FDD Basics
What is an FDD?
The Franchise Disclosure Document is a legal filing that every franchisor in the United States must provide to prospective buyers at least 14 days before any money changes hands. It is regulated by the FTC under 16 CFR Part 436 and contains 23 standardized items covering everything from the franchisor's litigation history to the actual financial performance of existing locations.
Why the FDD matters
A franchise sales team will tell you what they want you to hear. The FDD tells you what they are legally required to disclose. It is the single most important document in franchise due diligence because the information in it is audited, regulated, and subject to legal liability if materially false.
Every state that registers franchises requires the FDD to be filed with regulators. Several states (California, Minnesota, New York, and others) make these filings publicly accessible, which is how FranchiseVerdict sources its data.
The 23 Items at a glance
The FDD is divided into 23 numbered items, each covering a specific topic. While all 23 are worth reading, the items below are the ones that reveal the most about the financial reality of a franchise opportunity.
Item 5
Initial Fees
Item 5 discloses the franchise fee and any other payments you must make before opening. This is not the total investment. It is the amount the franchisor keeps before you spend a dollar on build-out, equipment, or working capital. Initial fees typically range from $10,000 to $50,000 but can exceed $100,000 for premium brands.
On FranchiseVerdict, the franchise fee appears in the key facts section of every brand page.
Item 6
Ongoing Fees
Item 6 covers all recurring fees: royalty rates (typically 4% to 8% of gross sales), advertising fund contributions, technology fees, and any other continuing obligations. These are the costs that eat into your margins every month for the life of the franchise agreement.
Pay close attention to how the royalty is calculated. Some franchisors charge a percentage of gross sales, others charge a flat monthly fee, and some use a tiered structure. The advertising fund contribution is separate from the royalty and typically runs 1% to 3% of gross sales.
FranchiseVerdict extracts royalty rates and ad fund percentages for every brand. Use the screener to filter brands by fee structure.
Item 7
Estimated Initial Investment
Item 7 is a table showing every cost category you will incur to open the franchise: real estate, equipment, signage, initial inventory, insurance, training travel, and working capital. Each line item has a low and high estimate. The total range at the bottom is what you need to have access to (cash plus financing) before you can open.
For a deeper breakdown, see our guide on understanding franchise investment costs.
Item 19
Financial Performance Representations
Item 19 is the most valuable and most inconsistent section of the FDD. This is where franchisors can (but are not required to) disclose actual financial performance data: gross sales, cost of goods sold, net income, or other metrics from existing locations.
About 65% of franchisors include some form of Item 19 data, but quality varies dramatically. Some disclose only average gross sales. Others provide quartile breakdowns, net income figures, and year-over-year trends. A blank Item 19 is not necessarily a red flag, but it means the franchisor has chosen not to share performance data that they almost certainly have.
FranchiseVerdict extracts and normalizes Item 19 data across every brand. Revenue figures and earnings data appear on brand pages where disclosed.
Item 20
Outlets and Franchisee Information
Item 20 contains two critical pieces of information. First, it includes tables showing how many units opened, closed, and transferred over the past three years. A brand that is consistently losing more units than it opens is a warning sign.
Second, Item 20 includes a list of every current franchisee with their name, business address, and phone number. This is the list you use for validation calls, the most important step in franchise due diligence.
FranchiseVerdict tracks unit growth trends on every brand page. Franchisee contact lists are available as a paid unlock.
Other items worth reading
- Item 3 (Litigation): lawsuits between the franchisor and franchisees, bankruptcy history, and government actions. A long litigation section is worth investigating further.
- Item 11 (Franchisor Obligations): what the franchisor promises to provide in terms of training, marketing support, and site selection.
- Item 12 (Territory): whether you get an exclusive territory and how it is defined. Some franchisors reserve the right to place another location within your trade area.
- Item 17 (Renewal and Termination): the terms under which the franchisor can terminate your agreement, and what happens when the contract expires. This is where you find out whether renewal is automatic or subject to new terms.
How to get an FDD
Under FTC rules, any franchisor actively selling franchises must provide you with a current FDD at least 14 days before you sign anything or pay any money. You can request one directly from the franchisor or through a franchise broker. Several states also make FDDs available through their regulatory agencies.
FranchiseVerdict extracts key data points from publicly available FDD filings so you can compare brands before requesting the full document. Browse all brands to start your research.