Franchise Disclosure Document Red Flags

Franchise disclosure document red flags can quietly undermine your goals or point to a franchise that may not be a good fit for you.

​A franchise disclosure document (FDD) won’t hand you a simple pass/fail grade. But it will show you patterns: conflict, weak unit economics, stalled growth, underfunded support, and franchisee churn. Below are the most significant franchise disclosure document red flags to look for, plus practical ways to estimate their real-world impact on your odds of success.

Franchise Disclosure Document Red Flags To Spot Fast

Red flags are most likely to be found in the following sections of an FDD.

• Item 3 (Litigation): Repeated franchisee lawsuits, class actions, or disputes that look like a pattern.
• Item 19 (Financial Performance): Missing or thin disclosures, unusually low revenue (or weak profit signals where provided), and Item 19s that report company-owned results only while excluding franchisee performance.
• Item 20 (Outlets): Closures, terminations, non-renewals, or heavy transfers that hint at churn.
• Item 21 (Financial Statements): A franchisor that looks financially strained or overly reliant on franchise fees.
• Items 6/8/11/12: Fees, required purchases, support/training specifics, and territory protections that can change your unit economics.

Franchise Disclosure Document Red Flags

Below, we’ll break each down.

Item 3: Litigation That Looks Like A Business Model Problem

Litigation is not automatically a deal-breaker. But repeated franchisee disputes about the same topics can be a loud signal that the system creates friction for owners.

Franchise disclosure document red flags to watch for:

• Multiple franchisee-versus-franchisor disputes with similar allegations.
• Class actions, large multi-party claims, or heavy arbitration activity.
• Legal issues tied to earnings claims, territory disputes, fees, supplier arrangements, or support failures.

Potential impact on business success: Patterns of conflict can indicate weak operational support, unclear policies, or a culture that relies on enforcement rather than coaching. Even if you never end up in a dispute, those dynamics often surface in day-to-day operations and in franchisee retention.

Quick metric or trend to calculate: Repetition score: Count how many cases share the same core theme (fees, territory, performance claims, support, purchasing).

What to do next:

• Ask what changed after the disputes.
• Speak with a franchise expert.
• Speak with current and former franchisees, not just top performers.
• Verify how the franchisor handles complaints, remediation, and operator performance issues.

Item 19: Financial Performance That Leaves You Guessing

​Item 19 is where franchisors can share financial performance representations, but many either omit it or provide limited data. That does not automatically mean the opportunity is bad, but it does mean your diligence needs to get more disciplined.

Franchise disclosure document red flags to watch for:

• No Item 19 at all.
• Company owned numbers only with no cost or profit context.
• Small samples, cherry-picked groups, or unclear timeframes.
• Averages that hide spread (no median, no ranges, no percentiles).

Potential impact on business success: Without reliable unit economics, your break-even timeline becomes guesswork. That can lead to underfunded working capital, stress decisions on staffing and marketing, and a slower ramp, especially in the first 6–18 months when most owners are most vulnerable.

Quick metric or trend to calculate: Margin sensitivity check: Build a conservative pro forma and test it at 10%–20% below the disclosed sales figure while holding labor/COGS steady. If the model collapses quickly, you need better cost data or stronger validation.

What to do next:

• Collect real cost ranges from franchisee calls (labor %, COGS %, rent, marketing, royalties).
• Ask how long it takes most locations to break even.
• Validate numbers with multiple operators across different markets and tenure levels.

Item 20: Openings, Closures, And Transfers That Hint At Churn

​Item 20 is one of the most revealing parts of the entire FDD, because it shows what actually happens to units over time. Think of it as the system’s vital signs.

Item 20 is one of the best reality checks in the entire FDD because it shows what happens to locations over time. A brand can market momentum while quietly bleeding operators in the background.

Franchise disclosure document red flags to watch for:

• Consistent closures or “ceased operations” over multiple years.
• High terminations or non-renewals.
• Heavy transfers (owners selling frequently).
• Footprint not growing, or growth coming mainly from transfers rather than net new openings.

Potential impact on business success: Persistent churn often points to underlying unit economics problems, insufficient support, weak training, or a sales process that oversells fit. Even when the concept is strong, high churn can create operational instability and uneven franchisee outcomes.

Quick metric or trend to calculate:

• 3-year churn snapshot (rough): (closures terminations non-renewals ceased operations) ÷ (average total outlets over 3 years)
• Net growth trend: Openings minus closures year over year. Flat or negative net growth deserves scrutiny.

What to do next:

• Ask why units are closing and whether there are patterns by region or format.
• Identify whether transfers are profit-taking exits or fatigue exits.
• Speak to former franchisees, if possible, to understand the real failure points.

Item 21: Franchisor Financials That Don’t Match Their Promises

A franchise can have a solid concept and still fail at the system level if the franchisor is under-resourced. Item 21 is where you look for the franchisor’s capacity to support growth, training, field operations, and brand marketing.

Franchise disclosure document red flags to watch for:

• Weak liquidity or signs of cash strain.
• Heavy debt load relative to the size of the system.
• Recurring losses without a clear, sustainable plan.
• A business model that appears overly dependent on franchise fees rather than ongoing royalties.

Potential impact on business success: Underfunded franchisors tend to cut where it hurts owners first: field support, training quality, marketing resources, and tech infrastructure. That can lengthen ramp time, increase operator mistakes, and reduce the consistency of franchisee performance.

Quick metric or trend to calculate: Support capacity proxy: Compare system size growth to staffing promises (from Item 11 and discussions). If unit count is rising faster than support resources, service quality often degrades.

What to do next:

• Ask how many field support reps there are per unit.
• Ask what investments are planned in training, marketing, and technology.
• Validate support experience with newer franchisees (they feel gaps most sharply).

Item 6 and Item 8: Fee Stacking And Required Purchasing That Squeezes Margins

Not all red flags are dramatic. Some of the most expensive ones are boring on paper and brutal in real life. These items are where you often find the terms that squeeze margins or create operational friction.

Franchise disclosure document red flags to watch for:

• Multiple recurring fees beyond royalties and marketing contributions.
• High COGS (especially if it’s a high % of sales) and limited operational flexibility.
• Rebates, markups, or supplier arrangements that feel misaligned with franchisee profitability.
• Advertising requirements that don’t translate into local demand.

Potential impact on business success: Margin compression forces bad tradeoffs, such as understaffing, reduced marketing, deferred maintenance, owner burnout, and slower break-even. If the model depends on perfect execution to work, the average operator is at risk.

Quick metric or trend to calculate:

• Fee load estimate: Add up recurring obligations as a percentage of sales (royalty national marketing required local marketing tech fees other recurring payments). Then test the model with conservative gross-margin and labor assumptions.

What to do next:

• Ask franchisees what their real all-in cost structure looks like.
• Verify whether purchasing rules raise costs versus local market alternatives.
• Stress-test profitability at lower-than-expected sales and higher labor costs.

Item 11 and Item 12: Support And Territory That Look Better On Paper Than In Practice

Some of the most expensive mistakes happen when buyers assume “the franchisor will help” or “my territory is protected,” without verifying what that means in practice. These sections tell you whether support and market protection are absolute or mainly marketing language.

Franchise disclosure document red flags to watch for:

• Vague promises around training, opening support, and ongoing coaching cadence.
• Limited detail on who provides support, how often, and in what format.
• Territory carve-outs, alternative channels, or weak exclusivity language.
• These rights allow the franchisor to compete near you through nontraditional outlets.

Potential impact on business success: Weak support increases early mistakes and slows ramp. Weak territory protection reduces upside and can create internal competition, making unit economics harder to sustain, especially in dense markets.

Quick metric or trend to calculate:

• Ramp risk check: Ask operators how long it took to feel stable, and what support they actually received in the first 90 days. If stories vary widely, outcomes often do too.

What to do next:

• Ask for specifics: training duration, onsite support, ongoing coaching, and marketing assistance.
• Verify the realities of the territory with franchisees in similar markets.
• Confirm how the brand handles encroachment and channel conflict.

Real World Example: When the FDD Looks “Fine” Until You Do the Math

Fran Chiseman is doing what most smart first-time buyers do: she’s excited, but she’s not trying to get married to a concept without checking the fine print. The brand she likes looks clean at first glance. No scandal. No obvious horror story. Just a few details that feel easy to wave off… until she lines them up.

The FDD looks “fine” until she stacks a few signals together:

• No Item 19 information, so she can’t verify performance with standardized numbers.
• Item 20 shows churn: 18 openings over three years, along with 9 closures, 4 transfers, and 3 non-renewals.
• Items 6/8 add fee pressure (royalty brand fund tech fees) and require purchasing that likely raises COGS.
• Item 12 carve-outs that could weaken her territory in a dense market.

None of that is an automatic “run.” But it’s a bundle of franchise disclosure document red flags that can turn into the same ugly surprise: slower ramp, tighter margins, and higher working-capital burn than her first spreadsheet assumed.

So Fran does the smart thing. She slows down, calls real operators, and forces the deal to make sense under conservative numbers before she signs.

Getting Help with Evaluating FDDs

Reading (and understanding) FDDs is a crucial part of the franchise process. Interpreting it correctly, comparing it across brands, and matching it to your goals is where most buyers usually need a little help. Franchise.com offers support for franchisees by helping them focus on the parts of the FDD that most often reveal franchise disclosure document red flags, and then using those findings to help narrow down concepts that fit their capital, lifestyle, and risk tolerances from day one.

That way, you’re picking more than just a franchise you like. You’re choosing one that fits you as much as you fit it.

Start your franchise journey today.