Get All Access for $5/mo

The Key to Understanding a Company's FDD Thinking of investing? Check out these three critical sections of the franchise disclosure document first.

By Tracy Stapp Herold

You'll find a lot of stats packed into the Franchise 500(R), including unit counts, costs, royalties and financing info. But it's impossible for us to show you every detail of every franchise system, which is why we always tell you to do your research before investing. Most important to that process? Carefully reading through the company's Franchise Disclosure Document (FDD).

Here, we take a look at three key sections from the FDD. You won't find this information among our listings, but if you are interested in a particular company, you'd be wise to check out these items carefully.

Related: Considering franchise ownership? Get started now and take this quiz to find your personalized list of franchises that match your lifestyle, interests and budget.


Item 3 of the FDD contains information on pending and prior litigation against the franchisor, as well as litigation filed by the franchisor against franchisees. Some litigation is inevitable, especially when dealing with old and large companies. But if a company's Item 3 goes on for page after page, take a closer look. Take note of who filed the suits, when they were filed and why. If there are many filed by franchisees, that could be a red flag. Likewise, a large amount of franchisor-initiated litigation could signal deeper problems.

Item 3 offers some of the greatest insight into whether franchisees are satisfied with the system. It reveals what the areas of conflict are and how the franchisor typically handles conflicts when they arise. But if you want to know even more (and you should), the best thing you can do is talk to current and former franchisees — who should also be listed in the FDD — to get their take.

Related: How to Read a Franchise Disclosure Document

Earnings claims

It's the biggest question on the minds of prospective franchisees: How much money can I make? That's where Item 19 comes in. This is the one place where franchisors are allowed to make financial performance representations. Disclosure is optional, but more and more franchisors are choosing to include information in this section — in fact, two-thirds of this year's Franchise 500(R) companies do.

But beware: Not all Item 19s are created equal. Some franchisors offer a comprehensive look at how all the franchises in their system are faring financially. But others offer only the average sales for their system, sales for a select few units or sales of company-owned units rather than those of franchisees. Also, Item 19 may not necessarily show the whole picture; gross sales are one thing, but profits are another.

In short, when seeking the answer to the big money question, look to Item 19 as just the first step in your research, and one to be taken with a grain (or block) of salt.

Related: Before Diving Into Franchise Ownership, You Need to Ask Yourself This One Key Question


Our listings show the total number of franchises year to year, but this is far from the whole picture when it comes to a company's growth. For that, you need to head to Item 20. The series of tables presented in this section offers a wealth of information on growth over the previous three years.

In particular, you'll want to look at the third table, which displays not only how many franchises were opened each year, but also how many were terminated, not renewed at the end of their term, reacquired by the franchisor or ceased operating for other reasons.

These numbers can be just as important to consider as the company's overall growth. If a company is losing numerous units each year — even if it's still managing positive net growth — it's time to ask questions. Find out why there's so much turnover and whether franchisees are actually experiencing long-term success with the business model or are simply being replaced faster than they leave.

Related: 9 Entrepreneur Habits That Lead to Long-Term Success

Tracy Stapp Herold

Entrepreneur Staff

Tracy Stapp Herold is the special projects editor at Entrepreneur magazine. She works on franchise and business opportunity stories and listings, including the annual Franchise 500.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick

Business Solutions

Increase Productivity with This Microsoft 365 Subscription, Now $25 Off

It can make the entrepreneur life a lot easier.

Business News

Apple Pay Later Is Ending. Here's What's Taking Its Place.

The program was available for less than a year.


This Artist Answered a Businessman's 'Powerful' Question — Then His Work Became 'the Poster Child for Juneteenth': 'Your Network Really Becomes Your Net Worth'

Reginald Adams was the executive director of a Houston-based art museum for more than a decade before he decided to launch his own public art and design firm.


Harvard Business School Professor Says 65% of Startups Fail for One Reason. Here's How to Avoid It.

Team alignment isn't nice to have -- it's critical for running a successful business.

Business News

Here's What Companies Are Open and Closed on Juneteenth 2024

Since it became a holiday in 2021, Juneteenth has been recognized by some major corporations as a paid day off.

Growing a Business

I Hit $100 Million in Annual Revenue by Being More Transparent — Here Are the 3 Strategies That Helped Me Succeed

Three road-tested ways to be more transparent and build relationships that can transform your business — without leaving you feeling nightmarishly over-exposed.