Franchise Disclosure Document · Review
FDD Review: Getting the Real Story From the 23 Disclosure Items
The Franchise Disclosure Document is the most informative thing a franchisor will ever hand you, and also the easiest to misread. A careful review tells you what the franchisor has committed to in writing and what still needs checking.
The ground rules
What the FDD is and when you receive it
Under the FTC Franchise Rule, a franchisor selling in the United States must give a prospective franchisee its disclosure document at least 14 calendar days before the buyer signs a binding agreement or pays any consideration. The document follows a fixed format of 23 items, which makes systems comparable but also makes it tempting to skim.
New Jersey does not run its own franchise registration or pre-sale review program, so for a franchise located here the federal FDD is the primary disclosure you will get. Nobody at the state level has checked it before it reaches you, which is one more reason for an independent read.
Disclosure is factual, not a recommendation. A system with heavy litigation or high turnover can lawfully sell franchises as long as it says so. The review's purpose is to make sure you have noticed what has been disclosed and understand what it means for your money. FDD review is usually where the firm's franchisee-side representation begins.
All 23 items
The FDD at a glance
The items fall into a few groups. Each group answers a different question about the investment.
| Items | What they cover | The question they answer |
|---|---|---|
| 1–4 | The franchisor, its predecessors and affiliates; management's business experience; litigation; bankruptcy | Who am I dealing with, and how do they behave in disputes? |
| 5–7 | Initial fees, other recurring fees, estimated initial investment | What will it really cost to open and reach steady operation? |
| 8–10 | Required suppliers and rebates, franchisee obligations, financing offered | Where does my money go after opening? |
| 11–16 | Franchisor assistance and training, territory, trademarks, proprietary information, owner participation, restrictions on what you may sell | What support and protection am I actually promised? |
| 17 | Renewal, termination, transfer and dispute resolution summary | How does the relationship end, and on whose terms? |
| 18–19 | Public figures; financial performance representations | What, if anything, does the franchisor say about results? |
| 20–21 | Outlet openings, closures and transfers with franchisee contacts; financial statements | Is the system growing, and is the franchisor solvent? |
| 22–23 | Copies of the contracts; receipts | What exactly will I sign, and when did I get this document? |
Where the review focuses
Six items that usually deserve the closest reading
Item 3 — Litigation
Patterns matter more than single cases. Repeated claims by franchisees alleging misrepresentation or wrongful termination tell you how the franchisor manages conflict.
Item 7 — Initial investment
These are estimates, often given as ranges. Compare them with real local quotes for rent, build-out and payroll, and note what is excluded, such as real estate or extended working capital.
Item 12 — Territory
The plain-language description of what protection you get, and what channels the franchisor keeps for itself. Read it with the grant clause of the agreement.
Item 19 — Financial performance
Optional. If the franchisor includes earnings figures, read the footnotes on which units are counted. If it omits them, staff generally should not offer numbers informally — and you should note it if they do.
Item 20 — Outlet data
Openings, transfers, terminations, non-renewals and units that stopped operating, over three years. High churn or many transfers can be a warning sign worth investigating.
Item 21 — Financial statements
Audited statements show whether the franchisor depends on new franchise sales to stay afloat. Have your accountant look at them.
Do your own diligence
Questions to put to current and former franchisees
Item 20 lists contact information for current franchisees and those who left recently. Speaking with several of both is one of the most valuable things a buyer can do.
- How long did it take to open, and how close was the actual cost to the Item 7 estimate?
- How long until the unit covered its expenses and paid you a salary?
- Is training and field support what the FDD describes?
- How have required suppliers and pricing changed since you opened?
- Has the franchisor added fees or mandatory upgrades during the term?
- Would you buy again, and if you left, why?
Keep notes of these conversations. If what you hear conflicts with the FDD or with what the sales team said, raise it before signing — the firm can help put those questions to the franchisor in writing.
The review engagement
How Paul handles an FDD review
Receipt and timing
Note the date on your Item 23 receipt so the 14-day period is clear, and send the full document including exhibits and the state addenda.
Read and annotate
Paul reads the FDD and the agreement in Item 22 together, flagging conflicts between them and terms that are unusual for the industry.
Written summary and call
You receive a summary of the significant risks and open questions, followed by a call to go through it and plan next steps.
Decide your approach
Walk away, sign as is, or request changes. If you want to negotiate, the review feeds directly into a franchise negotiation strategy.
Questions & answers
FDD review — questions
How long does an FDD review take?
Most reviews can be completed comfortably within the 14-day waiting period if the documents arrive promptly. Complex deals, such as development agreements for several units or resales with additional purchase documents, take longer. Tell the firm your intended signing date at the outset so the work can be scheduled around it.
Which FDD items matter most to a prospective franchisee?
Litigation, initial investment, territory, the renewal and termination summary, financial performance, outlet data and the franchisor's financial statements usually carry the most information. That said, a buyer opening a food concept will care more about supplier restrictions, while a service franchise may turn on the territory definition.
What if the FDD has no Item 19 earnings information?
Franchisors are not required to make financial performance representations. Without them, you will rely more heavily on conversations with existing franchisees and your own projections. Be cautious of anyone in the sales process offering revenue figures outside Item 19; the Rule generally confines such statements to that item.
Does New Jersey require franchisors to register their FDD?
New Jersey is not a franchise registration state, so there is no state review of the disclosure document before sale. The federal disclosure rules still apply, and once you are operating, the New Jersey Franchise Practices Act may protect a qualifying franchise against termination without good cause.
Your attorney
Paul H. Appel, Esq.
Every matter at the firm is handled personally by Paul — the same attorney reads the documents, gives the advice and negotiates on your behalf.
- Education
- Columbia Law School, Juris Doctor (1967)
- Experience
- 58+ years in commercial and business law
- Focus for this matter
- Franchise disclosure review and franchise agreement negotiation
- Office
- Freehold, NJ — serving Monmouth, Middlesex & Ocean Counties
Contact
Discuss Your Business Matter With Paul
Describe what the business is dealing with — a contract on your desk, a deal in progress, a dispute or a company you are about to form. You will hear back from the attorney who handles the work.
- Phone917-748-6124
- Office11 Crestwood Drive, Freehold, NJ 07728
- ConsultationsBy phone, video or in person by appointment
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