Checklist for Buying an Existing Franchised Business

Perhaps you'll buy an existing franchised business rather than start one. Although many of the decisions are the same for both, there are also dissimilarities. No list is complete for all situations. Look at this checklist and expand it as appropriate: 

General Examination 

1. Review the franchise agreements thoroughly. Determine under what conditions the franchise rights are transferrable. Also check the time left on the franchise agreement and the franchisor's intention to renew. 
2. Determine whether equipment is owned or leased. Check all equipment warranties and maintenance agreements. 
3. Check property leases for changeover fees assessed when new lessee assumes lease. 
4. Ask a professional to place a value on goodwill, usually valued between zero and 2.5 times annual pre-tax profit. 
5. Assess future potential in the context of whether or not to buy the business, not how much you should pay for it. 

Financial Examination 

1. Analyze financial statements for the last three to five years. Focus your analysis on cash flow. 
2. Check tax returns for the past three to five years. 
3. Review the previous four quarterly sales tax and payroll tax returns. 
4. Examine pension and profit-sharing plan reports for the last two years. 
5. Obtain a list of all employees showing names, length of employment, position and responsibilities, how compensated, earnings history for last three years, stock ownership, and potential for retention. 
6. Examine detailed depreciation schedules. 
7. Compile an asset list including land, buildings, furniture, and equipment. Determine acquisition date, cost, estimated current market value, depreciated value, condition, remaining useful life, and current appraisal. 
8. Review receivables and payables procedures, receivable aging procedures, and present receivables status. 
9. Reconcile the seller's inventory claims with your own. 
10. Compile a list of debt and lease payments and determine debt service requirements. 
11. Detail all liens, collateralized assets, judgments, past due accounts, and supporting documents. 
12. Determine that the financial relationship with the franchisor is current. 

Buying a business, whether franchised or not, can be tricky. Remember, there's a reason it's for sale. Be thorough, and caveat emptor.