Guide
How to read a Franchise Disclosure Document
An FDD can run to 300 pages or more. You don't need to read every word with the same care. Here is where to focus, what each section tells you, and what should make you stop and ask questions.
What is an FDD?
The Franchise Disclosure Document is a legal disclosure that every franchisor in the United States must give you before you buy. The format is set by the Federal Trade Commission's Franchise Rule, so every FDD has the same 23 sections, called Items, in the same order. That makes it easy to compare one brand against another.
The five Items to read first
- Item 7, Estimated Initial Investment. The real cost to open, as a low-to-high range. Plan for the high end.
- Item 19, Financial Performance Representations. What locations actually sell or earn, if disclosed. Check which locations are included and which are left out.
- Item 20, Outlets and Franchisee Information. Three years of openings, closures and transfers. A high number of closures or transfers is worth asking about. It also lists current and former owners you can call.
- Item 3, Litigation. Lawsuits from franchisees, especially several on the same complaint, tell you a lot about the relationship.
- Item 21, Financial Statements. Whether the franchisor has the money to support you. Thin finances can mean thin support.
All 23 Items at a glance
| Item | What it covers |
|---|---|
| 1. The Franchisor, Parents, Predecessors and Affiliates | Who you are really doing business with, and how long they have franchised. |
| 2. Business Experience | Five years of work history for each director and officer. |
| 3. Litigation | Lawsuits involving the franchisor and its leaders, including suits brought by franchisees. |
| 4. Bankruptcy | Any bankruptcy by the franchisor or its officers in the last 10 years. |
| 5. Initial Fees | The franchise fee and anything else you pay before opening. |
| 6. Other Fees | Royalties, marketing fund contributions, technology fees, transfer and renewal fees. |
| 7. Estimated Initial Investment | A low-to-high range of everything it takes to open and run for the first months. |
| 8. Restrictions on Sources of Products and Services | What you must buy from the franchisor or approved suppliers, and whether they profit from it. |
| 9. Franchisee's Obligations | A cross-reference table of your duties under the agreement. |
| 10. Financing | Any financing the franchisor offers, and its terms. |
| 11. Franchisor's Assistance, Advertising, Computer Systems and Training | Support before and after opening, the training schedule and how the ad fund is spent. |
| 12. Territory | Whether you get a protected territory and what the franchisor can still do inside it. |
| 13. Trademarks | Whether the brand name is registered and any disputes over it. |
| 14. Patents, Copyrights and Proprietary Information | Intellectual property you are licensed to use. |
| 15. Obligation to Participate in the Actual Operation of the Business | Whether you must run it yourself or can hire a manager. |
| 16. Restrictions on What the Franchisee May Sell | Limits on your products, services and customers. |
| 17. Renewal, Termination, Transfer and Dispute Resolution | How long the deal lasts, how it ends, how you sell, and where disputes are settled. |
| 18. Public Figures | Any celebrity paid to promote the brand. |
| 19. Financial Performance Representations | Sales or earnings figures, if the franchisor chooses to share them. |
| 20. Outlets and Franchisee Information | Three years of openings, closures and transfers, plus contact details for current and former owners. |
| 21. Financial Statements | The franchisor's audited financials. |
| 22. Contracts | Copies of every agreement you would sign. |
| 23. Receipts | The page you sign to confirm you received the FDD. It starts the 14-day clock. |
Red flags worth asking about
- Closures or transfers in Item 20 that are high compared with the number of open locations.
- Repeated franchisee lawsuits in Item 3 on the same issue.
- No Item 19 for a brand that has been franchising for many years.
- An Item 7 range that leaves out working capital, or seems low for the real estate involved.
- Large required purchases in Item 8 where the franchisor earns a rebate.
- No protected territory in Item 12, or wide rights for the franchisor to sell inside yours.
- A franchisor with weak finances in Item 21 that is growing quickly.
Call the owners
Item 20 lists current owners and those who left in the last year. Calling them, a step often called validation, is the best reality check there is. Ask what they earn, how long it took to break even, what support really looks like, and whether they would buy again.
Frequently asked questions
How long do I have to review an FDD?
Federal law requires the franchisor to give you the FDD at least 14 calendar days before you sign a binding agreement or pay any money. You can and should take longer if you need it.
How often is an FDD updated?
Franchisors must update their FDD every year, within 120 days of the end of their fiscal year, and sooner if something material changes during the year.
Does every FDD include earnings figures?
No. Item 19 is optional. If a franchisor does not include one, its sales staff are not allowed to give you earnings claims either. Talking to current owners listed in Item 20 is the best way to fill the gap.
Should I have a lawyer review the FDD?
Yes. A franchise attorney can explain the agreement terms and spot issues before you sign. Use this guide to know what questions to ask.
This guide is general information, not legal or financial advice. Have a franchise attorney review any FDD and agreement before you sign.