FDD Glossary: Franchise Disclosure Document Terms

The FTC requirement that you receive the complete FDD at least 14 calendar days before you sign any binding agreement or pay any money. It exists to give you time to read and get advice. Use it.

The money you need to cover early operating losses before the business supports itself. It appears as a line in the Item 7 investment table. A short window, like three months, is a common way to make the total look smaller than it is.

A franchisee who agrees to open several units in a region on a schedule, often at a reduced per-unit fee. The obligations and the development schedule sit in the franchise agreement, not just the brochure.

The franchisor's books, examined by an independent accountant. Item 21 must include them. A summary or unaudited statement is not the same thing, and the auditor's opinion is the part to read first.

The total divided by the count. One very large unit can pull an average far above what a typical owner earns, which is why an honest Item 19 reports a median alongside it.

The rate at which owners leave the system through closure, transfer, or the franchisor reacquiring units. Net growth can hide heavy churn, which is why Item 20 shows the gross counts, not just the net change.

The specific group of outlets an earnings figure is based on. An honest figure names the cohort and its size. A figure drawn only from mature or top-performing units, with the rest left out, tells you little about a new owner.

Language in Item 19 stating that results vary and are not a promise of your earnings. It is required, and it is honest. We report any earnings figure with the franchisor's disclaimer left intact.

Any statement by the franchisor about the sales, income, or profit a franchisee may earn. It lives in Item 19. A franchisor is allowed to make no earnings claim at all, and about a third make none, which means they will not stand behind any number in writing.

When the franchisor or another unit takes business from your area, in person or online. Whether it is allowed comes down to your Item 12 territory and the franchisor's reserved rights.

The full range of money required to open, listed item by item in Item 7: fees, build-out, equipment, signage, opening inventory, and working capital. The honest version is itemized rather than buried behind the word varies.

A defined area, by map or ZIP codes, in which the franchisor promises not to open or grant another unit during your term. The word exclusive means little unless Item 12 defines the area and limits the franchisor's reserved rights.

The binding contract you actually sign. The FDD describes it, but the agreement controls. It is attached to the FDD as an exhibit, and it is the document an attorney should read line by line.

The roughly 200-page document a franchisor must give you before you buy. It has 23 standard items covering fees, litigation, obligations, support, territory, owner turnover, and the franchisor's finances. Our guide covers the eight items that carry the real risk.

The person or company that buys the right to run a unit under the franchisor's brand and system. That is you, the buyer.

The company that owns the brand and sells franchises. Item 21 shows whether the franchisor itself is financially sound.

The federal rule that requires franchisors to give buyers a complete FDD and sets what it must disclose. It also sets the 14-day waiting period before you can sign or pay.

An auditor's note in Item 21 stating substantial doubt about the franchisor's ability to stay in business. It is one of the most serious signals in the entire FDD.

Gross sales are the money that comes in. Net profit is what is left after every cost. An Item 19 figure is usually gross sales, and treating it as profit is the most common and most expensive misread in the document.

The upfront fee you pay the franchisor for the right to open, disclosed in Item 5. It is only one line of the total cost and is often the smallest part.

The Financial Performance Representation: the franchisor's earnings claim, and the most gamed page in the FDD. See reading Item 19 and the free honesty check.

The outlet tables: how many units opened, closed, were transferred, and were reacquired, plus a list of former franchisees you can call. See owner turnover.

The lawsuits the franchisor and its officers have been involved in, disclosed in Item 3. The pattern matters more than the count: franchisees suing over earnings claims is a different signal than the franchisor collecting an unpaid bill. Allegations are not findings.

An ongoing fee, usually a percent of sales, that the franchisor collects for brand advertising. It is disclosed in Item 6 and is separate from the royalty.

An arrangement where one party buys the right to sell and support franchises in a whole region. It changes who actually trains and supports you, which is worth confirming in Item 11.

The middle value, where half of owners are above and half below. It describes a typical owner far better than an average, which is why its presence in Item 19 is a sign of an honest disclosure.

What the franchisor owns minus what it owes, found in the Item 21 balance sheet. A negative number, called a deficit, means the company owes more than it holds.

A clause limiting what business you can run during and after the franchise, disclosed in Item 9. The length and the geographic area are the terms to read.

The signed page at the back of the FDD acknowledging the date you received it. It starts the 14-day clock, so the date matters.

A state that requires franchisors to register their FDD and publish it. Several, including Wisconsin and Minnesota, offer free public databases. See how to find your FDD.

Your right to continue after the initial term ends, and the conditions attached, disclosed in Item 9. Renewal often requires signing the then-current agreement, which can differ from the one you signed first.

The ways a franchisor keeps the right to sell into your area, such as online, national accounts, or alternate channels, disclosed in Item 12. Broad reserved rights can hollow out a territory that is labeled exclusive.

An ongoing fee, usually a percent of gross sales, paid to the franchisor for the life of the agreement. Disclosed in Item 6, it is charged on sales, not on profit, so it is owed even in a bad month.

Contract language that lets the franchisor decide something on its own, often without notice or limit. When changes to required standards or purchases sit at the franchisor's sole discretion, the real cost of the franchise can move after you sign. See Item 9.

The conditions under which the agreement can be ended, by either side, disclosed in Item 9. Pay attention to what counts as a default and how much chance you get to fix it.

Your right to sell the franchise to someone else, and the franchisor's conditions and fees for approving it, disclosed in Item 9. A high transfer count in Item 20 can mean owners leaving, not just changing hands.