The Franchise Disclosure Document (FDD) is the central legal document in U.S. franchising. It outlines the franchisor’s background, the franchise system, fees, obligations, financial performance data (if provided), and all legal terms a prospective buyer must review before signing a franchise agreement.
Every franchisor operating in the United States must provide an FDD at least 14 days before a franchisee signs any agreement or pays any money. It is designed to ensure transparency and give buyers a clear understanding of what they are joining.
The FDD is organized into 23 sections, known as “Items.” Each Item covers a specific aspect of the franchise system. While not every Item is equally important for every buyer, all provide essential context and must be reviewed carefully.
Below is an overview of the most relevant Items.
Explains the company’s history, parent entities, related businesses, and how long it has operated the franchise system.
Lists the leadership team and their professional backgrounds. Strong experience can signal operational credibility.
Discloses past and ongoing lawsuits involving the franchisor. Frequent disputes or franchisee claims can indicate structural issues.
Details any previous bankruptcies involving the franchisor or executives.
Outlines the upfront costs to join the system, including franchise fees, training fees, or territory fees.
Summarizes ongoing financial obligations such as royalties, marketing contributions, technology fees, renewal fees, and transfer fees.
Provides a complete breakdown of the total startup costs—build-out, equipment, insurance, working capital, and other expenses required to open.
Explains which suppliers are approved or mandatory and whether the franchisor receives revenue from those vendors.
Lists the operational responsibilities of the franchisee, from training to compliance, financial reporting, and local marketing.
Details what the franchisor provides before opening and over the long term, including training programs, technology systems, field support, and marketing.
Specifies whether your territory is exclusive, protected, or subject to competition from other franchisees or corporate locations.
Covers intellectual property protections and potential risks.
Defines requirements for franchise owners, including minimum involvement levels, background checks, or required approvals.
Summarizes the conditions under which the agreement can be renewed, ended, or transferred to another buyer.
One of the most important sections.
The franchisor may choose to disclose historical financial results such as:
If the franchisor does not include an Item 19, they are not permitted to share any performance data outside the FDD.
Shows the number of franchise and corporate locations opened, closed, or transferred over the last three years. Strong growth and low turnover are positive indicators.
The FDD is the most reliable source of information when evaluating a franchise. It gives clear visibility into:
This document helps reduce information asymmetry between franchisor and franchisee and allows prospective buyers to make informed decisions.
Even familiar brands may have complex requirements or obligations that only appear in specific Items.
Items 5, 6, 7, and 19 are central to understanding the financial model.
Use the Item 20 list to contact current operators and ask about real performance, support quality, and operational challenges.
An experienced attorney can highlight clauses affecting territory rights, renewal terms, or fees that are easily overlooked.
For example, aggressive growth targets in Item 1 should align with the franchisee turnover reported in Item 20.
The FDD is the foundation of the franchise relationship. It ensures that prospective franchisees receive full and consistent information before committing to a long-term agreement. A careful review of Items related to finances, support, territory, and system performance is essential for making sound investment decisions.
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