Franchise Disclosure Documents: What to Look For

Thinking about buying a franchise? Hold that thought – because the devil is in the details.

Imagine this: You’ve found the perfect franchise opportunity, and you’re excited to dive in. The business model is proven, the brand is strong, and the financial potential seems huge. But before you sign on the dotted line, there’s one crucial document standing between you and your dream – the Franchise Disclosure Document (FDD). Skimming through this can be a big mistake. Why? Because this document contains everything you need to know before making a commitment that could shape your future.

What’s the Problem with FDDs?

FDDs are long, dense, and full of legal jargon. It’s easy to feel overwhelmed when facing hundreds of pages that can make or break your decision. But here's the kicker: buried in that overwhelming document are key details that will directly impact your rights, obligations, and overall success as a franchise owner.

If you don't know what to look for, you could miss red flags or opportunities to negotiate better terms. Worse, you might find yourself locked into an agreement that doesn’t live up to your expectations.

But don’t worry – we’re here to help you cut through the noise.

In this article, we’ll walk you through the most important things to look for in a Franchise Disclosure Document, so you can make an informed decision and set yourself up for success.

1. The Franchise Fees and Initial Investment

First things first, take a close look at the franchise fees. These include the initial franchise fee, ongoing royalty payments, and any other hidden costs that may surprise you down the road. Most people focus on the initial franchise fee, but don’t overlook the costs of ongoing royalties, advertising fees, or additional training costs.

How can you protect yourself? Make sure you understand the total initial investment required, including hidden costs like equipment, supplies, and real estate. If the numbers don’t add up, it’s time to take a step back and reconsider.

2. Franchisee’s Obligations

Each franchise agreement will specify what you, the franchisee, are required to do. This could include everything from how you run the day-to-day operations to how you market the business. Some franchises have strict controls, while others are more flexible.

The key question is: What level of control are you comfortable with? If the franchisor demands too much control over your operations, you might feel like you’re more of an employee than a business owner.

3. Territory Rights – Do You Have Exclusive Rights?

Territory rights may be crucial to your franchise's success. Look for clear language in the FDD that outlines whether you’ll have an exclusive territory, meaning no other franchisees will be allowed to open a location near you. Without this, you could face fierce competition from another franchise location just down the street.

Also, consider the possibility of expansion. Are there restrictions on where you can open more units in the future?

If you have concerns about competition, this is a section to review with extra care.

4. Financial Performance Representations

Every franchise buyer wants to know, “How much money can I make?” But not all franchisors provide detailed financial performance representations in the FDD. This section, often called “Item 19,” gives you an idea of the earnings potential of your franchise.

Be cautious if a franchisor avoids providing financial projections. A lack of transparency here should be a red flag.

Our advice? If the franchisor does provide financial data, make sure to ask follow-up questions. Does the data apply to all franchisees or just a select few? Are these figures achievable for a new franchisee starting out in your area?

5. Litigation History

Franchise disputes aren’t uncommon. It’s important to check if the franchisor has a history of litigation with franchisees. This can give you a clue about how the franchisor handles disagreements and whether there are recurring issues within the franchise system.

If you see a pattern of lawsuits or arbitration claims, it’s worth digging deeper. This could signal potential risks you should be aware of before moving forward.

6. Franchise Termination and Renewal Clauses

One of the most important sections of the FDD deals with termination and renewal rights. This tells you under what conditions the franchisor can terminate your agreement and what your rights are when it’s time to renew.

Beware of “one-sided” clauses that give the franchisor all the power. If it’s easy for them to terminate the agreement but hard for you to renew, it could put your investment at risk.

7. Franchise Support and Training

Franchise systems should provide ongoing support to help you succeed, especially in the early days of running your new business. The FDD will outline what training and support the franchisor offers – from initial training to ongoing assistance.

Take note: Are the training programs sufficient for someone new to the industry? What kind of marketing and operational support will you receive? These details are critical to ensure you’re not left to sink or swim on your own.

Why You Need a Legal Professional to Review Your FDD

Reading the FDD yourself might seem doable, but it’s not the same as having a legal expert by your side. Franchise agreements are designed to protect the franchisor – and while most of them are fair, others might include terms that are heavily skewed in the franchisor’s favor.

Don’t take chances. Before you commit, let our experienced legal team review your FDD and explain your rights and obligations in plain language. We can help you spot red flags, negotiate better terms, and make sure your franchise investment is as solid as you think it is.

Final Thoughts – Don’t Go It Alone

Deciding to invest in a franchise is a huge decision, but you don’t have to navigate it alone. The Franchise Disclosure Document is your roadmap to understanding the deal you’re getting into, but it’s easy to overlook important details without the right guidance.

Need help reviewing your FDD? Our law firm helps potential franchisees like you make informed decisions. Schedule a free consultation today, and we’ll go over your FDD with you, making sure you're fully prepared to step into franchise ownership with confidence.

Don't let an overwhelming document hold you back from making a great business decision. Contact us now for your free consultation and take the first step towards successful franchise ownership.

Mitchell C. Beinhaker, Esq. is a business lawyer and estates attorney who runs a solo legal & consulting practice representing business owners, entrepreneurs, executives, and professionals. Through his 30+ years of experience, Mitchell has handled business development, marketing, firm management, along with business transactional work for clients of the firm. He has extensive experience with corporate governance, commercial transactions, real estate, and risk analysis. Using his years of practical experience, he drafts contracts, negotiates purchases, and can manage outside counsel for any corporate situation. For business owners and executives, he creates and implements estate plans, along with succession plans to help companies continue for future generations.  

Mitchell is the co-author of 10 Ways to Get Sued by Anyone & Everyone:  the small business owners guide to staying out of court, available in paperback and kindle from Amazon.