How to Read a Franchise Disclosure Document (FDD)
A Franchise Disclosure Document (FDD) explains a franchise offering. For a sale covered by the federal disclosure rule, the franchisor must give it to you at least 14 calendar days before you sign a binding agreement with, or pay money to, the franchisor or an affiliate in connection with the proposed sale (16 CFR 436.2). The rule has exemptions. The Federal Trade Commission’s Franchise Rule sets its format: 23 sections, called Items, always in the same order (16 CFR 436.5). Because the order is fixed, you can put two brands’ FDDs side by side and compare them Item by Item.
Most FDDs run to hundreds of pages, and much of that is the franchise agreement and financial statements attached at the end. You don’t need to read it front to back on the first pass. Start with the Items that carry the numbers, then read the contract terms that decide what happens when something goes wrong.
Start with the six Items that carry the numbers
| Item | Title | What to look for |
|---|---|---|
| 5 | Initial Fees | The franchise fee and every other payment to the franchisor before you open, and whether any of it is refundable |
| 6 | Other Fees | Every ongoing fee: royalty, advertising or brand fund, technology fees, and fees charged only in some situations, such as transfers and renewals |
| 7 | Estimated Initial Investment | Estimated startup expenses and additional funds for the stated initial period, with exclusions in the notes |
| 19 | Financial Performance Representations | Any sales, income or profit figures the franchisor chooses to share |
| 20 | Outlets and Franchisee Information | How many units opened, closed or changed hands, and contact details for current and former owners |
| 21 | Financial Statements | Generally audited franchisor financial statements, subject to the startup phase-in exception |
Item 5 covers “all fees and payments, or commitments to pay, for services or goods received from the franchisor or any affiliate before the franchisee’s business opens” (16 CFR 436.5(e)). If the fee isn’t the same for every buyer, the FDD must give the range or formula used in the last fiscal year and the factors that set the amount. Discounts, such as those for veterans or for buyers who sign up for several units, usually appear here.
Item 6 is a table of “all other fees that the franchisee must pay to the franchisor or its affiliates,” including fees the franchisor collects for a third party (16 CFR 436.5(f)). A royalty can be a percentage of sales or a fixed periodic charge: Anytime Fitness’s Minnesota-filed FDD lists a fixed monthly fee that the franchisor may replace with a percentage royalty. Check the amount or rate, when it is due, and whether it can change. Read the whole table, not only the first rows. Transfer, renewal, audit and late fees apply only in certain situations, but some of them are large.
Item 7 is the startup budget. The rule requires a table showing each type of expense, the amount, how it is paid, when it is due and who is paid (16 CFR 436.5(g)). It must include a line called “Additional funds” for expenses during an initial period of operation. The rule describes a reasonable period as at least three months or a reasonable period for the industry. Check the stated duration, assumptions and exclusions. This line is not a promise that the business will break even within that period. Real property costs may also be described without a priced range when the franchisor cannot estimate them.
Item 19 is required, but a financial performance representation is optional. The section contains either the representation and its supporting disclosures or the prescribed statement that none is made (16 CFR 436.5(s)). See what Item 19 shows and what it leaves out.
Item 20 has four tables of outlet counts and ownership changes for the last three fiscal years. Its fifth table shows signed-but-unopened agreements at year-end and projected openings for the next fiscal year. It also lists current and recent former franchisees (16 CFR 436.5(t)). See how to check franchise closures in Item 20.
Item 21 contains the franchisor’s financial statements. They must follow U.S. generally accepted accounting principles and, except during a startup phase-in, be audited by an independent certified public accountant. The rule requires balance sheets for the previous two fiscal year-ends and statements of operations, stockholders’ equity and cash flows for each of the previous three fiscal years (16 CFR 436.5(u)). Three things to check:
- Whose statements they are. A franchisor may include an affiliate’s statements instead of its own if that affiliate “absolutely and unconditionally guarantees” the franchisor’s obligations to franchisees. The guarantee must be attached to the FDD. If you see a parent company’s statements, find the guarantee.
- Whether they are audited. A new franchise system may phase in audits: an unaudited opening balance sheet in its first year of selling franchises, an audited balance sheet in its second, and the full set from its third. Unaudited statements, or a statement that the franchisor has not been in business for three years, mean less history to judge.
- What the franchisor lives on. Compare revenue from royalties and fees with revenue from selling supplies to franchisees (Item 8 gives the second figure), and look at cash and debt at year-end.
The FTC suggests that “even if you’re comfortable reading financial statements, it’s a good idea to hire an accountant to go over them with you” (FTC, May 2023).
Read the items together: a Club Pilates example
The Club Pilates Minnesota FDD shows why a startup estimate, a sales average and outlet counts answer different questions:
| FDD section | What the document reports | What to check |
|---|---|---|
| Item 7, PDF pp. 33–34 | Estimated initial investment of $413,289–$1,029,811 for a single studio. Leasehold improvements alone range from $123,056 to $519,381. | The build-out range depends on the site. The total is an opening estimate, not an earnings figure. |
| Item 19, PDF p. 75 | Average gross revenue of $987,810 for 1,005 qualified studios during 2025. | The group excludes studios that opened during the year and other specified studios. Revenue is not owner profit. |
| Item 20, PDF p. 91 | 153 franchised studios opened and three ceased operations during 2025. | Openings and exits describe the system, not the sales or cash flow of an individual studio. |
The Club Pilates cost page keeps those figures with their FDD page references. For the excluded outlets behind the Item 19 average, see how to read Item 19.
Then read the terms that limit what you can do
The numbers tell you what the franchise costs. These Items tell you what you can and can’t do after you sign:
- Item 3, Litigation, and Item 4, Bankruptcy. Lawsuits and bankruptcies the franchisor must disclose. If several suits were brought by franchisees, ask what they were about.
- Item 8, Restrictions on Sources of Products and Services. Whether you must buy supplies from the franchisor or from approved suppliers, and whether the franchisor earns revenue from those purchases. Details below.
- Item 11, Franchisor’s Assistance, Advertising, Computer Systems, and Training. What help you get before and after opening, and the computer systems you must buy.
- Item 12, Territory. Whether you get an exclusive territory, and what the franchisor may still do inside it. Details below.
- Item 17, Renewal, Termination, Transfer, and Dispute Resolution. A table showing when the agreement can be ended, what renewal requires, what you need to do to sell the business, and where disputes are decided.
- Item 22, Contracts. The agreements you would actually sign. The other Items summarize them; the contract is what binds you, so have a lawyer read it.
Item 8: what you must buy, and who profits from it
Item 8 lists everything you must buy or lease from the franchisor, a supplier it names, an approved supplier, or to its specifications. That includes requirements set by the franchisor’s “practice,” not only by the contract (16 CFR 436.5(h)). The figures worth finding:
- The share of your spending that is locked in. The FDD must estimate the proportion of required purchases to all your purchases in opening and running the business. A high share leaves little room to shop around.
- What the franchisor earns from your purchases. If the franchisor or an affiliate earns revenue from required purchases, Item 8 must state its total revenue, its revenue from required purchases and the percentage that represents.
- Supplier payments. If a designated supplier pays the franchisor out of franchisee purchases, the FDD must give the basis, such as a percentage or a flat amount. The rule counts selling to the franchisor at a lower price than to franchisees as such a payment.
- How to get another supplier approved, including any fee, how long approval takes and how it can be revoked.
Item 12: whether your territory is protected
Item 12 says whether you get a specific site or one the franchisor approves, any minimum territory, and whether that territory is exclusive. If it is not, the FDD must say so in these words: “You will not receive an exclusive territory. You may face competition from other franchisees, from outlets that we own, or from other channels of distribution or competitive brands that we control” (16 CFR 436.5(l)). Then check:
- Conditions on exclusivity. Whether you keep it only by reaching a sales volume, market share or other target, and what the franchisor may do if you miss it.
- Other channels. Whether the franchisor reserves the right to sell inside your territory through the internet, catalogs, telemarketing or other direct marketing, under its own brand or a different one, and whether it pays you anything when it does.
- Sister brands. Whether the franchisor runs or plans a similar business under another trademark, and how it will settle conflicts over territory and customers.
If the franchisor changes the agreement on its own in a material way after giving you the FDD, it must give you the revised agreement at least seven calendar days before you sign it (16 CFR 436.2). Changes resulting from negotiations you initiate do not trigger that additional waiting period.
All 23 Items
| Item | Title |
|---|---|
| 1 | The Franchisor, and any Parents, Predecessors, and Affiliates |
| 2 | Business Experience |
| 3 | Litigation |
| 4 | Bankruptcy |
| 5 | Initial Fees |
| 6 | Other Fees |
| 7 | Estimated Initial Investment |
| 8 | Restrictions on Sources of Products and Services |
| 9 | Franchisee’s Obligations |
| 10 | Financing |
| 11 | Franchisor’s Assistance, Advertising, Computer Systems, and Training |
| 12 | Territory |
| 13 | Trademarks |
| 14 | Patents, Copyrights, and Proprietary Information |
| 15 | Obligation to Participate in the Actual Operation of the Franchise Business |
| 16 | Restrictions on What the Franchisee May Sell |
| 17 | Renewal, Termination, Transfer, and Dispute Resolution |
| 18 | Public Figures |
| 19 | Financial Performance Representations |
| 20 | Outlets and Franchisee Information |
| 21 | Financial Statements |
| 22 | Contracts |
| 23 | Receipts |
Source: 16 CFR 436.5.
What the FDD doesn’t tell you
- Profit at your location. Item 19 can contain historical results or a forecast. Neither guarantees your results. A sales figure alone does not show what is left after expenses (FTC consumer guide).
- Costs in your market. Item 7 gives a range. Rent and build-out where you live can fall outside it.
- How long before you can pay yourself. The FTC advises buyers to “consider your living expenses in light of the reality that it takes time to start a business and often much longer just to break even” (FTC, May 2023).
- What owners think. That is why Item 20 lists them. The FTC suggests you “talk to several franchisees who have been in business just over one year” about their total investment and whether they were able to break even, and ask longer-standing owners how long it took them to break even, earn a reasonable income and recoup their investment (FTC consumer guide).
Check the date on the cover
A franchisor must prepare a revised FDD within 120 days after its fiscal year ends, and attach revisions for material changes within a reasonable time after each quarter (16 CFR 436.7). The issuance date is on the cover. If your copy is more than a year old, ask for the current one. Every franchise page on this site shows the FDD year and issuance date it uses.
The receipt pages (Item 23)
The last pages of every FDD are two copies of a detachable receipt. The receipt repeats the 14-day rule and says that late delivery, a false or misleading statement or a material omission “should be reported to the Federal Trade Commission” and the state agency. It also names each franchise seller with an address and phone number, states the issuance date and lists every attached exhibit (16 CFR 436.5(w)).
The rule calls it an “acknowledgment of receipt”: signing it records the date you received the document, and it is not the franchise agreement. Before you sign, check that the issuance date matches the cover, that every listed exhibit is in your copy, and that the sellers named are the people you have been dealing with. Keep the second copy.
Fees that aren’t in the FDD
In July 2024, FTC staff issued guidance stating that “franchisors cannot lawfully impose and collect fees from franchisees that were not previously disclosed.” The same announcement included a Commission policy statement that contract provisions, “including non-disparagement clauses that prohibit franchisees’ communications with the government, violate the law” (FTC, July 12, 2024). If a salesperson mentions a fee you can’t find in Items 5, 6 or 7, ask where it is disclosed.
Get help before you sign
The FTC recommends a lawyer “experienced in franchise matters” to explain your obligations under the contract, and an accountant to help you “understand the franchisor’s financial statements, develop a business plan, assess any earnings projections” (FTC consumer guide).
How this site uses the FDD
Each franchise page cites the FDD and gives page numbers for Items 5, 6, 7, 19 and 20 where the item applies. A page shows a check date only after its figures have been independently verified against the PDF. Pages published under an owner override instead show a provisional warning and disclose unresolved source conflicts. The methodology explains how we calculate the startup-and-fee estimate and franchise exit rate. To get a copy of an FDD yourself, see where to find a franchise’s FDD for free.
