What They Don’t Tell You About the Franchise FDD: How to Spot a Winner

Let’s be honest, most people glaze over the Franchise Disclosure Document (FDD) like it’s a phone book from 1992. And I get it. It’s 200+ pages of legalese, financial tables, and fine print. But here’s the thing: if you know where to look, the FDD can show you exactly what kind of opportunity you’re walking into.

As a franchise consultant, I’ve reviewed hundreds of FDDs with clients, and I’ve spotted some clear patterns that separate the winners from the rest.

Today, I’m pulling back the curtain and showing you what the FDD really tells you, and how smart investors read between the lines.

But first, What Is an FDD?

The FDD is a legal document that every franchise in the U.S. is required to provide to prospective buyers. It outlines everything from startup costs to legal disputes, franchisee obligations, earnings potential, and much more.

There are 23 required items in every FDD. Not all are equally valuable, but some are pure gold when you know how to read them.

What to Look For (and What to Be Wary Of)

1. Item 7: Initial Investment

This shows the total cost to open a location—franchise fee, equipment, working capital, real estate, marketing, and more.

Look for: A detailed breakdown, not just a big range. You want transparency.

 Red flag: A wide range (say, $150K to $500K) without explanation. That signals inconsistency and a lack of clarity.

2. Item 19: Financial Performance Representations

This is where franchisors may (but don’t have to) show revenue and profit data.

 Look for: Detailed income statements from actual units. Average revenue, median profit, breakdown by location type.

Red flag: No Item 19 at all. That doesn’t mean it’s a bad franchise, but it makes due diligence harder. Ask why it’s missing.

Pro tip: Always compare top-performing units and median numbers. Averages can be skewed.

3. Item 20: System Growth and Turnover

This section lists:

• How many units opened vs. closed

• Transfers and terminations

• Franchisor-owned vs. franchisee-owned locations

Look for: Healthy growth, low closure rate, and transparency about turnover.

 Red flag: High closures or lots of units transferred back to the franchisor. That usually means franchisees are struggling—or quitting.

4. Item 3: Litigation

This is where lawsuits are disclosed.

 Look for: Minimal or no litigation.

 Red flag: Class-action lawsuits or multiple franchisees suing over the same issue (e.g., fraud, misrepresentation).

Litigation doesn’t always mean a bad brand, but patterns matter. Ask about the story behind any lawsuit.

5. Franchisee Validation (Outside the FDD)

Here’s the secret sauce: once you’ve reviewed the FDD, talk to current franchisees. Ask:

• Are you profitable?

• How long until you broke even?

• Would you do it again?

• Is the franchisor supportive?

Most FDDs don’t reflect the day-to-day reality. Validation helps you cut through the marketing and see what it’s really like to run the business.

The Signs of a Winner

After helping countless clients navigate this process, here’s what I’ve found top-performing franchises tend to share:

• Clear, conservative financial projections (not hype)

• Strong franchisee support and training programs

• High franchisee satisfaction during validation

• Simple, scalable business models

• Steady, healthy growth—not a land grab

Don’t let the FDD intimidate you. It’s one of the most powerful tools in your due diligence process—if you know how to use it.

I walk my clients through FDD reviews every week, helping them ask the right questions and avoid the landmines. Because a franchise might look shiny on the outside—but the FDD is where the truth lives.

If you want help reviewing one (or even knowing what FDDs to ask for), reach out. You shouldn’t have to navigate this alone.

– Gene