Franchise Factbook

The red flags in a Franchise Disclosure Document

Sixteen things worth stopping for, item by item — including the four this site checks automatically on every brand, and what each one usually means.

9 min read · Independent — no franchisor pays to appear here

A red flag is a question, not a verdict

Nothing on this list means a franchise is bad. Each one means there is something the document has not explained, and that you should get it explained before money moves. Plenty of good systems trip one or two of these for dull reasons.

What should worry you is a franchisor who cannot answer, answers differently to how the document reads, or treats the question itself as a problem.

The four we check on every brand automatically

These run against every filing we hold, and where one fails you will see it on the brand page rather than have to find it yourself.

  • Stale filing — the underlying document is several years old. Fees, investment ranges and unit counts all move, and an old filing describes a system that may no longer exist. We flag the age on the page.
  • Incomplete Item 7 range — a total investment range missing its high end, or with the ends the wrong way round. Usually a filing quirk; occasionally it hides how wide the real range is.
  • Item 20 that does not add up — opening count plus openings minus closures not equalling the closing count. Most often a column that did not parse, sometimes a table that was never right.
  • Item 19 inconsistency — earnings figures that disagree with each other or with the outlet counts they are drawn from.

Item by item, what to stop for

The rest need you to read the document. We link to the source on every brand page.

  • Item 1 — a franchisor incorporated very recently, or a chain of predecessors and affiliates that is hard to follow. Ask who actually holds the assets and who you would sue.
  • Item 3 — a pattern of litigation brought by franchisees rather than by the franchisor. One suit is noise; a pattern brought by owners is a signal about how the relationship goes when it goes wrong.
  • Item 4 — any bankruptcy in the franchisor or its principals. Rare, and serious when present.
  • Item 5 and 7 together — a small franchise fee against a very large total investment. The fee is the part people compare and the smallest part of the cost.
  • Item 6 — royalties charged on gross revenue with an advertising levy on top, and any minimum royalty payable whether or not you trade.
  • Item 8 — the franchisor or an affiliate is a required supplier and earns a margin on what you must buy. Legal and common; it means part of your cost base is set by the person you cannot negotiate with.
  • Item 11 — an advertising fund with no obligation to spend it in your market, and no audited account of where it went.
  • Item 12 — a territory that is not exclusive, or that excludes online, delivery and non-traditional venues. Read what it does not grant.
  • Item 17 — renewal at the franchisor's sole discretion, a broad non-compete, or a transfer clause giving the franchisor a right of first refusal on your buyer.
  • Item 19 — no financial performance representation at all. Permitted, and it means nobody has committed to a revenue figure you could later hold them to. Where one is given, check which units it covers: top-quartile-only is a different claim from system-wide.
  • Item 20 — closures, terminations and non-renewals running at a high rate against openings, or a column of zeroes across every year. Also the table listing owners who left in the last year: call them.
  • Item 21 — audited statements that are qualified, or a balance sheet too thin to fund the support the agreement promises you.

The ones that are not in the document at all

Pressure to sign before the statutory waiting period is up. A broker who will not say who pays them. A franchisor who discourages you from calling existing owners, or supplies a curated list and resists the rest of Item 20. Verbal earnings claims that appear nowhere in Item 19 — if it is not in the document, it does not exist, and a seller making them is telling you something important about the system.

The 16-point FDD red-flag checklist

Every point, printed here. The email below sends a copy — it does not unlock anything.

  1. Item 1 — how old is the franchisor, and who actually holds the assets?
  2. Item 3 — is there a pattern of litigation brought BY franchisees?
  3. Item 4 — any bankruptcy in the franchisor or its principals?
  4. Item 5 vs 7 — how small is the fee against the real total investment?
  5. Item 6 — royalty on gross, ad levy on top, any minimum payable regardless of trade?
  6. Item 8 — does the franchisor earn a margin on what I am required to buy?
  7. Item 11 — is the ad fund spent in my market, and is it accounted for?
  8. Item 12 — what does my territory NOT grant: online, delivery, non-traditional?
  9. Item 17 — renewal discretionary? Non-compete scope? Right of first refusal on my buyer?
  10. Item 19 — is there an FPR at all, and which units does it cover?
  11. Item 20 — closures and terminations against openings, year by year.
  12. Item 20 — have I called owners who LEFT, not only the ones still in?
  13. Item 21 — are the audited statements clean, and is the balance sheet thick enough to support me?
  14. How old is this filing, and what has changed since?
  15. Who pays my broker, how much, and at what point?
  16. Has anyone made an earnings claim to me that is not in Item 19?

Email the checklist to yourself

Every point above, in one email you can take into a meeting with a franchisor or a broker. We never sell your address and never pass it to a franchisor.

Rather not do all sixteen yourself?

We'll read one filing and come back with every point above answered for that brand. You pay us; the franchisor never does.

See what a review covers
This is not advice. It is general information about how franchising works, written from public filings and published rules. Your circumstances, your state and your agreement all change the answer. Before you sign anything, pay a franchise lawyer who is not connected to the franchisor or to a broker.

The rest of the series

What owning a franchise is actually likeThe parts of the job that nobody puts in a brochure: the first year, the hours, the control you give up, and what you are really buying.Your credit score, what you can borrow, and what it can be spent onHow franchise lending actually works: which score matters, roughly what lenders look for, how much of your own money goes in, and what a loan can and cannot cover.Territory, location, and how to check a franchise brokerWhy the site decision usually outlasts the franchise decision, and how to check the person recommending brands to you — including who actually pays them.How to use this site, and what each number meansWhere every figure here comes from, which ones are comparable between brands, and the specific ways a franchise number can mislead you.Planning your exit before you sign, and limiting the downsideWhat your stake is worth when you want out, what happens if it does not work, and the terms that decide both — all of which are set on the day you sign.

Back to the franchisee tools — work out what fits your budget and how you want to work.