Franchise Acquisitions - Verifying Financials

November 10, 2022

by a searcher from The University of Texas at Austin - Red McCombs School of Business in San Antonio, TX, USA

For those in the franchise world who have acquired existing franchise locations:
How have you approached verifying the target location's financials?
Did you have a QoE, QoE lite, or other 3rd party report created?
Did you perform the financial due diligence yourself - if so, how did you approach it?
Did you find a method to verify any of their expenses OR did you just spot check with existing FDD data etc.?

Thank you in advance for all of your help!

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Reply by a searcher
from University of Maryland at College Park in Havre De Grace, MD 21078, USA

While FDDs provide insight, I would certainly perform a QoE. This should be one of the easiest (and less costly) QoEs because of ^redacted‌'s points. Verification of expenses is a little different. COGS is easier if the franchisee can only produce with items purchased directly from the third party verifiable franchisor's value chain. Expenses are not always tracked well by franchisees and franchisors usually don't care because they calculate their royalties and fees based on the top line. Franchisees of smaller franchises are just like mom and pop main street businesses and commonly barter, exchange, and pay out of pocket for the small things which may add up in small locations as a percentage of revenue.

Reply by a searcher
from California State Polytechnic University in San Diego, CA, USA

If you don't do due diligence for a living or have a decent amount of experience, I highly recommend going to a professional. We do a QoE Express that's probably the cheapest way to get initial findings. It's not full due diligence but it should standardize the data and have enough of an analysis to weed out any potential problems down the line. I hear good things about DueDilio but have not used them myself. GET; Tax Returns, Bank Statements, Accounting Data; Perform a proof of cash (both revenue & exp) and put accounting data into your financial model. Handles 80% of the issues.

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