How to Read an FDD in 15 Minutes

Item 5

Initial Fees

Item 5 discloses the franchise fee and any other payments you make before opening. This is not the total investment. It is the amount the franchisor collects upfront for the right to use their brand, systems, and training. Most franchise fees fall between $15,000 and $50,000, though premium brands can charge $100,000 or more.

Red flags: fees that are significantly higher than competitors in the same category without a clear justification. A non-refundable fee that is payable before you receive site selection support is also a concern, because you are committing cash before knowing whether a viable location exists in your market.

Item 7

Estimated Initial Investment

Item 7 is a table showing every cost you will incur to open: real estate, equipment, signage, inventory, insurance, training travel, and working capital. Each line has a low and high estimate, and the total at the bottom is the range of capital you need access to (cash plus financing) before the franchisor will approve you.

Red flags: a very wide spread between low and high estimates (for example, $100K to $500K) suggests the cost experience varies enormously and is hard to predict. Also check whether working capital covers only three months. Many franchisees report the ramp-up period taking six to twelve months, and running out of cash is the most common reason new franchise locations fail.

For a deeper breakdown, see our guide on understanding franchise investment costs.

Item 19

Financial Performance Representations

Item 19 is where franchisors can (but are not required to) disclose actual financial performance data from existing locations: gross sales, cost of goods sold, net income, or other metrics. About 65% of franchisors include some form of Item 19 data, but the depth varies dramatically. Some report only average gross sales. Others provide quartile breakdowns, net margins, and year-over-year trends.

Red flags: a blank Item 19 is not automatically disqualifying, but it means the franchisor chose not to share data they almost certainly have. Also be cautious of Item 19 figures that report only average revenue without median data. Averages can be pulled up by a few high-performing outliers, so the typical franchisee experience may be well below the reported number.

Item 20

Franchisee List and Unit Changes

Item 20 contains two things. First, tables showing how many franchise units opened, closed, and transferred over the past three years. A brand that is consistently losing more units than it opens is shrinking, and you should find out why. Second, it includes a list of every current franchisee with their name, business address, and phone number. This is the list you will use for validation calls.

Red flags: a high number of terminations relative to total units. Also check the transfer count. A spike in transfers can mean owners are trying to exit. Look at the "ceased operations" column carefully, because some franchisors classify forced closures as transfers rather than terminations.

Item 3

Litigation

Item 3 discloses lawsuits between the franchisor and its franchisees, any bankruptcy history, and government enforcement actions. Every franchise system has some litigation (it is inevitable at scale), but the pattern and nature of the cases matter. A handful of disputes over unpaid royalties is normal. A pattern of franchisees suing over misrepresented earnings or territorial encroachment is a serious warning sign.

Red flags: class action lawsuits from groups of franchisees, repeated allegations of the same issue across different plaintiffs, or cases where the franchisor has been ordered to pay damages for fraud or misrepresentation. If Item 3 runs more than 15 to 20 pages, take extra time to understand the recurring themes.