5 Due diligence mistakes that cost franchisees thousands

Buying a franchise can feel like a shortcut to business ownership — a proven model, built-in support, and brand recognition. But too many franchisees discover the hard way that what looks safe on paper can quickly become a costly mistake. The problem isn’t always the franchise itself — it’s the due diligence (or lack thereof) that gets people into trouble.

Here are five common due diligence mistakes that can cost franchisees thousands of dollars — and how to avoid them.

1. Skipping a Legal Review of the FDD and Franchise Agreement

The Franchise Disclosure Document (FDD) is not a contract — it’s a disclosure document. But it includes the franchise agreement, which is legally binding once you sign it. Too many buyers skim the disclosures or skip straight to signature without fully understanding what they’re committing to.

The fix: Get both perspectives. Work with an independent advisor who can evaluate the FDD from a business and risk standpoint, and hire a qualified franchise attorney to review the franchise agreement for legal protections.

2. Relying Solely on Broker or Franchisor Data

Franchise brokers are paid by the franchisor, not you. That means their “facts” and data may be selective. Likewise, franchisor-provided earnings claims (Item 19) can paint a picture that doesn’t reflect reality.
The fix: Treat broker and franchisor data as starting points, not gospel. Validate numbers through independent research and conversations with existing (and former) franchisees.

3. Failing to Talk to Enough Franchisees

Franchisors typically provide a list of franchisees for validation, but many candidates only call a handful — often the most successful ones. This creates a skewed view of the system’s performance.
The fix: Speak with a broad sample of franchisees — top performers, average operators, and especially those who left the system. Ask tough questions about profitability, support, and challenges.

4. Ignoring the Franchisor’s Financial Health

The FDD includes audited financial statements, but too many buyers gloss over them. A franchisor that relies heavily on selling new territories (instead of supporting existing ones) may be more focused on growth than sustainability.
The fix: Review the franchisor’s revenue mix and profitability. Are they making money from franchise royalties (a sign of healthy operators) or just from selling new franchises?

5. Underestimating Total Costs and Capital Needs

The “initial investment” ranges in the FDD often exclude working capital, unexpected delays, or mandatory upgrades. Franchisees who underfund their business often end up in financial distress.
The fix: Build a conservative financial model that includes realistic revenue assumptions, at least 6–12 months of working capital, a cushion for delays, and your own personal living expenses.

Final Thought

Franchising can be a smart path to business ownership, but skipping steps in due diligence is like signing a blank check. The mistakes above aren’t rare — they’re common, and they’re costly.

If you’re considering a franchise, slow down, dig deeper, and get independent advice. The money you save in mistakes could be the difference between thriving and barely surviving.