Before you sign or pay for a U.S. restaurant franchise, review the entire Franchise Disclosure Document (FDD), every proposed agreement and the evidence behind any sales or earnings claims. Focus especially on the difference between the initial fee and the total opening investment, the contract terms that control your rights, and the experiences of current and former franchisees.
Start with the complete, current FDD
A U.S. FDD has 23 required items covering the offering, the franchisor and its officers, and other franchisees. The Federal Trade Commission (FTC) says you must receive it at least 14 days before you are asked to sign a contract or pay money to the franchisor or its affiliate. Treat that period as review time, not a reason to rush a decision.
- Ask for the complete FDD and all proposed agreements, exhibits, addenda and state riders. The FTC says a prospective buyer may request an FDD once the franchisor has received an application and agreed to consider it.
- Check the issue date and confirm it is the current document for the offer. If terms or agreements have changed, ask what changed and when; timing requirements for changed terms and state requirements may need legal confirmation.
- Keep a usable copy. Check that every referenced exhibit is present and readable, including the franchise agreement, financial statements and any support for Item 19 claims.
- Record questions as you go and request answers in writing. The FDD is a disclosure document, not a substitute for reviewing the proposed contract.
Items 1–4: identify the business and examine its history
Item 1: the franchisor and its business
Review the franchisor’s background and any relevant parent, predecessor or affiliate information. Note who is actually responsible for the promised training, operating assistance and other obligations. Item 1 may also identify licensing or permit requirements; what applies to a particular restaurant depends on its format and location.
Item 2: management experience
Item 2 identifies directors, principal officers and key executives. Look at their experience with franchise systems and consider whether the people responsible for the offer and support have relevant operating backgrounds.
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Item 3: litigation
Item 3 covers specified litigation and legal history involving the franchisor and certain executives, including qualifying convictions, injunctions and franchise-related lawsuits or settlements. Read what each matter concerns, its status and outcome, and whether it raises a question for the franchisor or your lawyer. A lawsuit’s existence alone does not prove wrongdoing.
Item 4: bankruptcy
Inspect the bankruptcy disclosure in the actual FDD and ask counsel to explain anything disclosed. The significance depends on the facts and the parties involved.
Items 5–7: separate the franchise fee from the opening budget
Item 5 states the initial franchise fee. Item 7 estimates the total initial investment and breaks it into startup-cost categories. They answer different questions: the franchise fee is one payment, while the investment estimate concerns the broader cost of opening.
- Compare Item 7 with the restaurant format and location you are considering: build-out, equipment, lease terms, opening schedule and working capital can change the budget.
- For each payment, confirm who receives it, when it is due, whether it is refundable, and whether it recurs or goes to an affiliate or supplier. Check the FDD and agreements rather than relying on a sales presentation.
- Ask how the estimate was prepared and which assumptions may not fit your site or financing plan. Treat it as an estimate for the offering, not a promise that every outlet will open for the same amount.
The FTC’s disclosure materials do not provide a universal restaurant startup figure. Build a location-specific budget rather than relying on an unsupported national average.
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Items 8–16: understand what operating the restaurant requires
Item 8: required suppliers and purchases
Item 8 addresses restrictions on sources of products and services. Find out which ingredients, equipment, technology and distributors are required, whether alternatives need approval, and whether the franchisor or an affiliate receives revenue from required purchases. Ask operators how required goods affect cost and quality; confirm the actual requirements in the FDD.
Items 9–11 and 13–16: obligations, support and operating rules
These items address franchisee obligations, financing, training and assistance, advertising, computer systems, trademarks and other intellectual property, and participation in operating the business. Read each disclosure alongside the corresponding agreement language. The rule sets the topics; the actual requirements vary by offer.
Item 12: territory
Check whether the territory grant is exclusive and what exceptions apply. Look for carve-outs involving channels, formats or competing outlets, then ask a lawyer how the written grant works in the market you intend to serve.
Items 17 and 22: check the contract before committing
Item 17 summarizes key relationship terms, including renewal, termination, transfer and dispute resolution. Item 22 attaches proposed agreements. Read the summaries and the complete contract language together: the FTC says the contract governs the relationship.
- Renewal: What conditions must you meet, and can fees or contract terms change?
- Termination: Which defaults can lead to termination, and what steps or cure periods apply?
- Transfer or sale: Does a sale require approval, and what conditions, fees or buyer qualifications apply?
- Disputes: Are disputes handled in court, arbitration or another process, and where?
- After exit: Do post-termination restrictions limit competing activity? Ask a lawyer to assess their practical effect and enforceability in the relevant jurisdiction.
Review every attached agreement, including leases, options and purchase documents when included. Compare the final documents with the FDD, and get professional advice on terms you do not understand.
Items 18–19: distinguish sales activity from financial evidence
Item 18: public figures in franchise sales
Item 18 addresses public figures’ participation in selling franchises. Review it as part of understanding who is involved in the sales process.
Item 19: financial performance representations
Item 19 may contain sales or earnings claims, but the Franchise Rule does not require a franchisor to provide financial performance information. If the franchisor makes such a claim, it must appear in Item 19 and have a reasonable basis. Examine the data source, reporting period, population of outlets, limitations and assumptions, and request written substantiation. Check whether the outlets and operating conditions resemble the restaurant you are considering.
If a salesperson makes an earnings or sales claim outside Item 19, stop and resolve the discrepancy before proceeding. The FTC says financial performance claims generally cannot be made outside Item 19, subject to narrow exceptions, such as actual records for an existing outlet you are considering.
Do not treat gross sales as owner income or profit. To assess a location, model labor, occupancy, food and packaging, royalties, advertising contributions, debt, taxes and other expenses using assumptions relevant to that site. An accountant can help evaluate the claim and the assumptions behind your model.
Item 20: look for system changes and speak with operators
Item 20 includes three-year tables of outlet openings, closures, transfers and terminations, as well as contacts for current and former franchisees. Use the tables to identify patterns and investigate departures, including outlets in or near your intended market. The figures do not, by themselves, explain why an outlet left.
Contact a range of current and former operators rather than relying on a single unusually positive or negative account. Ask current franchisees:
- What did you actually pay to open, and how did costs compare with the estimate?
- How long did opening take, and what training and support arrived when promised?
- What do ongoing fees and required purchases cost, and how do suppliers perform on price and quality?
- How much owner labor does the restaurant require, and how is business performance tracking against expectations?
- What would you check before buying again?
Ask former franchisees why they left. Compare their answers with the disclosure and the franchisor’s explanations.
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Item 21: franchisor financial statements
Review the franchisor’s financial statements and notes with an accountant. Consider whether its financial condition appears consistent with its ability to deliver the support described in the offer; the FDD alone does not establish that any particular franchisor will meet its obligations.
Item 23: receipt
Confirm the receipt accurately lists the FDD and exhibits you received, and retain the dated copy. It documents receipt; it is not a substitute for reviewing the disclosures or agreements.
Compare offers on the same evidence
If you are considering more than one restaurant franchise, compare the same categories across offers and locations rather than relying on headline fees or sales claims.
| Compare | Where to look or what to verify |
|---|---|
| Initial fee and total opening investment | Items 5 and 7; payment recipients, timing, refundability, recurring costs and fit with your location budget |
| Ongoing fees and required purchases | FDD disclosures and agreements; royalties, marketing or technology charges, supplier restrictions and operator experience |
| Territory and operating support | Item 12 and the relevant contract language; territory exceptions, training and opening assistance |
| Financial performance claims | Item 19; outlet population, period, assumptions, limitations and written substantiation |
| Outlet changes and franchisee experience | Item 20; openings, closures, transfers and terminations, plus interviews with current and former operators |
| Exit rights and dispute terms | Items 17 and 22; renewal, transfer, termination, post-termination restrictions and dispute resolution |
| Franchisor resources and history | Items 1–4 and 21; background, relevant legal or bankruptcy disclosures, and financial statements |
Get advice on the parts you cannot independently assess
The FTC recommends showing the FDD and contract to an advisor such as a lawyer or accountant. A franchise lawyer can review contract rights, state-specific requirements and legal disclosures; an accountant can examine financial statements, Item 19 support and investment assumptions. This is U.S. federal guidance: states may add registration, filing or disclosure requirements, while restaurant permits and location rules depend on jurisdiction and format. Confirm the rules for the state and site involved before making a transaction decision.
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