CFC Franchise Due Diligence & Disclosure Documents Flashcards
6 cards from real CFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 CFC Franchise Due Diligence & Disclosure Documents flashcards as text
What does 'churning' mean in the context of franchise due diligence?
Answer: A franchisor repeatedly terminating and reselling the same franchise location to collect multiple fees
Churning occurs when a franchisor terminates a franchisee's agreement and resells the same location to a new buyer, generating repeated franchise fees from a single territory.
Which metric, found by analyzing Item 20 of the FDD, is a key indicator of franchise system health?
Answer: Franchisee turnover rate (closures + transfers relative to total units)
Analyzing the ratio of closures, terminations, and transfers to total units in Item 20 reveals the franchisee turnover rate, a critical health indicator for the system.
What is the significance of a 'state registration' requirement for franchise sales?
Answer: About 15 states require franchisors to register their FDD with the state before offering franchises there
Approximately 13–15 states (registration states) require franchisors to register their FDD with state regulators and receive approval before selling franchises within their borders.
When reviewing a franchise agreement, what does 'right of first refusal' typically mean?
Answer: The franchisor's right to purchase the franchisee's business before it can be sold to a third party
Right of first refusal gives the franchisor the option to match any bona fide third-party offer and purchase the franchisee's business before the franchisee can sell to that outside buyer.
What is the purpose of reviewing a franchisor's audited financials (Item 21) during due diligence?
Answer: To assess the franchisor's financial stability and ability to support the franchise system long-term
Reviewing the franchisor's audited financial statements allows a prospective franchisee to evaluate whether the franchisor is financially solvent and capable of delivering ongoing support and services.
Which professional should a franchise candidate always consult before signing a franchise agreement?
Answer: A franchise attorney independent from the franchisor
An independent franchise attorney (not affiliated with the franchisor) can review the FDD and franchise agreement to identify unfavorable clauses and protect the candidate's interests.