What Are The 23 Items in a FDD? (Franchise Disclosure Document)

The FDD contains 23 legally required disclosure items covering the franchisor’s background, fees, obligations, territory, financial performance, and contracts. The FTC requires them but does not verify them

Again, those 23 items in the FDD are not verified. What?

That’s right. Although the U.S. government (via the Federal Trade Commission), requires every franchise company (franchisor) registered to offer and sell franchises here to provide information under each of the 23 items, that information won’t be verified by the FTC.

That means only one thing.

You’re the person who needs to verify that the information contained in the FDD is factual. But don’t worry, it’s not difficult to do if you know how.

With those things in mind, let’s take a look at the 23 items that are included in the FDD.

Note: You should never have to pay to get a Franchise Disclosure Document. Get them free here.

Key Takeaways

The 23 items in an FDD are standardized by the FTC, but the information inside them isn’t verified by anyone in government. That job falls to you.

That being said, the most revealing items are usually 19, 20, and 21: what the franchisor says you might earn, who’s actually running units right now and who’s left, and whether the company itself is on solid financial footing.

Be sure to hire a good franchise attorney. They can help you interpret all 23 items that are listed, but no attorney can do the outreach to existing and former franchisees for you. That part is on you.

The 23 Items in the FDD

Here they are, in order:

1. The Franchisor, its Predecessors, and its Affiliates

This item tells you who you’re actually doing business with. It lists the franchisor’s business history, any predecessor companies, and any affiliates that sell similar products or services.

Fact: some franchisors restructure or rebrand to bury a rocky past. Check how long the company has operated under its current name.

2. Business Experience

This item lists the backgrounds of the company’s key executives. Look at how long leadership has been in place and whether they have franchising experience specifically, not just experience running a single business.

Note: High executive/management turnover in this section is worth asking about.

3. Litigation

This part of the FDD discloses lawsuits involving the franchisor and its executives, including ones filed by franchisees. A few lawsuits over many years and hundreds of units isn’t unusual. A lot of franchisee-initiated litigation is a red flag. Talk to your franchise attorney about it.

4. Bankruptcy

This item discloses whether the franchisor or its executives have filed for bankruptcy in the past ten years. A past bankruptcy doesn’t automatically disqualify a franchisor, but you need to understand what caused it and whether the same conditions still exist.

Note: For me, if the founder of the franchise concept has one or more bankruptcies in his or her background, I would dig in deep. As in, what happened???

5. Initial Franchise Fee

This one states the upfront, one-time fee you pay for the right to operate under the brand.

Most franchise fees (they are non-negotiable) fall between $35,000 and $40,000, though they can be higher. And when you purchase a Master Franchise, your franchise fee may be $100,000 or more.

That said, if you sign a multi-unit franchise agreement, the franchise fee is normally discounted since you are buying several locations.

6. Other Fees

This item lists every ongoing fee you’ll pay beyond the initial franchise fee: royalties, marketing fund contributions, technology fees, transfer fees, and more. Add these up. Royalty and marketing fees can add up.

7. Initial Investment

This section estimates your total startup cost, including real estate, build-out, equipment, initial inventory, and working capital. It’s usually presented as a range. Budget toward the high end, not the low end.

8. Restrictions On Sources Of Products And Services

This item explains whether you’re required to buy supplies, equipment, or inventory from the franchisor or its approved vendors. Required purchases can mean the franchisor earns a markup on your supply chain. Ask what that markup is. Then, find out what percentage of their revenue comes from those products.

9. Franchisee’s Obligations

This item is a reference chart pointing to where, elsewhere in the FDD or franchise agreement, each of your obligations as a franchisee is spelled out. Use it as a checklist while you read the rest of the document. And make sure your lawyer goes over this section in detail.

10. Financing

This part discloses whether the franchisor offers any financing, either directly or through a preferred lender relationship. Most franchisors don’t finance directly. If they do, read the terms as carefully as you would a bank loan.

Note: I’ve seen franchisors offer financing for the Franchise Fee. if the rate’s competitive, you may want to consider doing it.

11. Franchisor’s Obligations

Yes…your franchisor has obligations too. In this case, this section of the Franchise Disclosure Document lists what the franchisor is required to provide you: training, site selection help, operations manuals, ongoing support. This is one of the most important items in the whole document. Vague language may translate into vague support later.

12. Territory

Out of all the 23 items in an FDD, this one may be the most important one. Or, at least one of the top 3.

That’s because this section defines the geographic area you’ll operate in and whether that territory is exclusive. That’s why you need to ask directly whether the franchisor can place another unit, or sell online into your territory, without your consent.

Finally, these days, the internet is being used as a sales tool for franchisors. Find out if you get a piece of the action if something is sold online in your territory.

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13. Trademarks

This item confirms the franchisor’s ownership of its trademarks and discloses any legal challenges to them. An unresolved trademark dispute can put your entire investment at risk. Have your franchise lawyer look into the company’s trademarks.

14. Patents, Copyrights and Proprietary Information

Again, this one is for your lawyer to handle. In a nutshell, you want your attorney to confirm the franchisor’s ownership of its trademarks and discloses any legal challenges to them. An unresolved trademark dispute can put your entire investment at risk.

15. Obligation To Participate In The Actual Operation Of The Franchise Business

This part of the FDD states whether you’re required to personally run the business day to day, or whether you can be an absentee or semi-absentee franchise owner. Confirm this matches the ownership model you actually want. And the one that’s been described in the sales literature and by the franchise broker and/or company salesperson.

16. Restrictions On What The Franchisee May Sell

This item explains any limits on the products or services you’re allowed to offer, and whether the franchisor can change your product line without your input.

Note: If you’re the creative type, make sure you understand that you can’t just willy-nilly decide to “add a product” to sell at your franchise location. It’s not permitted.

17. Renewal, Termination, Transfer And Dispute Resolution

This item covers how your agreement can end: Renewal terms, grounds for termination, your ability to sell or transfer the business, and how disputes get resolved.

Fact: Many of today’s agreements require arbitration in the franchisor’s home state, not yours. That matters if things ever go wrong.

18. Public Figures

This item discloses whether any celebrities or public figures are involved with the franchise, how much they’re compensated, and how much they’ve actually invested themselves.

Note: Ask your franchise lawyer what can potentially happen to your business if a spokesperson does something to damage the brand. See this example.

19. Earnings Claims – Financial Performance Representations

This item, when a franchisor chooses to include an earnings claim, discloses actual or potential financial performance data. It’s the only item where a franchisor is legally allowed to make earnings claims. If Item 19 is blank, no one at the company is legally allowed to tell you what you might earn, verbally or otherwise.

20. List Of Outlets

This item is most valuable.

That’s because it lists current franchisees, plus anyone who left the system in the past three years, and why.

Keep this list in front of you at all times. Why?

Because as part of your due diligence, you’re going to be calling 10-15 franchisees from that list.

Learn how and when to make those calls here.

21. Financial Statements

This portion of the FDD contains the franchisor’s audited financial statements. This tells you whether the company itself is financially stable enough to support you if things get tough. Read it carefully.

Tip: Hire a CPA experienced with small businesses to look over the financials.

22. Contracts

This item includes copies of every contract you’ll be asked to sign: the franchise agreement, lease addendums, guarantees, and more. Read every page. Have a franchise attorney read every page too.

23. Receipt

This is the acknowledgment page confirming you received the FDD. Signing it starts the legally required 14-day waiting period before you can sign any agreement or pay any money.

Bottom Line

To summarize, the FDD has 23 items. All franchisors have to include them. That’s the law. But here’s the catch. The FTC doesn’t verify a single word of it. Nobody checks the franchisor’s homework for you. That job is yours.

With that in mind, some items matter more than others.

For instance, item 19 tells you what you might earn, if the franchisor chooses to disclose it. Item 20 lists current and former franchisees. Item 21 shows you the franchisor’s own financial health. Read those three closely. Then call the people in Item 20. Especially the ones who left (they’re listed).

Fact: A good franchise attorney can help you make sense of all 23 items.

But an attorney can’t make those franchisee phone calls for you. That part is on you. Do it right, ask the right questions, and you’ll know exactly what you’re getting into before you sign anything.

While it’s important for you to go through each and every one of them, it’s even more important to hire a good franchise attorney to help you figure them out.

That’s because franchise lawyer’s write and read FDD’s all the time. They know what to look for. And they can quickly spot red flags for you to be aware of.

Finally, be sure to bookmark this post. That way you can refer back to it as needed.