchise buyer often asks an existing owner, “Do you like the franchise?”

That question is too easy to answer and too vague to be useful.

Ask what the business cost to open. Ask how long it took to break even. Ask how much the owner works. Ask what expenses were underestimated. Ask whether the franchisor provides meaningful support. Ask whether the business can pay a manager and still produce a fair return.

Then ask whether the owner would make the same investment again.

The franchisor has told you how the franchise is supposed to work.

Before you sign the agreement and guarantee the debt, find out how it actually works.

Do not search for reassurance.

Search for the truth.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

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Cytonn Photography, Unsplash

The business is making money. You and your partner are barely speaking.

Every decision has become a negotiation. One of you believes the other is not working hard enough. The other believes years of sacrifice are being ignored. Distributions have slowed. Trust has disappeared. What began with enthusiasm and a handshake now feels like a business divorce with no clear way out.

You may recognize your own situation in that description.

Perhaps you started the business with a friend because neither of you wanted to do it alone. Maybe one partner had the money while the other had the experience. Perhaps you bought a franchise together because the investment seemed too large for one person. At the beginning, having a partner felt like a source of confidence.

Now you are asking a very different question: How much will it cost to get out?

Buying out a business partner is often far more difficult than anyone expects. The problem is not simply determining a price. A buyout requires the parties to untangle money, control, expectations, emotions, risk, and years of competing narratives about who created the value.

By the time lawyers and valuation experts become involved, the disagreement is rarely just about numbers.

Why Partner Buyouts Become So Difficult

Most owners assume a partner buyout should follow a simple formula. Determine what the business is worth, multiply that value by the departing owner’s percentage, and pay the resulting amount.

Business valuation is rarely that simple.

Two qualified valuation professionals can examine the same company and reach materially different conclusions. They may disagree about normalized compensation, projected earnings, appropriate valuation multiples, discounts for lack of control, discounts for lack of marketability, working capital, debt, owner dependence, customer concentration, or whether the business could realistically be sold to an outside buyer.

Those differences become even more significant when the business depends heavily on one owner, another related company, a particular customer, or a franchise relationship. A business may produce substantial income for its current owners while having a limited market to an outside buyer. The departing partner may focus on current cash flow. The remaining partner may focus on the risks and obligations that must be carried forward.

Both may feel entirely justified.

The disagreement becomes personal because each partner usually has a different story about the business. One remembers contributing the original capital. Another remembers working nights and weekends without adequate compensation. One believes the company could not have succeeded without the other’s relationships. The other believes those relationships would have meant nothing without someone handling the daily operations.

These beliefs do not appear neatly on a balance sheet, but they often drive the negotiation.

Fair Market Value Does Not Always Feel Fair

Many buy sell agreements provide that an owner’s interest will be purchased at “fair market value.” That sounds precise. It is not.

Fair market value is a valuation standard, not a final number. The parties may still disagree about the valuation date, the financial period to use, the treatment of owner compensation, the appropriate earnings multiple, and whether valuation discounts apply.

The parties may also disagree about cash and working capital. A departing partner may believe a percentage of the company’s cash should be added to the value of the ownership interest. The remaining owners may view that cash as necessary to cover payroll, taxes, vendor obligations, debt service, and the ordinary risks of operating the business.

Then there is the question of payment. Even if the parties agree on value, the company or remaining owners may not have enough cash to fund an immediate buyout. A large lump sum could damage the business everyone is attempting to value. Installment payments create another set of questions concerning interest, collateral, personal guarantees, default remedies, and whether the departing owner should remain exposed to the company’s future performance.

Every answer creates another question.

The Agreement Often Does Not Solve the Problem

Owners are frequently surprised by how little their governing documents say about a voluntary separation.

The operating agreement, shareholder agreement, or buy sell agreement may address death, disability, bankruptcy, or termination of employment. It may say little about what happens when two healthy owners simply cannot work together anymore.

Some agreements provide a valuation process but fail to explain how the purchase price will be paid. Others establish payment terms without clearly defining the value being purchased. Some contain mandatory purchase provisions. Others merely give the company or remaining owners an option to buy.

Poorly drafted agreements may even create incentives for strategic behavior. An owner may attempt to force a buyout through resignation, withholding approval, disrupting operations, or threatening litigation. The other side may respond by restricting information, suspending distributions, or claiming the departing owner breached fiduciary or contractual duties.

At that point, the buyout is no longer a business transaction. It has become a contest for leverage.

Ask the Hard Question Before Choosing a Partner

The difficulty of unwinding a partnership points to a question that should be asked before the business is purchased or formed:

Why do you need a partner?

That question is not cynical. It is practical.

Many partnerships are created because the owners are friends, relatives, coworkers, or people who share enthusiasm for an opportunity. Those relationships may explain why the parties trust each other. They do not necessarily explain why joint ownership is the right business structure.

A person may be an excellent friend but a poor business partner. Friendship does not tell you whether you have compatible attitudes toward debt, compensation, reinvestment, hiring, risk, growth, or the number of hours each owner should work.

Before giving someone ownership, consider whether the person’s contribution could be addressed another way. Could the necessary capital be borrowed? Could the person receive compensation or a bonus instead of equity? Could the company use a profit sharing arrangement? Could an experienced employee or independent contractor provide the needed skill without receiving permanent ownership and control?

Equity is easy to give away when the business has little value. It becomes painfully expensive to recover after the business succeeds.

Compatibility Requires More Than Shared Ambition

Future partners should discuss uncomfortable subjects before signing an agreement.

How much money will each person contribute? Will additional contributions be required? Who will work in the business, and how much time will each person devote? How will compensation be determined? When will profits be distributed, and when will they be reinvested? Who has authority to hire employees, borrow money, sign contracts, or make major purchases?

The parties should also discuss what happens if one owner stops working, becomes disabled, gets divorced, files bankruptcy, wants to retire, or simply loses interest. They should decide whether outside employment is permitted and whether family members will have roles in the business.

These conversations may feel unnecessarily negative when everyone is excited about the opportunity. They are not predictions of failure. They are tests of compatibility.

If prospective partners cannot comfortably discuss how they might separate, they may not be ready to own a business together.

Plan the Exit While Everyone Still Gets Along

A carefully drafted agreement cannot prevent every dispute, but it can narrow the issues and reduce the opportunities for conflict.

The agreement should identify the events that may trigger a purchase, whether the purchase is mandatory or optional, and who has the first right to buy. It should establish a workable valuation process and specify the treatment of debt, cash, working capital, owner compensation, and valuation discounts.

It should also address payment terms. The parties should decide whether the purchase price will be paid at closing or over time, whether interest will apply, what security will be provided, and what happens if a payment is missed.

For franchise owners, the agreement should also account for the franchisor’s approval rights, transfer restrictions, personal guarantees, lease obligations, and any required amendments to the franchise agreement. A partner may transfer an ownership interest between the owners and still remain liable to the franchisor, landlord, or lender unless a formal release is obtained.

Most importantly, the agreement should create a process that allows the business to continue operating while the parties resolve their differences. A buyout dispute should not give either owner the ability to hold the company hostage.

A Business Partner Is One of Your Most Important Business Decisions

Entrepreneurs spend considerable time evaluating locations, financing, equipment, employees, and projected revenue. Yet they sometimes choose a business partner after only a few conversations.

That decision deserves more scrutiny.

A partner does not merely share the investment. A partner may share control over your income, your financial risk, your professional reputation, and your ability to leave the business. Depending on the agreement, that person may have the power to block important decisions or force you to remain connected long after the relationship has stopped working.

If you are considering starting or buying a business with someone else, do not begin by asking how ownership should be divided. Begin by asking why ownership needs to be shared at all.

If you are already in a partnership that is deteriorating, address the problem before every disagreement becomes evidence in a future lawsuit. Review the governing documents. Understand the company’s financial position. Identify the guarantees and obligations that must be resolved. Obtain credible valuation advice, but recognize that the valuation is only one part of the negotiation.

The best partner buyout is usually the one planned before anyone wants out.

And the best partnership decision may be deciding that you do not need a partner in the first place.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

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Tingey Injury Law Firm, Unsplash

You have attended Discovery Day. You like the people. The concept looks polished, the existing locations appear busy, and the franchisor has told you that your market is a perfect fit.

The franchise salesperson says the next step is simply to sign the agreement.

This is the moment when many franchise buyers stop investigating and start imagining. They picture the opening. They think about leaving their current job. They calculate what the business might earn. They may even begin looking at locations or telling friends and family about the opportunity.

If you recognize yourself in this situation, slow down.

The question is no longer whether you like the franchise. The question is whether the business can succeed in your market, with your capital, under the franchisor’s system, and within the restrictions of the franchise agreement.

Those are very different questions.

A franchise can have an impressive brand, enthusiastic leadership, and successful locations while still being the wrong investment for you. The purpose of franchise due diligence is not to confirm your excitement. It is to test it.

The Franchise Disclosure Document Is the Beginning

The Franchise Disclosure Document, commonly called the FDD, contains 23 categories of information about the franchise system. Under the Federal Trade Commission’s Franchise Rule, a prospective franchisee generally must receive the FDD at least 14 calendar days before signing a binding agreement or paying money to the franchisor or an affiliate in connection with the proposed sale.

That waiting period is not merely time to locate the signature pages. It is intended to give you an opportunity to investigate the investment.

The FDD contains important information about the franchisor, litigation, bankruptcy, initial costs, ongoing fees, required suppliers, financial performance representations, franchisee turnover, financial statements, and the contracts you will be expected to sign. But the FDD does not decide whether you should buy the franchise.

It gives you information. Due diligence requires you to ask what that information means.

Who Is the Franchisor?

Begin with the business behind the brand.

How long has the franchisor operated this particular concept? Is the management team experienced in operating businesses like the one you will own, or is its primary experience selling franchises? Has the concept operated through different entities or under different names?

A franchise system may appear established because its executives have worked in franchising for years. That does not necessarily mean the current concept has been tested through different markets and economic conditions.

Review Item 1 carefully. Understand the franchisor’s history, its parent companies, its affiliates, and the business experience behind the system. Determine which entity owns the intellectual property, which entity will receive your payments, and which entity is actually responsible for providing support.

You are not merely buying a brand. You are entering a long term relationship with the people and companies controlling that brand.

What Do the Litigation and Bankruptcy Disclosures Reveal?

Items 3 and 4 disclose certain litigation and bankruptcy information. Buyers sometimes skip these sections because the cases appear old, technical, or unrelated to the location they hope to open.

Do not simply count the lawsuits. Look for patterns.

Has the franchisor repeatedly sued franchisees for unpaid royalties or post termination competition? Have franchisees claimed the franchisor made misleading financial representations or failed to provide promised support? Are there disputes involving suppliers, advertising funds, territory, or termination?

Some litigation is inevitable in a large franchise system. The existence of lawsuits does not automatically make the franchise a poor investment. The nature and frequency of the disputes, however, may tell you how the franchisor manages conflict and enforces its agreements.

Ask the franchisor what happened. Then ask current and former franchisees whether the disclosed disputes reflect broader problems within the system.

How Much Money Will You Really Need?

Item 7 estimates the initial investment required to establish the franchise. Many buyers focus on the franchise fee and the cost of equipment. The more dangerous number may be the estimated working capital.

Ask whether the estimate reflects current construction costs, wages, rent, insurance, inventory, technology, and local permitting requirements. Find out when the estimates were last updated and what assumptions were used.

Then ask existing franchisees what they actually spent.

Did they exceed the construction budget? Were there unexpected landlord requirements? Did the franchisor require upgrades or vendors that increased the cost? How long did it take to open? How much cash did they need before the business generated enough revenue to cover its expenses?

Most importantly, determine whether you have enough capital to survive a slower opening than the projections suggest. A business can eventually become profitable and still fail because the owner runs out of money first.

Your financial plan should include more than the cost of opening. It should include enough working capital to operate through delays, seasonal changes, early mistakes, and a reasonable period of sales below expectations.

What Will You Pay After the Business Opens?

The franchise fee is paid once. Royalties and other continuing fees may be paid for years.

Review Items 5 and 6 to identify every fee that may apply. In addition to royalties and advertising fund contributions, you may be required to pay technology fees, training expenses, renewal fees, transfer fees, audit costs, conference expenses, local marketing obligations, and fees for late payments.

Ask whether the royalty is based on gross sales or profit. In most systems, it is based on gross sales. This means the franchisor may continue receiving royalties even when your location is losing money.

Calculate the combined effect of royalties, advertising contributions, required software, supplier pricing, and other system fees. A seemingly manageable charge becomes more significant when it is added to several other recurring obligations.

You need to understand how much revenue the location must generate before it can pay its bills, service its debt, compensate you for your work, and provide a return on your investment.

What Financial Performance Information Can You Verify?

Item 19 contains any financial performance representation the franchisor chooses to make. Not every franchisor provides one.

If the franchisor makes revenue or profit claims, determine exactly what the numbers represent. Are they averages or medians? Do they include every location or only selected locations? How long were the included units open? Are company owned locations included? Are poorly performing or recently closed locations excluded?

An average can be misleading when a small number of high performing locations pull the number upward. A revenue figure also tells you little about profitability unless you understand labor, rent, cost of goods, royalties, advertising, debt service, and owner compensation.

Ask what percentage of franchisees achieved or exceeded the stated results. Request the underlying assumptions and compare them with the economics of your proposed location.

Do not rely on earnings statements, projections, or success stories that do not appear in Item 19. If a salesperson makes a financial claim during a call or meeting, ask where the claim appears in the FDD.

The better question is not, “How much can this franchise make?” It is, “What evidence supports the numbers, and do the same assumptions apply to my location?”

What Do Current Franchisees Say When the Franchisor Is Not Present?

Item 20 generally provides information about the franchise system’s outlets, including openings, closures, transfers, and the contact information of current franchisees and certain former franchisees.

Use it.

Do not speak only with the franchisees recommended by the franchisor. Those owners may be successful and sincere, but they may not represent the broader system. Contact franchisees in different markets, at different stages of operation, and with different performance levels.

Ask specific questions:

  1. How much did you actually spend before opening?
  2. How long did it take to reach break even?
  3. Were the franchisor’s initial financial expectations realistic?
  4. How effective was the training?
  5. What support did you receive after opening?
  6. Does the franchisor respond when problems arise?
  7. Have required vendors provided competitive pricing and reliable service?
  8. How much time does the owner need to spend in the business?
  9. What expenses surprised you?
  10. Would you make the same investment again?

The final question is especially valuable. Listen not only to the answer but also to how long it takes the franchisee to give it.

Former franchisees may offer an entirely different perspective. Ask why they left, whether they sold or closed, how difficult the exit process was, and whether they remained liable for leases, loans, or personal guarantees after the business ended.

A former franchisee may be disappointed or angry. That does not make the person’s experience irrelevant. Look for themes that appear across multiple conversations.

Is the System Growing or Merely Selling Franchises?

Growth can be a sign of a healthy system. It can also conceal turnover.

Review the Item 20 tables to determine how many locations opened, closed, transferred, terminated, or did not renew during the reported periods. A franchisor may emphasize the number of new franchises sold while saying little about the number of existing franchisees leaving the system.

Ask why locations closed. Were they undercapitalized? Were their markets poorly selected? Did operating costs exceed expectations? Did owners discover the business required more time than anticipated?

Transfers also deserve attention. A transfer may represent a successful franchisee selling a valuable business. It may also represent an owner accepting a reduced price to escape continuing losses.

The number of franchise sales matters. The number of franchisees who remain successful over time matters more.

What Must You Purchase, and From Whom?

Item 8 addresses restrictions on the sources of products and services. These requirements can affect both your operating costs and your control over the business.

Determine which products, equipment, software, and services must be purchased from the franchisor, its affiliates, or approved suppliers. Ask whether the franchisor or its affiliates receive rebates or other financial benefits from those purchases.

Required suppliers may promote consistency and quality. They may also limit your ability to respond when prices increase or service declines.

Ask existing franchisees how required supplier pricing compares with the open market. Find out whether shortages have occurred and whether the franchisor allowed alternative sources. Determine how frequently required equipment, technology, signage, or décor must be replaced.

A franchisee can meet every sales target and still struggle if required operating costs increase faster than revenue.

What Support Will the Franchisor Actually Provide?

Item 11 describes the franchisor’s contractual obligations regarding training, advertising, technology, site assistance, and other support.

Pay attention to the words the franchisor uses. An agreement may say the franchisor “may” provide assistance rather than saying it “will” provide it. The franchisor may retain broad discretion over the nature, timing, and amount of support.

Ask what happens after the opening team leaves. Who will be your primary contact? How many franchisees does that person support? How often will someone visit your location? What assistance is available if sales fall below expectations?

If the system advertises nationally or regionally, ask how the advertising fund is spent. Determine whether the franchisor must spend your contributions in your market. Ask franchisees whether they believe the advertising produces measurable results.

Do not evaluate support based solely on what the sales team promises. Compare those promises with the contractual obligations and the experiences of existing owners.

Is Your Territory Really Protected?

Item 12 addresses territory.

Do not assume that being assigned a territory means you have complete protection from competition within it. The franchisor may reserve the right to sell through websites, grocery stores, delivery platforms, special venues, alternative brands, or other distribution channels.

Ask whether the franchisor can establish another location near your territory. Determine how the territory is measured and whether it can be reduced. Find out whether protection depends on meeting sales quotas, development schedules, or other performance requirements.

Then evaluate competition beyond the franchise system. How many similar businesses already operate in the market? Is local demand sufficient? Will the proposed site draw the customer base assumed in your projections?

A protected territory does not create customers. It only limits certain forms of competition from within the franchise system, and sometimes not as much as the buyer expects.

What Control Will You Give Up?

Franchise ownership is not the same as operating an independent business.

The franchisor will likely control many aspects of the operation, including products, services, suppliers, appearance, technology, advertising, hours, training, and operating standards. The franchisor may change those standards during the term of the agreement.

Ask what significant system changes have been required during the past five years. How much did those changes cost franchisees? Were owners required to remodel, buy new equipment, adopt new technology, or offer products with lower margins?

Consider whether you are comfortable following a system even when you disagree with a particular decision. A franchise agreement usually gives the franchisor substantial discretion to modify the operating system. Your ability to object may be limited.

The strength of a franchise is often its system. The price of that system is reduced control.

What Happens If You Want to Leave?

Buyers naturally focus on getting into the business. Due diligence also requires understanding how you may eventually get out.

Review Item 17 and the franchise agreement provisions addressing renewal, termination, transfer, noncompetition, and dispute resolution.

Ask these questions:

  1. Can you sell the business, and must the franchisor approve the buyer?
  2. What transfer fee must be paid?
  3. Can the franchisor exercise a right of first refusal?
  4. Must the new owner sign the franchisor’s current form of agreement?
  5. What upgrades or renovations will be required before a transfer or renewal?
  6. Can you continue operating a similar business after the franchise ends?
  7. Are disputes subject to mediation, arbitration, or litigation in another state?
  8. What obligations continue after termination?

Also consider obligations outside the franchise agreement. A business may close while the owner remains personally liable under a lease, bank loan, equipment financing agreement, or guaranty. Terminating the franchise does not automatically terminate those obligations.

The time to understand the exit is before you invest, not when you are exhausted and looking for a way out.

Who Should Review the Investment With You?

Franchise due diligence should not be performed by the buyer alone.

An experienced franchise attorney can explain how the FDD and franchise agreement allocate risk, identify provisions that differ from common industry practices, and help determine which terms may be negotiable. An accountant can test the financial assumptions, evaluate working capital needs, and help build realistic projections.

Depending on the investment, you may also need assistance from a commercial real estate advisor, lender, insurance professional, or industry consultant.

These advisors are not there merely to tell you whether the documents are legal. Their job is to help you understand the commitments you are making and the circumstances that could cause the investment to fail.

The cost of professional advice before signing is usually small compared with the cost of discovering a serious problem after the franchise fee has been paid, the lease has been guaranteed, and the business has opened.

Due Diligence Must Be Willing to Produce the Answer “No”

The most dangerous stage of buying a franchise is often the point when you have already decided emotionally that you want it.

You may have spent months researching opportunities. Your family may be excited. The franchisor may be holding a territory for you. Walking away can feel like losing the future you have already imagined.

But due diligence has value only if you are willing to act on what you learn.

The purpose is not to eliminate every risk. No business investment comes with that promise. The purpose is to identify the risks, determine whether the financial assumptions are credible, and decide whether the opportunity fits your resources, experience, market, and goals.

Ask the questions that could change your mind.

Speak with the franchisees who succeeded and those who struggled. Examine the numbers that support the sales presentation. Understand the contract you will have to live under. Calculate what happens if revenue is lower and expenses are higher than expected.

A polished brand may capture your attention. Careful due diligence protects your future.

Before you sign, make sure you understand not only why the franchise might succeed, but also why other franchisees have failed.

That may be the most important question you ask.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.