How to Read a Franchise Disclosure Document

In short

Rob Lancit calls the Franchise Disclosure Document the most important thing a buyer reviews and then goes through it in order. Under the FTC’s Franchise Rule a franchisor must hand over the FDD at least 14 calendar days before an agreement is signed or money changes hands. He treats that as a floor and tells buyers to take as long as they need, with a franchise attorney or CPA beside them.

The document runs to 23 Items and often hundreds of pages. Items 1 to 4 cover company history and the executives, and Items 3 and 4 disclose litigation and bankruptcies. Items 5 to 7 lay out every fee: the initial fee, royalties, marketing and technology fees, renewal and transfer costs, with Item 7 projecting expenses for the first three months. He singles out Item 9 for the obligations of each side, Item 11 for support, Item 12 for territory, Items 13 and 14 for trademarks and patents, and Item 17 for renewal, termination, transfer and disputes.

Item 19, the financial performance section, gets the closest reading. He warns that corporate-owned units pay no royalties and may get other breaks, so their numbers can differ from franchisee-owned units, and that figures are often drawn from top performers. Franchisors may not make any earnings claim, written or spoken, that is not in Item 19. Items 20 to 23 cover unit counts, audited financials, contracts and receipts.

Summary by the editors of this site. The original is Rob’s own writing; read the original at the source.