The Franchise Disclosure Document: All 23 Items Explained

The franchise disclosure document (FDD) is the legal disclosure every franchisor in the United States must hand you before you buy. It has 23 required items, in a fixed order, covering the company’s history, litigation, fees, startup costs, territory, unit turnover, audited financials, and the contracts you will sign. You must receive it at least 14 calendar days before signing or paying anything.

That fixed structure is the best thing about the FDD. Once you learn where each answer lives, you can read any franchisor’s document in the same way and compare them line by line. This guide walks through all 23 items, flags which ones deserve the most time, and lists the red flags that tend to sit quietly in plain sight.

One rule before you start. This guide helps you read the document intelligently. It does not replace legal review. Before you sign, hire a franchise attorney who reviews FDDs regularly.

What is a franchise disclosure document, and why does it exist?

The FDD exists because of the FTC Franchise Rule, a federal regulation that requires franchisors to give prospective buyers standardized, written disclosures before a sale. Before the rule, buyers often relied on sales presentations and whatever the franchisor chose to share. The rule replaced that with a uniform document that has to say the same kinds of things in the same order.

Three points about the rule matter to you as a buyer:

1. Timing. You must receive the FDD at least 14 calendar days before you sign a binding agreement or pay the franchisor any money. If the franchisor unilaterally makes material changes to the agreement, you get 7 calendar days to review the final version before signing.
2. No government approval. The FTC does not review or approve FDDs. A complete-looking document is not a stamp of quality.
3. Earnings rules. A franchisor can only share financial performance information through Item 19 of the FDD. Everything else is off-limits.

Our article on the FTC franchise rule explains your rights and the rule’s limits in more depth. The FTC also publishes a plain-language Franchise Rule Compliance Guide that describes what each item must contain.

State law adds another layer

Some states go further than the federal rule. A group of states, including California, New York, Illinois, Maryland, Minnesota, Virginia, and Washington, require franchisors to register their FDD with a state regulator before offering franchises there, and some add state-specific disclosures through addenda at the back of the document. If you live in or plan to open in a registration state, check with that state’s securities or franchise regulator. The North American Securities Administrators Association (NASAA) is a good starting point for finding state regulators and state franchise resources.

How the FDD is organized

Every franchise disclosure document has three parts:

• A cover page and state cover pages. These show the issuance date, a summary of the total investment, and risk factors the franchisor or a state regulator wants you to see first.
• The 23 items. These are the core disclosures, always in the same order.
• Exhibits. These usually include the franchise agreement and related contracts, financial statements, lists of franchisees, state addenda, the operations manual table of contents, and receipt pages.

The items are short compared to the exhibits. A 300-page FDD might have 80 pages of items and 220 pages of exhibits. Do not skip the exhibits. The franchise agreement is the contract that actually governs your business for the next decade, and the financial statements tell you whether the franchisor can hold up its end.

All 23 FDD items explained

Below, each item gets a plain-English summary, what to look for, and the red flags that should prompt questions. Items marked “high priority” deserve extra time.

Item 1: The franchisor and any parents, predecessors, and affiliates

Item 1 tells you who you are actually contracting with. It names the franchisor entity, its parent company, predecessors, and affiliates, and describes the business you would operate, the general market, competition, and any industry-specific laws.

Look for: how long the franchisor has been franchising versus operating; whether a private equity firm or larger holding company owns it; and industry regulations that could add cost (licensing for senior care or med-spa services, for example).

Red flags: a franchisor entity formed very recently with no clear predecessor, or a vague description of the business model.

Item 2: Business experience

Item 2 lists the directors, officers, and key managers, with their positions over the past five years.

Look for: whether leadership has real operating experience in this industry, not only franchise sales experience. Note recent turnover in the CEO, operations, or training roles.

Red flags: an executive team that changes every year, or leaders whose backgrounds are almost entirely in selling franchises across unrelated brands.

Item 3: Litigation (high priority)

Item 3 discloses certain litigation involving the franchisor, its predecessors, and key people. That includes pending material lawsuits, certain concluded cases from the past 10 years involving franchise, fraud, securities, or unfair practices claims, and lawsuits the franchisor brought against franchisees in the last fiscal year.

Look for: patterns. One lawsuit with a landlord is normal business friction. Several franchisees suing over misrepresentation or unfair termination is a different story. Read our guide to FDD litigation history for a framework on telling the two apart.

Red flags: clusters of franchisee claims alleging fraud or misrepresentation, regulatory actions by state franchise examiners, or the franchisor suing many of its own owners in a single year.

Item 4: Bankruptcy

Item 4 discloses bankruptcies in the past 10 years involving the franchisor, its parent or affiliates, and its officers.

Look for: context. A past bankruptcy is not automatically disqualifying, but you want to understand what happened and what changed.

Red flags: a recent bankruptcy at the parent level, which can affect support, marketing funds, or the franchisor’s ability to survive.

Item 5: Initial fees

Item 5 covers the fees you pay before opening, most notably the initial franchise fee. It states whether the fee is uniform, whether any part is refundable, and under what conditions.

Look for: whether the fee varies by territory size or for veterans and multi-unit buyers, and exactly when it is due.

Red flags: a non-refundable fee combined with no firm opening timeline, or fees that vary widely between buyers without a clear explanation.

Item 6: Other fees

Item 6 is a table of every recurring or occasional fee: royalties, marketing or brand fund contributions, technology fees, training fees for new staff, transfer fees, renewal fees, audit fees, late fees, and more.

Look for: how each fee is calculated (percentage of gross sales versus flat amount), whether there are minimum royalties, and whether the franchisor can raise technology or other fees at its discretion. Royalties commonly fall between 4 and 8 percent of gross sales, with brand fund contributions often adding 1 to 4 percent, but every system is different.

Red flags: minimum royalties that apply even in slow months, open-ended language that lets the franchisor add new fees, and a long list of “as determined by us” charges.

Item 7: Estimated initial investment (high priority)

Item 7 is a table showing the low and high range of what it costs to open: the franchise fee, real estate, build-out, equipment, signage, opening inventory, insurance, grand opening marketing, professional fees, and “additional funds” for an initial operating period, usually at least three months.

Look for: what the additional funds period covers and whether it is long enough for your business to reach break-even. Many owners need more working capital than the table suggests. Our guide on how much does a franchise cost breaks down each line and shows how to stress-test it.

Red flags: a narrow range that seems too tidy for a business with build-out, an additional funds period of only a few months for a model that takes longer to ramp, and costs that are excluded from the table but mentioned elsewhere.

Item 8: Restrictions on sources of products and services

Item 8 explains what you must buy from the franchisor, its affiliates, or approved suppliers, and whether the franchisor or its affiliates receive revenue, rebates, or other payments from those suppliers.

Look for: the share of your purchases that are restricted and how much the franchisor earned from supplier relationships last year.

Red flags: required purchases from the franchisor at prices you cannot verify, combined with significant rebate income. That structure can quietly turn your supply costs into a second royalty.

Item 9: Franchisee’s obligations

Item 9 is a cross-reference table that maps your obligations (site selection, training, fees, compliance with standards, insurance, and so on) to the sections of the franchise agreement where they appear.

Look for: use it as a navigation tool to jump into the agreement.

Red flags: not many in the table itself, but it can reveal obligations you did not expect, like personal guarantees or ongoing remodel requirements.

Item 10: Financing

Item 10 describes any financing the franchisor or its affiliates offer, directly or indirectly, along with the terms.

Look for: interest rates, security requirements, and what happens on default. Many franchisors offer no financing at all, which is normal.

Red flags: financing that requires you to waive defenses or allows the franchisor to accelerate the loan if you breach the franchise agreement for unrelated reasons.

Item 11: Franchisor’s assistance, advertising, computer systems, and training

Item 11 is long and important. It describes what the franchisor does before you open and after, how the brand fund is managed, the required technology systems, the typical time between signing and opening, and a table of the training program.

Look for: the training hours split between classroom and on-the-job, who teaches it, and how the brand fund was spent last year. Compare the stated time-to-open with what owners tell you during validation. Our article on franchise training covers what good programs include.

Red flags: support language full of “may” instead of “will”, a brand fund the franchisor can spend with almost no accountability, or a time-to-open estimate far shorter than what current owners report.

Item 12: Territory

Item 12 states whether you receive an exclusive territory, how it is defined, and what the franchisor can do inside it, such as selling online, through national accounts, or in non-traditional locations like airports.

Look for: whether protection depends on meeting sales minimums, and the exact carve-outs the franchisor reserves. If you do not receive an exclusive territory, the FDD has to say so. Our guide to franchise territory explains the common structures.

Red flags: a “protected” territory with so many exceptions that it protects very little, or territory rights the franchisor can shrink at renewal.

Item 13: Trademarks

Item 13 describes the principal trademarks you will use, whether they are registered with the U.S. Patent and Trademark Office, and any disputes.

Red flags: the core brand name is not federally registered, or there is pending litigation over it. A rebrand forced by a trademark dispute can cost owners real money.

Item 14: Patents, copyrights, and proprietary information

Item 14 covers patents, copyrights, and the confidential information you will use, including the operations manual.

Look for: what counts as confidential and how the franchisor protects it. For most service franchises, the real asset is the system and the manual, not patents.

Item 15: Obligation to participate in the actual operation of the franchise business

Item 15 says whether you must personally run the business or can hire a manager, and whether the manager must complete training or own equity.

Look for: this item matters a great deal if you plan a semi-absentee franchise. Some systems require the owner on site full time for the first year.

Red flags: marketing materials that pitch absentee ownership while Item 15 requires full-time personal participation.

Item 16: Restrictions on what the franchisee may sell

Item 16 explains limits on the goods and services you may offer and whether the franchisor can change them.

Look for: how freely the franchisor can add or drop services, which can change your required equipment or training costs.

Item 17: Renewal, termination, transfer, and dispute resolution (high priority)

Item 17 is a table summarizing the key contract terms: the length of the initial term, renewal conditions, what counts as default, the franchisor’s termination rights, transfer conditions, post-term non-compete covenants, and how disputes are resolved (mediation, arbitration, venue, and governing law).

Look for: renewal conditions such as signing the then-current agreement, which may carry higher fees; cure periods for defaults; and where you would have to arbitrate or sue. Our article on the franchise agreement walks through each clause.

Red flags: defaults that allow termination with no chance to cure, a non-compete that would keep you out of your industry across a wide area, and a venue clause requiring you to resolve disputes far from home.

Item 18: Public figures

Item 18 discloses whether any public figure, such as a celebrity, is paid to endorse or recommend the franchise, and whether that person has a role in management or owns an interest.

Look for: a celebrity connection is a marketing choice. It tells you nothing about unit performance.

Item 19: Financial performance representations (high priority)

Item 19 is the only place a franchisor may legally share information about the actual or potential sales, costs, income, or profits of its outlets. It is optional. If the franchisor does provide one, it must have a reasonable basis and written substantiation, and it must explain what the figures cover. If not, Item 19 includes a statement that the franchisor does not make financial performance representations.

Look for: which units are included and excluded, whether the figures are gross sales or something closer to profit, the median versus the average, and what share of units hit or exceeded the stated figures. Our guide to reading an item 19 financial performance representation shows how to question the numbers and build your own model.

Red flags: a salesperson who shares numbers that are not in Item 19, an Item 19 that only covers the top-performing units without saying so clearly, and gross sales figures presented without any cost data. An Item 19 shows what some units did in the past. It is not a forecast of what yours will do.

Item 20: Outlets and franchisee information (high priority)

Item 20 contains tables showing how many units opened, closed, transferred, were terminated, were not renewed, or were reacquired by the franchisor over the last three fiscal years, by state. It also includes contact information for current franchisees and for those who left the system in the last fiscal year or have not communicated with the franchisor recently.

Look for: the ratio of closures, terminations, and transfers to total units. Compare growth in franchised units with growth in company-owned units. Then use the contact lists for validation calls. Our deep-dive on FDD item 20 shows how to calculate turnover.

Red flags: a high number of transfers (sometimes a quiet sign of owners selling out), terminations clustered in recent years, and disclosure that franchisees signed confidentiality clauses that limit what they can tell you.

Item 21: Financial statements (high priority)

Item 21 requires the franchisor’s audited financial statements, generally balance sheets for the last two fiscal year-ends and statements of operations, stockholders’ equity, and cash flows for the last three fiscal years. Newer franchisors may phase in audited statements.

Look for: whether the franchisor is profitable, how much of its revenue comes from initial franchise fees versus ongoing royalties, and whether it has enough cash to support owners. Our non-accountant’s guide to franchisor financial statements explains what to read first.

Red flags: a going-concern note from the auditor, revenue dominated by one-time franchise fees, negative equity, or a parent company guarantee you cannot evaluate. Have your CPA review this section with you.

Item 22: Contracts

Item 22 lists every contract you may be asked to sign: the franchise agreement, development agreements, personal guarantees, software licenses, leases or subleases, confidentiality agreements, and general releases. The contracts themselves are attached as exhibits.

Look for: the personal guarantee, which can make you individually liable for the business’s obligations. Spouses are sometimes asked to sign as well.

Item 23: Receipts

Item 23 is two copies of a receipt page. You sign one and return it to confirm the date you received the FDD. That date starts your 14-day review period. Keep the other copy.

Look for: make sure the date you write is the date you actually received the document, and keep a copy for your records.

Which FDD items matter most?

All 23 items matter, but some carry more weight for a buyer’s decision. Here is how we suggest prioritizing your reading time.

If you only have one evening with a new FDD, read the cover page risk factors, then Items 7, 19, 20, and 21, then Item 17. Those five tell you whether to spend more time on this brand.

Common red flags hiding in plain sight

Red flags rarely appear in bold. They tend to show up as a pattern across items. A few combinations worth watching:

• Growth that is mostly sales. Item 20 shows many new franchises sold but few actually opened, while Item 21 shows revenue driven mostly by initial franchise fees. That can mean the franchisor makes its money selling territories more than supporting operating units.
• Support promised, support not funded. Item 11 describes extensive field support, but Item 21 shows thin cash and recent losses.
• Turnover dressed as transfers. Item 20 shows few closures but many transfers, and former owners on the contact list describe selling at a loss.
• Earnings talk outside Item 19. Any revenue or profit figure given verbally, in a spreadsheet, or on a call that is not in Item 19 violates the spirit and likely the letter of the rule.
• Pressure on timing. Being asked to sign or pay before 14 calendar days have passed since you received the FDD.
• Confidentiality clauses. Item 20 discloses that former owners signed agreements restricting what they can say. That is legal, but it makes validation harder, so you need to work harder at it.

The FTC’s own consumer’s guide to buying a franchise lists similar warning signs and is worth reading alongside this guide. For a broader list, see our article on franchise red flags.

How to read a franchise disclosure document: a step-by-step process

Fourteen days goes faster than you think. Here is a practical sequence.

1. Sign and date the receipt honestly. Write the actual date you received the FDD and keep your copy.
2. Read the cover pages and state risk factors. Note anything a state regulator required the franchisor to highlight.
3. Skim the table of contents and exhibits list. Know where the franchise agreement and financial statements are.
4. Read Items 7, 19, 20, and 21 first. Take notes on questions as you go.
5. Build a simple model. Use Item 7 for startup costs and Item 6 for ongoing fees. If there is an Item 19, use it as one input, not as your answer.
6. Call owners. Use the Item 20 lists to call current and former franchisees. Our list of 40 franchise validation questions gives you a script.
7. Read Items 1 through 6, then 8 through 18. Fill in the context on leadership, litigation, fees, territory, and obligations.
8. Hand the full FDD and agreement to a franchise attorney. Ask for a written summary of risks and negotiable points.
9. Review Item 21 with a CPA. Ask whether the franchisor looks financially able to support owners.
10. Write your questions for the franchisor. Bring them to your follow-up calls or discovery day.

Our franchise due diligence checklist turns this process into a printable list, and our step-by-step guide on how to buy a franchise shows where FDD review fits into the full buying timeline.

Can AI help you read an FDD?

Yes, with limits. AI tools are good at summarizing long documents, pulling fees into a table, and generating questions for validation calls. They can also misread tables, miss state addenda, or state things with more confidence than the text supports. Use them to speed up your first pass and organize questions, then verify every number against the document itself. Our guide on AI for franchise buyers explains where these tools help and where they fall short. AI does not replace an attorney’s review.

What the FDD cannot tell you

The franchise disclosure document reports facts. It makes no judgment about whether the business suits you, and even a clean FDD leaves open questions that only you can answer:

• Fit. Whether the day-to-day work suits your skills, hours, and goals.
• Local market. Whether your specific territory has enough customers, workers, and affordable real estate.
• Culture. How the franchisor treats owners when things go wrong. Validation calls are where you learn this.
• Your numbers. What your unit might do depends on your market, your execution, your costs, and your financing. No FDD can tell you that.

This is where many buyers get the order backwards. They pick a brand first, then try to make the FDD fit. A better order is to understand what kind of owner you are, narrow to industries that fit, and only then read FDDs closely.

How long should you spend reviewing an FDD?

The legal minimum is 14 calendar days. Treat that as a floor. Most careful buyers spend several weeks on review, validation calls, attorney review, and financing conversations before signing. If a franchisor will not give you reasonable time, that tells you something about the relationship ahead.

A practical schedule for a first FDD:

Your next step

Reading FDDs is serious work, so it pays to read the right ones. Before you request a stack of disclosure documents, get clear on your goals, budget, time commitment, and risk tolerance. Take the free Franchise Genie assessment to see your owner archetype and three industry categories that fit, then bring that profile into your FDD review so you know what you are reading for.