The Franchise Disclosure Document (FDD) is the most important resource you'll have when evaluating a franchise opportunity. This 200+ page legal document contains everything you need to know about costs, obligations, and the health of the franchise system.
Unfortunately, many prospective franchisees skip the FDD or only skim it. This is a costly mistake. Understanding how to read and evaluate an FDD can save you from making a poor investment decision and help you identify truly great opportunities.
FDD Basics
Federal law requires franchisors to provide the FDD at least 14 days before you sign any agreement. The document must be updated annually and registered in certain states. You can access FDDs for 1,200+ brands through Frandera's franchise directory.
What is an FDD?
The Franchise Disclosure Document is a standardized legal document that franchisors must provide to prospective franchisees. It contains 23 specific items covering everything from initial fees to litigation history.
The FDD is regulated by the Federal Trade Commission (FTC) and must follow a specific format. This standardization makes it easier to compare franchises, but you still need to know what to look for in each section.
Key Facts About FDDs
- Must be provided 14 days before signing (federal requirement)
- Updated annually (check the cover page for the date)
- Contains 23 standardized items
- Must be registered in certain states (franchise registration states)
"The FDD is your most important due diligence tool. Every prospective franchisee should read it cover to cover, and I always recommend having a franchise attorney review it before signing anything."
Michael Seid
Franchise Attorney & Consultant, MSA Worldwide
Key Items to Review
While you should read the entire FDD, certain items are more critical than others. Here's what to focus on:
Item 5: Initial Fees
Item 5 discloses the initial franchise fee—the upfront payment you make to the franchisor for the right to operate under their brand.
What to Look For:
- • The exact franchise fee amount
- • Whether the fee is refundable (usually it's not)
- • If there are discounts for veterans, multi-unit purchases, or other circumstances
- • How the fee compares to similar franchises in the industry
Compare franchise fees across similar brands using Frandera's comparison tools.
Item 6: Other Fees
This is one of the most important items. Item 6 lists all ongoing fees you'll pay to the franchisor, including royalties, marketing fees, and other charges.
Royalty Fees
Typically 4-7% of gross sales, paid weekly or monthly. This is the franchisor's primary revenue stream.
Marketing Fees
Usually 1-4% of gross sales. May be national, local, or both. Check if you control how local funds are spent.
Watch Out For:
- • Total ongoing fees exceeding 10% of revenue
- • Hidden fees or fees that increase over time
- • Mandatory purchases from franchisor or approved suppliers
Item 7: Initial Investment
Item 7 provides a detailed breakdown of all costs required to open your franchise, from real estate to equipment to working capital.
This is presented as a low-to-high range. The actual cost will depend on your location, real estate costs, and local regulations.
Typical Investment Categories:
- • Real Estate & Build-Out: Leasehold improvements, construction
- • Equipment & Fixtures: Machinery, furniture, technology
- • Initial Franchise Fee: From Item 5
- • Inventory/Supplies: Opening stock
- • Working Capital: Cash to operate until profitable (usually 3-6 months)
- • Training & Travel: Costs to attend initial training
Use Frandera's investment filters to compare costs across similar franchises.
Item 19: Financial Performance Representations
Item 19 is optional—franchisors are not required to provide financial performance data. However, when they do, it's incredibly valuable. According to our analysis, approximately 40-50% of franchises provide Item 19 data in their FDDs.
If Item 19 is present, you'll see revenue data, profit margins, or other financial metrics from existing franchisees. This helps you understand realistic revenue potential.
What Good Item 19 Data Includes:
- • Median or average revenue figures
- • Revenue ranges (low, median, high)
- • Breakdowns by location type, market size, or other factors
- • Sample size (how many units the data is based on)
- • Time period covered
Red Flag: No Item 19
If a franchisor doesn't provide Item 19, it doesn't necessarily mean the franchise is bad—but it means you'll need to do more research by talking to existing franchisees. Always ask why Item 19 isn't provided.
Item 20: Outlets and Franchisee Information
Item 20 shows the growth (or decline) of the franchise system over the past three years. This is critical for understanding system health.
What to Analyze:
- • Total Outlets: How many locations exist (company-owned vs. franchised)
- • New Openings: How many units opened in the past year
- • Closures: How many units closed (and why)
- • Transfers: How many franchises were sold to new owners
- • Franchisee List: Contact information for existing franchisees
Calculate Growth Rate
Compare total outlets year-over-year. A declining system (more closures than openings) is a major red flag. Use industry benchmarks to see how the brand compares.
Red Flags to Watch For
High Closure Rates
If Item 20 shows more closures than openings, the system may be in decline. Calculate the closure rate: (closures / total outlets) × 100.
Excessive Ongoing Fees
Royalty + marketing fees exceeding 10% of revenue can make profitability difficult. Compare to industry averages.
No Item 19 Data
While not required, the absence of financial performance data means you'll need to do more research on your own.
Litigation History (Item 3)
Some litigation is normal, but excessive or serious litigation (fraud, misrepresentation) is concerning.
Bankruptcy Disclosures (Item 4)
Recent bankruptcies of the franchisor or key executives may indicate financial instability.
Unrealistic Earnings Claims
If the franchisor makes earnings claims outside of Item 19, this is illegal and a major red flag.
Working with Professionals
While you can review the FDD yourself, it's highly recommended to work with professionals who specialize in franchising:
Franchise Attorney
Reviews the FDD and franchise agreement for unfavorable terms, explains legal obligations, and can help negotiate better conditions.
Franchise Accountant
Analyzes financial projections, tax implications, and helps you understand the true cost of ownership.
Franchise Consultant
Helps you identify suitable franchises, navigate the process, and connect with franchisors. Many work at no cost to you (they're paid by franchisors).
Tip: Connect with qualified franchise advisors through Frandera's network.
Next Steps
Request the FDD
Get the FDD from the franchisor or download it from Frandera if available.
Read It Thoroughly
Don't skip sections. Take notes and highlight areas you don't understand.
Compare to Other Franchises
Use Frandera to compare fees, investment, and growth metrics across similar brands.
Contact Existing Franchisees
Use the franchisee list in Item 20 to call at least 5-10 existing franchisees.
Consult Professionals
Have a franchise attorney and accountant review the FDD before signing.
Want to explore franchise opportunities?
Get access to detailed FDD analysis, fee breakdowns, and franchisee contacts.
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