How to Read a Franchise Disclosure Document

Every franchise in the United States is required by the FTC to provide a Franchise Disclosure Document to prospective buyers. It contains 23 standardized items covering everything from the franchisor's litigation history to your estimated startup costs. The problem is that FDDs run 200-400 pages and are written in legal language.

Here is what actually matters — and what you can safely skim.

The 5 Items You Must Read Carefully

Item 5 — Initial Fees

This is the franchise fee — the upfront cost for the right to use their brand. It typically ranges from $10,000 to $50,000 but can be much higher for premium brands. Look for whether the fee is uniform or varies by territory, and whether any portion is refundable.

Item 6 — Other Fees

This is where the ongoing costs live. Royalty fees (usually 4-8% of gross revenue), advertising fund contributions (1-3%), technology fees, and transfer fees. These fees compound over the life of the franchise and directly impact your profitability. Compare the total fee burden across brands you are considering.

Item 7 — Estimated Initial Investment

A line-by-line breakdown of everything you will spend before opening: build-out, equipment, signage, insurance, training travel, working capital, and more. The range can be enormous — a Subway may start at $230K while a McDonald's can exceed $2M. Pay attention to the working capital line — that is how long the franchisor thinks it will take before you are profitable.

Item 19 — Financial Performance Representations

This is the only place a franchisor can legally share earnings data. Not all franchisors include it — and that absence itself is information. When present, look at median revenue (not just average), the sample size, and whether the data separates mature units from new ones. Our dedicated Item 19 guide covers this in depth.

Item 20 — Outlets and Franchisee Information

Three years of unit counts: openings, closings, transfers, and total. This tells you whether the system is growing or shrinking. A franchise losing more units than it opens is a red flag. High transfer rates may indicate owner dissatisfaction. The contact list at the end lets you call current and former franchisees directly — do this.

Items Worth a Careful Skim

• Item 3 — Litigation: Active lawsuits between the franchisor and franchisees. One or two disputes are normal; dozens suggest systemic problems.
• Item 8 — Sourcing Restrictions: Are you required to buy supplies only from approved vendors? This limits your ability to negotiate costs.
• Item 12 — Territory: Do you get an exclusive territory? How is it defined? Can the franchisor open competing units nearby? Non-exclusive territories can kill your unit economics.
• Item 17 — Renewal and Termination: Under what conditions can the franchisor terminate your agreement? What does renewal cost? Some franchises charge a full new franchise fee at renewal.

Items You Can Skim Quickly

Items 1-2 (franchisor background), Item 4 (bankruptcy), Items 9-11 (obligations), Items 13-16 (trademarks, patents, obligations), Items 21-23 (financial statements, contracts, receipts). These are important for your attorney to review but are less critical for your initial evaluation.

How to Use FranchiseVS

We extract the most decision-relevant data from Items 5, 6, 7, 19, and 20 and present it in a comparable format across brands. Our comparison pages let you see two brands side by side, and our Health Score combines growth, fees, scale, and data quality into a single number.

The FDD is your most important research tool. We make it faster to get started — but always read the complete document before signing.