Why FDDs feel confusing (and how this checklist fixes it)

Most people get stuck because they try to read an FDD like a novel-front to back, word for word. That's not how it's meant to be used.

The FDD is a standardized disclosure document organized into 23 required Items. The trick is knowing which Items control the economics, which control the power dynamics, and which reveal whether the franchise system is healthy or quietly churning.

Quick answer: how to read an FDD (60-second checklist)

If you want the fastest path to signal, do this in order:

1. Item 7 (Estimated Initial Investment) - can you afford it, and does the range feel real?
2. Item 6 (Other Fees) - what do you pay every month forever?
3. Item 19 (Financial Performance Representations) - are earnings claims disclosed, and are they credible?
4. Item 20 (Outlets & Franchisee Information) - is the system growing, or are owners exiting?
5. Item 21 (Financial Statements) - can the franchisor support the network through downturns?
6. Item 17 (Renewal/Termination/Transfer) - what happens if things go wrong, or you want out?

Then (and only then) do your full skim of Items 1–23 using the checklist below-capturing notes in the same format each time so your comparisons are clean.

The 5 items you read first (fast triage)

When you're comparing multiple opportunities, your goal isn't to read more-it's to disqualify faster. These five Items let you decide whether an opportunity deserves deeper diligence.

1) Item 7 - Estimated Initial Investment

What you're checking: total cash required to open (not just the franchise fee), including build-out, equipment, signage, initial inventory, and working capital.

Red flags:

• Ranges that feel artificially low (especially working capital)
• Big line items pushed into "optional" categories
• Costs that "vary by market" with no guidance on how to estimate your market

2) Item 19 - Financial Performance Representations (if provided)

What you're checking: what performance metrics are disclosed (gross sales, average unit volume, costs, margins), how many units are included, and whether the definitions match your planned format.

Red flags:

• Small sample sizes or cherry-picked cohorts
• Metrics that exclude major costs (labor, rent, local marketing)
• "Top performers only" without showing distribution (median, quartiles, lows)

Helpful references: FTC Franchise Rule overview and NASAA FPR Commentary.

3) Item 20 - Outlets & Franchisee System Turnover

What you're checking: whether outlet counts are rising, flat, or declining-and why. Item 20 is also where you'll find lists of current and former franchisees, which fuels your validation calls.

Red flags:

• High closures, transfers, or terminations
• Growth driven mostly by company-owned units (if you're buying a franchise)
• Reacquisitions (franchisor buying units back) without clear rationale

4) Item 21 - Financial Statements

What you're checking: liquidity, debt load, cash flow, and whether franchise fees are propping up operations.

Red flags:

• Weak cash position or persistent operating losses
• Heavy related-party transactions that could distort economics
• Signs the franchisor may struggle to provide support during downturns

5) Item 17 - Renewal, Termination, Transfer, Dispute Resolution

What you're checking: who holds the leverage over renewal, whether transfers are practical, and what happens if you underperform or want to exit.

Red flags:

• Short cure periods and broad default triggers
• Transfer approvals that can be denied "in sole discretion"
• Dispute forums far from you or expensive/arbitration-heavy structures

Item-by-item skim guide (Items 1–23)

Below is the practical skim guide for all Items 1–23. Don't aim for perfection-aim for consistency. If you capture the same notes each time, your comparisons become objective.

Item 1 - The Franchisor, Parents, Predecessors, and Affiliates

Skim for: who you're doing business with, corporate structure, and affiliate entities you may pay.

Red flags: frequent entity changes, confusing affiliate webs, key services billed through affiliates.

Reference: FTC FDD deep-dive guide.

Item 2 - Business Experience

Skim for: leadership experience in the industry and in franchising specifically.

Red flags: thin operator experience, constant executive turnover, sales-heavy leadership profiles.

Item 3 - Litigation

Skim for: franchisee lawsuits, fraud/misrepresentation claims, class actions, regulatory actions.

Red flags: repeated franchisee disputes, patterns in multiple states, many settlements.

Item 4 - Bankruptcy

Skim for: bankruptcy history of the franchisor, parents, affiliates, or key executives.

Red flags: recent bankruptcies tied to the system, repeat issues among principals.

Item 5 - Initial Fees

Skim for: franchise fee, deposits, training fees, tech setup, "opening assistance," what's refundable.

Red flags: lots of nonrefundable fees before you're operational, vague "administrative" charges.

Item 6 - Other Fees

Skim for: ongoing royalties, marketing fund, tech fees, renewal/transfer fees, audit/late/payment penalties.

Red flags: many variable fees, "at franchisor's discretion," missing caps or change limits.

Item 7 - Estimated Initial Investment

Skim for: the true all-in opening range and biggest cost drivers (build-out, equipment, working capital).

Red flags: unrealistic rent/build assumptions, low working capital, heavy "not included" exclusions.

Item 8 - Restrictions on Sources of Products and Services

Skim for: approved suppliers, mandatory purchasing, rebates, and franchisor affiliate suppliers.

Red flags: supplier lock-in with unclear value, franchisor profit motives hidden in "rebates."

Item 9 - Franchisee's Obligations

Skim for: the obligations table mapping your duties to contract sections (your compliance roadmap).

Red flags: obligations described broadly ("as we require"), heavy reporting burden with thin support.

Item 10 - Financing

Skim for: whether the franchisor offers/arranges financing and what security interests they take.

Red flags: high rates/fees, cross-default terms, financing tied to purchasing requirements.

Item 11 - Franchisor's Assistance, Advertising, Computer Systems, Training

Skim for: what support is promised vs optional, training duration, required software stack.

Red flags: minimal opening support, expensive required tech, vague marketing help.

Item 12 - Territory

Skim for: exclusivity (or not), carve-outs, online sales rules, relocation rights.

Red flags: no exclusive territory, broad carve-outs, franchisor right to compete near you.

Item 13 - Trademarks

Skim for: trademark registrations, disputes, and ownership structure.

Red flags: unregistered marks, ongoing infringement disputes, unstable brand rights.

Item 14 - Patents, Copyrights, and Proprietary Information

Skim for: the IP you rely on and what happens if it's challenged or expires.

Red flags: core system depends on shaky IP claims or licenses that can be revoked.

Item 15 - Obligation to Participate in the Actual Operation

Skim for: owner-operator requirements, manager qualifications, time-in-business expectations.

Red flags: mandatory owner presence that conflicts with your plan or portfolio.

Item 16 - Restrictions on What the Franchisee May Sell

Skim for: product/service limitations and required menus/catalogs.

Red flags: tight restrictions that reduce local market fit or limit upsell options.

Item 17 - Renewal, Termination, Transfer, Dispute Resolution

Skim for: renewal conditions, default triggers, cure periods, transfer approvals, dispute venue.

Red flags: one-sided termination, hard transfer, expensive dispute forums, short cure windows.

Item 18 - Public Figures

Skim for: endorsements, celebrity involvement, and compensation arrangements.

Red flags: celebrity-heavy marketing that doesn't match unit economics reality.

Item 19 - Financial Performance Representations

Skim for: definitions (gross sales vs profit), sample size, geography, time period, cost assumptions.

Red flags: outdated cohorts, missing distributions, definitions that hide key costs.

Reference: NASAA FPR Commentary.

Item 20 - Outlets and Franchisee Information

Skim for: outlet counts over time, openings/closures/transfers, and franchisee contact lists.

Red flags: churn spikes, many terminations, shrinking footprint masked by "refranchising."

Item 21 - Financial Statements

Skim for: audited financials, liquidity, cash flow, debt, related-party transactions.

Red flags: weak cash, negative trends, dependence on franchise fees to stay afloat.

Item 22 - Contracts

Skim for: every agreement you must sign (franchise agreement, guarantees, leases, software terms).

Red flags: additional contracts adding obligations not summarized elsewhere.

Item 23 - Receipts

Skim for: proof of when the FDD was delivered and which version/date you received.

Red flags: pressure to sign quickly, confusion about dates/versions, missing seller details.

Reference: FTC Franchise Rule FAQs.

How to use this checklist for real due diligence

Here's a simple operating rhythm that turns "reading" into "decision-making":

• Build a one-page comparison sheet per brand: Item 7, Item 6, Item 12, Item 19, Item 20, Item 21, Item 17.
• Use Item 20 to contact 5–10 current and former franchisees and validate ramp time, margins, labor model, and support quality.
• Have franchise counsel review Item 17 and the full contract stack in Item 22.

Download FDDs + extract the data with GetFDD

Once you know how to read an FDD, the bottleneck becomes access and extraction: finding the right document, tracking versions, pulling the same key fields every time, and building outreach lists.

GetFDD helps you move faster by providing:

• FDD downloads so you can review disclosures without hunting for PDFs
• Structured extraction (fees, key clauses, and system metrics) so comparisons are consistent
• Franchisee lead lists so B2B suppliers and consultants can build targeted outreach quickly

Ready to apply this checklist to a real brand? Browse FDDs on GetFDD or see pricing.