How Do I Evaluate an Existing Franchise Restaurant Before Making an Offer?

What documents should I request when buying an existing franchise restaurant?

Request the records that show what you are buying, what you must take on, and who must approve the transfer.

The U.S. Small Business Administration tells buyers to examine contracts, leases, existing cash flow, and inventory. Its list for an attorney and accountant includes a letter of intent, confidentiality agreement, contracts and leases, financial statements, tax returns, a sales agreement, and a purchase-price adjustment.

For a franchise resale, add the current Franchise Disclosure Document, the franchise agreement, all amendments, and the franchisor’s transfer materials. Read the FDD before treating the seller’s agreement as the deal you will receive. The SBA also directs franchise buyers to review the disclosure document, rules and regulations, and franchise contract, including duties to meet sales quotas and buy equipment, supplies, and inventory.

• Seller profit-and-loss statements and balance sheets for the period available
• Business tax returns and sales-tax records
• POS sales reports, bank-deposit records, payroll records, and supplier invoices
• The restaurant lease, amendments, guarantees, and landlord correspondence about assignment
• The current FDD, franchise agreement, operations requirements, and proposed transfer documents
• Inventory records and a draft purchase agreement showing any price adjustment

Build one document trail. A sales claim is one record; cash received, labor paid, and rent owed are different records. The work resembles the discipline of proving whether an in-store display actually increased sales: a claimed result needs evidence that can be checked.

How do I verify that a franchise restaurant's sales and profit are real?

Verify sales and profit by reconciling the seller’s profit-and-loss statement with tax returns, POS reports, bank deposits, payroll, rent, and other source records.

Start with sales. Compare the total shown in the POS system with deposits and with the sales reported on tax returns. Then test the main costs on the profit-and-loss statement against payroll records, lease payments, supplier invoices, royalties, and other recurring expenses. A figure that appears in only one report is a claim, not a conclusion.

The Federal Trade Commission draws the line plainly: “An outlet with high gross sales on paper might be losing money because of high overhead, rent and other expenses.” The FTC also states that gross-sales figures do not establish profitability and that franchise agreements can require royalties based on gross income even when a franchisee is losing money.

Ask what the franchisor has disclosed. FDD Item 19 is the place where a franchisor may make sales, income, or profit claims, apart from providing actual records for the specific outlet under review. An Item 19 claim needs a reasonable factual basis. Request written substantiation, including the underlying data source, assumptions, and limits.

Ask an accountant to determine the full cost of buying and operating the business. The SBA identifies that as part of an accountant’s role. A clean reconciliation does not guarantee future results. It does establish what the outlet has recorded.

Will I have to sign a new franchise agreement when buying a resale?

Often, yes: the transfer terms can require the buyer to sign the franchisor’s then-current franchise agreement instead of taking over the seller’s agreement.

The American Bar Association’s franchise-law checklist states that the franchise agreement governs whether and to whom a franchise can be transferred. It describes a common transfer structure in which the new franchisee signs the then-current form of franchise agreement.

That difference can change the deal. The seller’s old agreement does not settle the buyer’s future obligations when the transfer documents require the current form. Read the proposed agreement beside the seller’s agreement. Mark each difference in term, renewal rights, termination rights, required purchases, dispute terms, and transfer rules.

FDD Item 17 is the map for this part of the review. According to the FTC’s guide to the FDD, Item 17 covers renewal, termination, transfer, and dispute-resolution terms, including what happens when an owner wants to sell. The agreement controls the actual obligation. The FDD tells you where to look.

Approval can also depend on financial qualifications, training, and whether the buyer has an interest in a competing business. The ABA notes that franchise agreements can give the franchisor a right of first refusal. The seller may need to submit the proposed deal’s material terms before the franchisor decides whether to exercise that right.

What transfer fees, remodels, or training costs can a franchisor require?

A franchisor can require transfer conditions set out in the franchise documents, including a transfer fee, payment of outstanding debts, bringing the restaurant to current standards, buyer training, and a new agreement.

The ABA checklist identifies these as typical conditions: the seller pays amounts owed to the franchisor, the location is brought up to current standards, and a transfer fee is paid. It also identifies satisfactory completion of required training and financial qualifications as common buyer-approval conditions.

Renovation risk belongs in the price discussion before the offer. The FTC says franchise agreements can require periodic renovations or design changes. A required remodel is not a side issue when it is a condition of approval or a duty under the new agreement. Ask the franchisor for the transfer checklist, all current standards that apply to the outlet, and the written conditions for approval.

The lease carries its own gate. The American Bar Association’s lease guidance states that standard assignment provisions commonly require landlord consent. Review transfer restrictions, the consent standard, response deadlines, recapture rights, financial tests, and whether the seller receives a release. A lease assignment transfers the tenant’s lease interest, yet the original tenant usually remains liable without a release.

Put each known condition in writing before you set a final price. Unknown cost is not a small cost. It is an open term.