Buying a Franchise: What the Disclosure Document Covers

Buying a franchise can look like a shortcut to owning a business: a known brand, an existing system, and training. It is also a long-term contract with a company that will have a lot of control over how you operate. Federal law gives prospective buyers an important tool to evaluate that decision: the Franchise Disclosure Document, often called the FDD. This guide explains what it is, what it covers, and how to use it.

The federal Franchise Rule

The Federal Trade Commission's Franchise Rule, found at 16 CFR Parts 436 and 437, is designed to give prospective franchise buyers the material information they need to weigh the risks and benefits. According to the FTC, the rule requires franchisors to give potential franchisees a disclosure document containing 23 specific items of information about the franchise, its officers, and other franchisees.

The FTC also publishes a Franchise Rule Compliance Guide for franchisors. Some states have their own franchise laws in addition to the federal rule, so ask a lawyer whether your state adds requirements.

When you should receive the FDD

In its consumer series on franchising, the FTC explains in a deep dive into the Franchise Disclosure Document that you must receive the FDD at least 14 days before you are asked to sign any contract or pay any money to the franchisor or its affiliates. The FTC adds that you have a right to the FDD once the franchisor has received your application and agreed to consider it.

The FTC also points out that how a franchisor handles the FDD can be revealing. Receiving the document does not mean a franchisor is reputable, since it is required by law. But if a franchisor does not provide it promptly, gives you an incomplete copy, avoids your questions, or rushes you, that is a warning sign.

Key items to read closely

The FTC's article walks through many of the 23 items. Some of the most important for buyers:

• Item 1 — Franchisor background. Information about the franchisor, its parents and affiliates, how long it has been in business, and any special licenses the business may require.
• Item 2 — Business experience. The directors and key executives and their backgrounds.
• Item 3 — Litigation. Prior lawsuits and certain convictions related to the franchise relationship, plus whether the franchisor sued its own franchisees in the past year.
• Item 4 — Bankruptcy. Whether the franchisor, its affiliates, or executives have filed for bankruptcy.
• Items 5–7 — Fees and costs. Initial fees, some of which may be non-refundable, startup costs, and ongoing payments such as royalties and advertising fees.
• Items 8 and 12 — Restrictions. What you must buy, from whom, what you can sell, and where.
• Item 17 — Renewal, termination, transfer, and disputes. What happens if you want to renew or sell, the grounds for termination, limits on competing later, and whether disputes go to court or arbitration.
• Item 19 — Financial performance representations. Claims about sales or earnings. The FTC explains that the rule does not require these, but if a franchisor makes such claims, they must be in Item 19. Financial claims made outside Item 19 should raise a red flag.
• Item 20 — Outlets and franchisee information. Growth and turnover in the system, plus contact information for current and former franchisees.
• Item 21 — Financial statements. The franchisor's audited financial statements, with special rules for newer franchisors.
• Item 22 — Contracts. Copies of the proposed agreements, including the franchise agreement itself.

Talk to current and former franchisees

The FTC calls the franchisee contacts in Item 20 one of the most valuable sources of information. Ask current owners about their total investment, training, required suppliers, and whether they have broken even. Ask former owners why they left. If you cannot find franchisees willing to speak candidly, the FTC suggests treating that as a red flag.

Get professional help before you sign

The FTC recommends consulting independent accounting and legal professionals. An accountant can review the financial statements, and a lawyer can review the franchise agreement and other contracts, explain your obligations, and point out terms that may matter later, such as renewal, termination, and dispute resolution. Our business law practice page describes the kinds of matters business lawyers often handle.

The FTC also encourages buyers to contact the Better Business Bureau, their state attorney general, and the attorney general in the state where the company is headquartered.

If something goes wrong

In a later article in the same series, the FTC suggests first raising concerns directly with the franchisor, then exploring legal options. You can also report your experience at ReportFraud.ftc.gov. The FTC notes it cannot negotiate individual disputes, but reports help its investigations.

Frequently asked questions

What is the Franchise Disclosure Document?

It is the document the FTC's Franchise Rule requires franchisors to give prospective buyers. It contains 23 specific items about the franchise, its officers, and other franchisees.

How long before signing must I get the FDD?

The FTC says at least 14 days before you sign any contract or pay any money to the franchisor or its affiliates.

Does the FDD tell me how much I will earn?

Not necessarily. Earnings claims are optional, but if a franchisor makes them, they must appear in Item 19.

Do I need a lawyer to review the FDD?

The law does not require one, but the FTC recommends consulting independent legal and accounting professionals before you commit.

Related: Browse guides on legal topics.

This page is general information, not legal advice. Laws change and every case is different — talk to a licensed attorney about your situation.