Nov 18 • Franchise Development
Understanding the Franchise Disclosure Document (FDD): Structure, Contents, and Key Disclosure Requirements
The Franchise Disclosure Document (FDD) is the foundation of franchise legal compliance and one of the most important documents in the franchisor–franchisee relationship. Required under the Federal Trade Commission’s (FTC) Franchise Rule, the FDD ensures that prospective franchisees have the information necessary to make an informed investment decision. The document must be provided to a buyer at least 14 days before any agreement is signed or money is exchanged. Its purpose is to promote transparency, reduce fraud, and create a standardized framework for disclosure across the franchise industry.
An FDD is highly structured. It contains 23 specific disclosure items, each covering a different aspect of the franchise system: its background, financial performance, litigation, fees, training, financial information, and more. Together, these items offer a full picture of what a prospective franchisee is buying, the risks involved, and the obligations on both sides.
Below is a detailed overview of the FDD and the key disclosure items within it.
What Is the Purpose of the FDD?
Learn more about how to put together your FDD:
The FDD serves several critical functions:
1. Transparency and Protection
The primary intent of the FDD is to protect franchise buyers by giving them access to essential information, preventing deceptive practices, and ensuring full disclosure.
2. Due Diligence Tool
A prospective franchisee should use the FDD to evaluate:
- The franchisor’s history
- The true cost of the investment
- Potential profitability
- Territory rights
- Operational support
- Competitive risks
- Financial obligations
3. Legal Compliance
For franchisors, the FDD is not optional—it is a legal requirement. Many states also impose additional registration or filing requirements (so-called franchise registration states).
The 23 FDD Disclosure Items
Each FDD must include 23 uniform items. These items create consistency across the industry and standardize information so a prospective buyer can compare different brands effectively. Below is a summary of each item, with additional emphasis on the key disclosures.
Item 1 – The Franchisor and Any Parents, Predecessors, and Affiliates
Item 1 provides background information on the franchisor, including:
- Legal name and corporate structure
- Length of time in business
- Affiliates involved in franchising
- Predecessor companies (if any)
- Description of the franchise system
It answers the basic question: “Who am I getting into business with?”
Item 2 – Business Experience
This item lists the leadership and decision-makers behind the franchise, including:
- Directors
- Executives
- Key officers
- People responsible for franchise operations
It helps a prospective buyer assess the experience and competence of the team guiding the brand’s growth.
Item 3 – Litigation
One of the most important sections, Item 3 discloses:
- Pending lawsuits
- Past litigation
- Criminal charges involving fraud or franchise law
- Material civil actions
- Claims involving the franchise relationship
This section helps buyers identify risk and evaluate whether the franchisor has a history of disputes, fraud, or systemic issues across the system.
Item 4 – Bankruptcy
This item discloses whether the franchisor, its executives, or predecessors have filed for bankruptcy. Bankruptcy history may signal financial instability.
Item 5 – Initial Fees
Item 5 describes all fees that must be paid upfront, such as:
- Initial franchise fee
- Territory fee
- Initial training fees
- Pre-opening development costs
These are usually one-time fees required before opening a franchise.
Item 6 – Other Fees
Item 6 includes recurring or ongoing fees, often including:
- Royalties
- Marketing and advertising fund contributions
- Technology fees
- Renewal fees
- Transfer fees
- Audit fees
This item is crucial because it outlines the franchisor’s revenue stream and shows the franchisee’s long-term cost obligations.
Item 7 – Estimated Initial Investment
Item 7 provides a detailed estimate of the total investment required to open the franchise. This is one of the most scrutinized parts of the FDD because it lays out:
- Real estate costs
- Construction and build-out
- Equipment
- Inventory
- Insurance
- Working capital
- Licenses and permits
The total investment range helps buyers understand the financial commitment and secure financing.
Item 8 – Restrictions on Sources of Products and Services
This item outlines what franchisees must buy, from whom, and under what conditions. It may include:
- Required suppliers
- Approved vendors
- Proprietary products
- Restrictions on where goods can be purchased
- Reasons for sourcing requirements (quality control, branding, etc.)
It also discloses whether the franchisor receives revenue from supplier rebates or markups.
Item 9 – Franchisee’s Obligations
Item 9 lists the franchisee’s contractual obligations in a chart format, showing where each obligation appears in the FDD and the franchise agreement. It includes duties related to:
- Site selection
- Build-out
- Training
- Operations
- Marketing
- Reporting
- Renewal and termination
Item 10 – Financing
If the franchisor offers financing, Item 10 discloses:
- Terms
- Interest rates
- Loan structure
- Guarantees required
- Whether the franchisor may modify or cancel financing
If the franchisor does not offer financing, this section must state so.
Item 11 – Franchisor’s Assistance, Advertising, Computer Systems, and Training
Item 11 describes what support the franchisor provides, including:
- Pre-opening support
- Training programs
- Onsite assistance
- Computer and POS systems
- Vendor relationships
- Marketing support
- Standards and operating requirements
This section clarifies what the franchisor will—and will not—do to support the franchisee.
Item 12 – Territory
This item defines:
- Whether a franchisee receives an exclusive territory
- The size and boundaries of that territory
- Conditions under which territories can be changed
- Rights to open additional units
- Whether the franchisor can compete within a franchisee’s area
Territory rights are essential for evaluating long-term competitiveness.
Item 13 – Trademarks
Franchisees are buying a brand. This section discloses:
- Registered trademarks
- Pending trademark applications
- Any trademark disputes
- Restrictions on the franchisee’s use of intellectual property
It protects franchisees from unknowingly entering a system with trademark problems.
Item 14 – Patents, Copyrights, and Proprietary Information
Item 14 covers other intellectual property, including:
- Patents
- Copyrighted materials
- Proprietary software
- Trade secrets
Item 15 – Obligation to Participate in the Actual Operation of the Business
This item describes whether:
- The franchisee must personally run the business
- Absentee ownership is allowed
- A manager can operate on behalf of the franchisee
It outlines operational expectations and management structure.
Item 16 – Restrictions on What the Franchisee May Sell
If the franchisor limits or controls what products or services can be offered, this is disclosed in Item 16. It protects brand consistency and quality.
Item 17 – Renewal, Termination, Transfer, and Dispute Resolution
This item outlines the contractual conditions under which the franchise relationship begins, continues, and can end. It includes:
- Renewal conditions
- Termination rights
- Franchisee defaults
- Mandatory dispute-resolution procedures
- Conditions for transfer or sale of a franchise
- Post-termination obligations
This item is vital for understanding the life cycle of the franchise relationship.
Item 18 – Public Figures
If a franchisor uses a public figure (celebrity, professional athlete, influencer) to promote the brand, they must disclose:
- Their financial interest
- Role and use in the franchise system
- Compensation received
Item 19 – Financial Performance Representations (FPRs)
This item is optional but highly valued by franchise buyers. We strongly recommend that a new franchise in particular have a Item 19.
It includes:
- Revenue data
- Profitability information
- Unit-level sales performance
- Average or median financial metrics
- Systemwide performance statistics
A franchisor can provide detailed performance data or choose not to disclose any earnings claims. If they do not disclose performance, they must explicitly state that no earnings claims are being made.
Item 20 – Outlets and Franchisee Information - openings, closings and locations of the company owned and franchise owned locations.
Item 20 provides transparency into:
- Number of franchise and corporate outlets
- Openings and closures
- Transfers
- Terminations
- Projections for future openings
It also provides franchisee contact information, which buyers use for due diligence.
Item 21 – Financial Statements
Franchisors must disclose audited financial statements for the last two fiscal years (or since inception). This section helps franchisees assess financial stability and capitalization.
Item 22 – Contracts
All agreements a franchisee must sign are included, such as:
- Franchise agreement
- Lease riders
- Development agreements
- Guaranty agreements
- Supply contracts
This ensures the franchisee sees all binding documents before signing.
Item 23 – Receipts
Finally, the FDD ends with two receipt pages confirming the franchisee received the document. This is critical for legal compliance.
Conclusion
The FDD is the primary disclosure tool in franchising, designed to protect prospective franchisees and create transparency throughout the franchise sales process. Each of the 23 mandatory disclosure items plays an essential role in helping buyers evaluate risk, understand obligations, and decide whether a franchise opportunity fits their goals.
For franchisors, the FDD serves as a blueprint for compliance and an operational guide that outlines the expectations and standards required of every franchisee in the system.
A well-prepared FDD strengthens:
- Legal compliance
- Franchise sales effectiveness
- Transparency
- Trust between franchisor and franchisee
Understanding the contents and purpose of each disclosure item allows both parties to make informed, strategic decisions, reducing misunderstandings and laying the foundation for a productive long-term business relationship.
Read more on the FDD Compliance Guide and additional information on the FDD process:
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Understanding the Franchise Disclosure Document (FDD): Structure, Contents, and Key Disclosure Requirements
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