How to Review a Franchise Disclosure Document (FDD) in 10 Minutes or Less
If you're considering buying a franchise, you’ve likely come across the Franchise Disclosure Document (FDD)—an essential legal document that lays out the relationship between the franchisor and franchisee. While the FDD can feel overwhelming at first glance, there’s good news: you don’t need to get bogged down in the details just yet. In fact, you can do a quick, high-level review in under 10 minutes by focusing on key sections.
Here’s a breakdown of how to efficiently review an FDD, with a few helpful tips for making the most out of your time.
The Top 5 Sections to Review in an FDD
Before you dive into the FDD, it’s worth noting that a franchise attorney should always do a more in-depth review before you sign anything. However, if you're still in the discovery phase and just want a quick overview, here's where to focus your attention.
1. Item 19 – Financial Performance Representations
The most important section of the FDD is Item 19, where franchisors provide information about the financial performance of both franchise and corporate locations. This is where you’ll find profitability metrics, sales figures, and key performance indicators (KPIs).
- Tip: Use the search function (Command+F for Mac, Control+F for PC) to quickly locate Item 19. Jot down the sales and profitability numbers for reference later.
Make sure to check if these figures cover all locations or just a portion. If certain stores are left out, that’s a red flag and something you’ll want to ask about during your validation process with existing franchisees.
2. Item 7 – Initial Investment Estimates
Next, turn your attention to Item 7, which breaks down the low and high estimates for getting the franchise up and running. This section helps you understand the total investment needed, including real estate, build-out costs, equipment, and other key expenses.
Pay special attention to variables like lease vs. purchase options for equipment, or whether the business requires a retail space—as this could cause significant differences between the low and high-end estimates.
- Tip: Compare your estimated startup costs from Item 7 with the sales and profit numbers from Item 19 to get a rough idea of your potential return on investment (ROI).
3. Item 15 – Franchisee Responsibilities
This section outlines how you’re expected to manage the business. If you're planning to be a hands-on owner, there’s usually no issue. However, if you plan to hire a manager and take a step back (known as a "manage-the-manager" model), make sure Item 15 doesn’t have any restrictions around this.
For example, does the manager need specific training or licenses? Is the franchisor supportive of semi-absentee ownership? You’ll want to ensure the franchise model aligns with how you plan to operate.
4. Items 6 and 11 – Fees and Support
Item 6 lists out the fees you’ll need to pay to the franchisor, while Item 11 details the support services the franchisor will provide. It's important to see whether the fees you’re paying—like royalties, marketing fees, and technology fees—are justified by the services offered in return.
- Exercise: Write down the monthly fees you’ll owe based on the sales numbers from Item 19, and then cross-check these against the support you’ll receive from the franchisor as outlined in Item 11. Are you getting value for what you’re paying? If not, you might want to explore other franchise options.
5. Item 20 and Exhibits – Franchise Growth and Royalty Health
Lastly, review Item 20 and the franchise agreement exhibits (typically Exhibits D or E), which show both the total number of franchise locations and the franchisor's royalty revenue over the past three years.
Franchise location growth is one indicator of success, but more important is whether existing locations are growing. A healthy, growing royalty revenue suggests that franchisees are making money and reinvesting in their businesses, which is a much better sign than just seeing new locations pop up.
- Tip: Be cautious if you see a lot of terminations or non-renewals in Item 20. This could indicate a problem with the franchise system or support.
Final Thoughts
The FDD might seem like a daunting document, but by focusing on these five key sections—Item 19 (Financials), Item 7 (Investment), Item 15 (Responsibilities), Items 6 and 11 (Fees and Support), and Item 20 (Growth)—you can quickly gather the most important information to guide your decision.
Keep in mind that this quick review is just the first step. Always bring in a franchise attorney for a deeper dive when you're close to making a decision. With the right preparation and validation, you’ll have a clearer picture of whether the franchise is the right fit for you.
If you're considering multi-unit ownership, there are a few extra steps to take, but this guide should give you a solid foundation to start with. Don't let the complexity of the FDD intimidate you—take it step by step, and soon you'll be well-prepared to make a smart investment decision.
