Member education

The Franchise Disclosure Document, Item by Item

Federal law requires every franchisor to hand a prospective franchisee the same 23-part document at least 14 days before any money changes hands. The order never varies, so once you know where to look, any brand reads the same way.

1. Item 1

   The franchisor and its affiliates

   Who you would be signing with: the company, its parents, predecessors and affiliates, and how long each has sold franchises.

   What to check: How long this entity has franchised, and whether the brand you know is actually sold by a different company.

2. Item 2

   Business experience

   The people running the franchisor, their titles and their last five years of work.

   What to check: Turnover. A leadership team that arrived last year runs a different company than the one with a ten-year bench.

3. Item 3

   Litigation

   Cases the franchisor and its management are involved in, and certain past ones.

   What to check: Suits brought by franchisees, and whether the same complaint appears again and again.

4. Item 4

   Bankruptcy

   Bankruptcies involving the franchisor, its affiliates or its management.

   What to check: Any entry at all, and who it names.

5. Item 5

   Initial fees

   What you pay to sign: the franchise fee and anything else due before opening.

   What to check: Whether the fee is refundable, and what discounts exist for veterans, multi-unit deals or conversions.

6. Item 6

   Other fees

   Everything that recurs: royalty, advertising fund, technology, training, transfer, renewal, audit.

   What to check: The total percentage of revenue leaving each month, not just the royalty.

7. Item 7

   Estimated initial investment

   A low-to-high table of everything it takes to open, including working capital for the early months.

   What to check: What the high column assumes, and whether real estate and build-out are in it or excluded.

8. Item 8

   Restrictions on sources

   What you must buy, and from whom, including suppliers the franchisor owns or earns rebates from.

   What to check: Rebates the franchisor collects on your purchases, disclosed here as a percentage of system revenue.

9. Item 9

   Your obligations

   A table pointing to every promise you make in the agreement.

   What to check: Use it as the index to the contract; each row names the section that binds you.

10. Item 10

    Financing

    Financing the franchisor offers or arranges, and its terms.

    What to check: Whether you waive defenses or confess judgment as a condition of their financing.

11. Item 11

    Franchisor's assistance, advertising, computer systems and training

    What you actually get: pre-opening support, training hours, required systems, and how ad funds are spent.

    What to check: The training table's hours, and whether ad-fund spending is audited and reported back.

12. Item 12

    Territory

    The area you get, whether it is exclusive, and what the franchisor may still do inside it.

    What to check: Reserved channels: delivery apps, grocery, online sales and company outlets near your borders.

13. Item 13

    Trademarks

    The marks you may use and any disputes over them.

    What to check: Whether the marks are federally registered, and who must defend them.

14. Item 14

    Patents, copyrights and proprietary information

    Other intellectual property you are licensed to use.

    What to check: Confidentiality obligations that outlive the agreement.

15. Item 15

    Your participation in the operation

    Whether you must run the business yourself or may hire a manager.

    What to check: Owner-operator requirements, which decide whether this can be a passive investment.

16. Item 16

    Restrictions on what you may sell

    The products and services you may offer, and who may change that list.

    What to check: The franchisor's right to add required products or drop profitable ones.

17. Item 17

    Renewal, termination, transfer and dispute resolution

    How the relationship ends, is renewed, or is sold, plus arbitration and venue.

    What to check: Notice and cure periods, non-competes after termination, and the state whose courts decide disputes.

18. Item 18

    Public figures

    Any celebrity paid to endorse the brand, and what they are paid.

    What to check: Whether the endorsement comes with any operational involvement.

19. Item 19

    Financial performance representations

    The only place a franchisor may state what outlets earn. Disclosure is optional.

    What to check: Which outlets are included, how many met the average, and whether costs appear at all.

20. Item 20

    Outlets and franchisee information

    Three years of openings, closures, terminations and transfers, plus the list of current and former franchisees.

    What to check: Closures and transfers against openings, and the pipeline of signed-but-not-open units.

21. Item 21

    Financial statements

    Audited statements for the franchisor, usually three years.

    What to check: Whether the franchisor has the equity to fund the support promised in Item 11.

22. Item 22

    Contracts

    Every agreement you will sign, attached in full.

    What to check: The franchise agreement itself, plus personal guarantees and any development agreement.

23. Item 23

    Receipts

    Two copies of a receipt proving you got the document.

    What to check: The date you signed it: your review period runs from there.

Educational summary of the FTC Franchise Rule disclosure items. It is not legal advice; state franchise laws add requirements in several states, and a franchise attorney should review any agreement before signing.