Buy a Franchise
Buying a franchise starts with the FDD. But it can feel overwhelming. In this guide, franchise attorney Tanya Nebo breaks down why it matters and how to read each line item with confidence.
Before a prospective franchisee ever signs a franchise agreement, there is one document that governs nearly everything that follows: the Franchise Disclosure Document (or FDD).
An FDD is not created casually. It is compiled with franchise attorneys, must follow a strict, federally mandated format and, in many states, is reviewed or registered with state regulators before it can even be used. Because of that, franchisors are limited in what they can represent outside of the FDD. Financial claims, operational promises and system descriptions must align with what is disclosed in writing.
In other words, the FDD is the source of truth in the franchise buying process. It is not a marketing tool. It is a disclosure tool (and one designed to slow the process down and ensure prospective franchisees have access to consistent, verifiable information before making an investment decision).
So, what is an FDD and how do I read one?
A Franchise Disclosure Document is a standardized legal document franchisors are required to provide to prospective franchisees before a franchise can be sold.
“The franchise disclosure document is required by the Federal Trade Commission,” said Tanya Nebo, a franchise attorney at Clark Hill with roughly two decades of experience. “It’s designed to disclose to potential franchisees critical information related to the franchise system, the franchise leadership and the franchise history.”
An FDD does not tell a buyer whether a franchise is “good” or “bad” per se. Instead, it provides the information a buyer needs to determine whether a franchise opportunity is properly aligned financially, operationally and strategically.
Therefore, understanding how to approach the document can make the franchise buying process much more manageable.
“The potential franchise owner gets the FDD and, admittedly, it can be a very intimidating document,” Nebo said.
An FDD typically ranges anywhere from 100 to more than 400 pages, depending on the brand. The length of the document alone causes many candidates to skim or skip sections entirely. But that’s a mistake.
Rather than reading the FDD as a single tome of legal text, it’s best approached section by section. Each of its 23 required items serves a specific purpose. Each item provides valuable information about a key topic that should influence the investment decision.
For buyers, the goal is not to memorize the document. Rather, the FDD should be used to support the candidate in making a smart investment decision, often in partnership with financial advisors and attorneys.
This section explains who the franchisor is, how long they have been in operation and how the corporate structure is organized. Item 1 provides essential context about the actual company behind the brand (and any related entities that may affect operations or obligations).
This helps you to identify the “family tree” of the franchise, and it can provide valuable context. For example, if the parent company of the franchise has other, seemingly unrelated obligations, this may be cause for concern.
Item 2 details the franchisor's leadership background.
This should be reviewed for any brand, but it can be especially helpful when considering an emerging brand. A young brand may have a group of highly successful industry experts at the top, and this is something to consider in the due diligence process.
“That’s where you look deeper into the leadership: the background of the people in leadership,” Nebo said. “Despite this being a new franchise system, do they have experience in franchising or other experience that would help them run a new franchise system well?”
You should also look at the bigger picture. Not only “Who are these people?” but “What are the implications of their involvement?”
For example, if the founder is listed in Item 2 and remains involved in the franchise, the brand will likely have a unique culture. Other things to look for in the Item 2 are any tenured industry professionals who will help lead the brand (likely a positive) or any controversial figures who are at the helm (something to be cautious of).
This section discloses material legal actions involving the franchisor.
“A large litigation section doesn’t necessarily mean there’s a red flag,” Nebo said. “What I look for are patterns. What conflicts keep coming up? Are these issues typical or are they one-offs?”
In many cases, this can serve as a pulse check on the franchisor-franchisee relationship. If a franchisor is disclosing multiple franchisee-related lawsuits stemming from something like breach of contract, you should ask more questions.
Item 4 reveals if the franchisor or its executives have filed for bankruptcy within the last 10 years. This section helps potential franchisees assess the level of financial stability or risk involved in the franchise opportunity.
Historical financial instability can be a predictor of how the leadership team may manage collective funds, especially during more challenging times. If bankruptcy is disclosed, explore how the corporate structure and/or financial strategy has evolved, and weigh whether this is enough change to avoid a similar hurdle in the future.
This item outlines all upfront fees and payments, or commitments to pay, for goods or services received from the franchisor or its affiliates prior to opening day. While the initial franchise fee is the most common entry here, Item 5 also includes payments for things like training, equipment and inventory.
This is the cost of admission. While understanding what the initial costs cover is important, you should also think about the uncomfortable possibilities here. What happens to this money if you can’t secure a loan or find a site, for example?
Item 6 details ongoing fees like royalties, marketing contributions, technology fees and other recurring or occasional charges. Because these fees directly affect long-term profitability, they should be carefully considered.
Buyers should look for a full list of all fees and clear descriptions of how each is calculated, when it’s triggered and who receives it. Look for vague language and fees that can be changed at the franchisor’s discretion; these can be warning signs. And, throughout this exploration, identify exactly what the fees cover.
You may also want to ask whether there are additional fees commonly paid that aren’t listed in this section.
This section provides a range of the total investment required to open the franchised business. Line items like buildout, equipment, working capital and professional fees should be included. These figures should be based on real data, but they’re not guaranteed minimums and maximums.
When researching, look at the provided ranges, but consider how they might play out in your market. If you’re in an especially competitive real estate market, costs associated with the lease and deposit may be higher.
You should also pay special attention to the “Additional Funds” entry. This is the cushion for the first few months of operations, but it’s important to remember what all this cushion realistically needs to cover. If you’re looking to replace your income with your franchise venture, you’ll need both additional funds to support any fluctuations in the business itself and to account for your own living expenses as you work to drive the business to profitability.
Item 8 explains where and from whom franchisees must purchase products, equipment or services. These requirements can impact cost control and operational flexibility.
Beyond this, franchisors can receive rebates from suppliers, and you should understand whether you’re required to buy supplies from a specific source because it benefits the franchisor.
This item summarizes exactly what the franchisee is required to do under the franchise agreement. It functions as a roadmap of daily responsibilities and can be a bit of a “cheat sheet” for the legal contract. This tells you where you can be held in default. When reviewing Item 9, seriously consider whether you can commit to the obligations it describes.
If the franchisor offers any type of financing support or guidance, those details appear here.
Some franchisors offer in-house financing — investing in your success. Others have established partnerships with preferred lenders who already know the brand, which can speed up the financing process. If a franchisor does not offer direct financing and does not disclose partnerships with preferred lenders, this isn’t necessarily a bad thing, but you may need to put some additional time and effort into exploring the options.
Item 11 outlines support provided by the franchisor, including training, ongoing assistance and system standards. This is the heart of the value proposition. It’s what you’re paying royalties for, so make sure it makes sense and is worth the ongoing investment.
This section of the FDD establishes whether or not a franchisee will receive a protected territory and under what conditions that territory can be modified or encroached upon.
If the franchisor does not offer protected territories, this can be cause for concern as it leaves the door open for the franchisor or a new franchisee to open another location right down the road, should they choose.
Item 13 discloses the status of the brand’s trademarks. Strong trademark protection is critical to maintaining long-term brand value. While you’re buying into a proven business model and system, another key perk of franchising is the brand itself. Without a registered trademark, the brand identity isn’t fully owned, and the investment may be shaky.
This item expands on intellectual property and clarifies what franchisees are licensed to use.
This section protects the “how-to” of the business — the proprietary systems and tools that give you an advantage over mom-and-pop operations. Make sure the franchisor has the rights to the key tools and programs that empower day-to-day business operations.
Item 15 explains whether the franchise requires owner involvement (or permits absentee ownership). Some franchises can be run with an absentee or semi-absentee model. Many cannot. Understanding exactly what the franchisor requires can help you distinguish whether you’re buying a job or an investment, and it gives a clearer picture of what will be required of you as you scale.
This section defines what products or services franchisees must offer in order to maintain brand consistency. While it’s generally accepted that buying a franchise means following the established model, it’s important to understand just how much flexibility you have. Can you slightly pivot the menu to include a local offering if enough guests request it? Can you expand to related service offerings if there’s a clear local demand?
Item 17 outlines how long the franchise lasts, how it can be renewed or terminated, and how disputes are resolved (all of which shape a franchise owner's long-term exit strategy).
While not everyone goes into their franchise investment thinking about the exit, you will, one day, need to exit. Understanding this section can help you prepare for anything from an unexpected exit due to hardship in a few years to a successful sale after decades of success and multiple renewals.
If celebrities or public figures are associated with the brand, that information is disclosed here.
Celebrity endorsements can be a double-edged sword. While having these partnerships can increase visibility and drive business success, there is also the risk of a public figure’s personal scandals impacting the brand’s image (e.g. Subway).
It’s worth asking the leadership team more about how these partnerships work and how strategy may change should the spokesperson separate from the brand.
Item 19 includes financial performance data – if the franchisor chooses to provide it. Many do not. When included, the data should be reviewed carefully and in context.
This is the only place where the franchisor can legally make representations about how much money you may make, but it’s all still very circumstantial. Review the data itself as well as how it was compiled. Some brands will segment the Item 19 based on unit maturity or build-out model.
Look carefully at the differences between franchised and corporate-owned locations, if disclosed, and review the full range of performance, not just the averages.
Item 20 details unit changes and current and former franchisee contacts. When it comes to the franchise due diligence process, Item 20 functions as one of the most valuable FDD sections.
At first glance, Item 20 will paint a picture of the brand’s recent growth. Is the unit change from year to year net positive? Is the brand closing dozens of locations each year?
Beyond this, though, are the people behind those units.
“My biggest piece of advice is to talk to as many existing and prior franchisees as possible. Those are the people who can give you practical insight into how the process went for them,” Nebo said. “Franchisees can tell you things that franchisors’ salespeople cannot and should not. So, speak to people currently in the system — and those who have left. Find out why they left.”
And, perhaps one of the most powerful questions to ask when working through the Item 20: “Would you do it again?” This can be very telling. Many franchisees, even those who have experienced hardships along the way, will answer with an enthusiastic “Yes.”
This section includes audited franchisor financial statements. Item 21 can offer insight into the overall financial health of a given franchise.
While the financial stability of your individual franchise is crucial, you should also consider the financials of the franchisor. If they’re struggling, they may not have the resources necessary to support you long-term.
When reviewing the Item 21, try to get a feel for where the money is coming from. If the franchisor appears to be making a disproportionate amount of its money from franchise fees, this could be a red flag. Getting someone to sign an agreement and pay a one-time fee should not be the heart of the franchisor’s revenue structure, and relying on initial franchise fees to support the organization’s day-to-day demands can water down the franchisee system and ultimately damage the brand.
Item 22 includes all contracts that franchisees must sign and should be reviewed alongside the FDD. Here, you can see what you’ll be agreeing to before you agree to it. Review it carefully with your franchise attorney.
The final item simply acknowledges that the franchisee received the FDD and starts the clock on the required two-week “cooling off” period.
“That 14-day period is a great protection,” Nebo said. “It forces people who are excited about an opportunity to slow down and evaluate it properly.”
With hundreds of pages to process, reading an FDD takes time. But it’s one of the single most important steps in the franchise buying process.
So, what is an FDD and how do I read one? The FDD is the source of truth. It reveals the franchise system’s financial obligations, leadership experience, operational expectations and legal framework. So, prospective franchisees should approach it with care, looking for clarity, consistency and potential warning signs. Zees should also seek professional help from both an attorney and a CPA to fully understand what the document itself actually reveals.
While the FDD does not tell a buyer whether a franchise is “good” or “bad,” it does provide the information needed to make an informed decision early and avoid surprises along the way.
Want to learn more about franchise opportunities on 1851 Franchise? Be sure to visit our Power Rankings to read more on brands making moves.
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