FDD Items Explained: A Guide to Item 7, Item 19 & More

Part 1: Introduction - Your Journey Starts Here

1: Decoding the FDD: The Key to Your Smart Franchise Investment

I bet you're holding a thick document filled with legal jargon called the FDD (Franchise Disclosure Document). You're probably feeling the same mix of excitement and overwhelm I did when I first encountered it. Excited because it means you're one step closer to realizing your entrepreneurial dream; overwhelmed because this document looks like gibberish, leaving you unsure where to begin, and even more uncertain if it hides any "gotchas."

I completely understand how you feel. As someone who's been in the business information field for years, I've reviewed countless business plans and FDDs. Let me tell you this: The FDD isn't your enemy-it's your most powerful ally. It's a legal document mandated by the Federal Trade Commission (FTC) that franchise brands must provide you at least 14 days before signing any agreements or paying fees. Its sole purpose is to protect you, ensuring you make decisions with full knowledge of the facts.

But achieving that "knowledge" isn't easy. That's why I'm writing this article. I won't give you a dry list of legal clauses. Instead, I'll walk you through every corner of the FDD, explaining the real meaning behind each term in language you can understand. We'll dive deep into the clauses that hit your wallet the hardest, such as Item 7 (Initial Investment) and Item 19 (Financial Performance Representations).

More importantly, this website offers more than just information. I firmly believe true value lies in turning information into action. So as we dissect the FDD, I'll show you how to use our site's exclusive free tools-like the ROI Calculator and Business Plan Generator transform those dry numbers into your own business blueprint.

Ready? Let's demystify the FDD together and turn your doubts into confidence.

Disclaimer: 

This article provides general information and educational content about the Franchise Disclosure Document (FDD) and is not a substitute for professional legal, accounting, or financial advice. Franchise investment involves significant risks. Before making any investment decision, you should always conduct your own thorough due diligence and consult qualified franchise attorneys and accountants.

Part 2: The 23 FDD Items: A Section-by-Section Breakdown

2: The Complete Guide to the 23 FDD Items: Item-by-Item Analysis

The FDD's structure is standardized. Whether you're considering a coffee shop or a gym, its 23 items follow the same sequence. The benefit of this standardization is that once you learn how to read one FDD, you master the core skill for evaluating any franchise opportunity. Next, I'll break down each of these 23 items for you. For each one, I'll explain what it means, why it matters to you, and the "red flags" you need to watch out for.

2-1: Item 1: The Franchisor, and any Parents, Predecessors, and Affiliates

• What It Is: This is the franchisor's "family tree." It details the company's legal entities, historical background, and any parent companies or affiliates holding controlling interests.

• Why It Matters to You: You need to clearly understand who you're signing with. Is this an experienced, established company or a newly formed one? Does it have the backing of a stronger group? This information relates to the stability and reliability of your future partner. In my view, a company with a clear, stable ownership structure and a solid historical background is generally more trustworthy. Complex corporate structures can sometimes be used to evade certain legal liabilities, which warrants your particular attention.

• [Deep Dive] Red Flags to Watch For:

The company has a very short history (e.g., less than 5 years) and lacks a strong parent company background.

Frequent changes in company name or ownership structure within a short timeframe.

The actual operator of the franchise system is an affiliated company distinct from the contracting entity, which may lead to liability disputes in the future.

• [Deep Dive] Key Questions to Ask:

"Could you share your company's development history and key milestones?"

"What role does the parent company or affiliated entities play in the day-to-day operations of the franchise system?"

2-2: Item 2: Business Experience (Business Experience)

What It Is: This section serves as the "resume" for the franchise company's executive team. You'll find the past five years of professional experience for key figures like the CEO, COO, and Chief Marketing Officer.

Why It Matters to You: You're about to entrust your savings and future to this team. Do they have experience operating a franchise system? Do they have successful experience in your specific industry? A team of seasoned professionals provides more reliable guidance and support for your future journey. I recall reviewing a food franchise brand's FDD where the Operations Director previously worked in real estate with zero food service experience. This is a major red flag, as they may struggle to understand the specific operational challenges you'll face-like supply chain management or employee training.

[Deep Dive]Red Flags to Watch For:

- Core executive team lacks franchise industry experience.

- Frequent turnover among team members; a revolving door of management suggests potential serious internal issues.

- Executives' resumes appear overly polished but don't hold up to scrutiny (cross-check on LinkedIn).

[Deep Dive] Key Questions to Ask:

"Could you share your most valuable experience in helping franchisees succeed?"

"Who on the team will be my primary daily operational contact? What is their background?"

2-3: Item 3: Litigation

What It Is: This critical section discloses major lawsuits involving the franchisor, its predecessors, or executives over the past decade.

Why It Matters to You: Litigation history acts as a mirror reflecting the health of the relationship between the franchisor and franchisees. If you see numerous lawsuits, especially those initiated by franchisees alleging fraud, breach of contract, or violations of franchise law, you must be highly vigilant. This could indicate systemic issues within the system. Of course, a few isolated lawsuits may be normal for a large system. The key lies in the nature and frequency of the litigation. I recommend carefully reading the summary of each lawsuit to understand the core of the dispute.

[Deep Dive] Red Flags to Watch For:

Numerous lawsuits filed by franchisees, especially regarding site selection, inadequate training support, or misleading financial performance projections.

Fraud-related lawsuits targeting the company's core executives.

Frequent disputes with suppliers or landlords, which may indicate payment or partnership credibility issues.

[Deep Dive] Key Questions to Ask:

"Regarding the lawsuit mentioned in Item 3, what lessons did the company learn to improve franchisee relations?"

"Does the company currently have any major disputes that could escalate into litigation?"

2-4: Item 4: Bankruptcy

What It Is: Discloses any bankruptcy history of the franchisor, its parent company, predecessor, or executives within the past decade.

Why It Matters to You: This is a direct measure of financial stability. If the franchisor itself has faced financial distress, its ability to provide ongoing support becomes questionable. A company with bankruptcy history must demonstrate it has resolved the underlying issues and is now financially sound. In my view, while bankruptcy reorganization can sometimes make a company healthier, as a potential investor, you deserve a very clear and convincing explanation.

[Deep Dive] Red Flags to Watch For:

Recent bankruptcy history (within the past 1-3 years).

Bankruptcy caused by mismanagement or fraud, rather than external market conditions.

Key executives with multiple personal bankruptcy records.

[Deep Dive] Key Questions to Ask:

"What were the root causes of the company's bankruptcy that year? What measures have been implemented to prevent recurrence?"

"Can you provide recent financial statements (refer to Item 21) to demonstrate the company's current financial health?"

2-5: Item 5: Initial Fees (Initial Fees)

What It Is: This section clearly lists all upfront fees you must pay to the franchisor upon signing the franchise agreement, most notably the "Initial Franchise Fee."

Why It Matters to You: This is your "entry ticket" into the system. You need to understand exactly what this payment covers. It typically includes brand licensing rights, initial training, and launch support. Note that this fee is usually non-refundable. Therefore, you must be 100% certain before paying.

[Deep Dive] Red Flags to Watch For:

The Initial Franchise Fee is disproportionately high relative to the brand's recognition and the support provided.

The fee structure is highly complex, including various add-on fees under different names.

The terms regarding fee refundability are very vague.

[Deep Dive] Key Questions to Ask:

"What specific services and support items are included in this Initial Franchise Fee?"

"Under what extreme circumstances could a portion of this fee be refunded?"

"Are there fee reduction policies for specific situations (e.g., veterans, multi-unit franchising)?"

2-6: Item 6: Other Fees

What It Is: This is your "ongoing cost checklist." It details all fees you'll pay periodically or irregularly throughout the franchise agreement via a table.

Why It Matters to You: If Item 5 represents your startup costs, Item 6 is crucial for your long-term profitability. The most significant fees typically include:

Royalty Fee: Usually paid monthly as a percentage of your gross sales (e.g., 4%-8%). This is the franchisor's primary revenue source.

Advertising/Marketing Fee: Also usually a percentage of sales (e.g., 1%-3%), used for national or regional brand promotion.

Other Fees: May include software usage fees, additional training fees, renewal fees, transfer fees, etc. I strongly recommend printing this table and studying each item carefully. These ongoing costs directly impact your profit margins.

[Deep Dive] Red Flags to Watch For:

- Excessively high royalty rates that squeeze your profit margins.

- Lack of transparency regarding advertising fee usage and expenditures, leaving you unaware of where your money is spent.

- Presence of numerous "punitive" fees, such as steep fines for minor violations.

[Deep Dive] Key Questions to Ask:

"Is the royalty rate fixed or tiered? Could it increase in the future?"

"How will our advertising fees be allocated? Can we access advertising expenditure reports?"

"Beyond the fees listed here, what unexpected costs have franchisees incurred over the past three years?"

Part 3: Deep Dive into the Most Critical Items

3: In-Depth Analysis: The Key Clauses That Directly Impact Your Wallet

Alright, we've covered the first half of the FDD. Now, we're diving into the two most crucial sections requiring your full attention: Item 7 and Item 19. These directly determine your investment amount and future return expectations. Drawing on years of experience and a highly relatable case study, I'll help you thoroughly understand them.

3-1: Item 7 (Estimated Initial Investment): Plan Your Financial Launchpad

What It Is: Item 7 provides a clear table estimating all initial investments required to open and operate your franchise for the first three months. It goes beyond just the franchise fee in Item 5, offering a comprehensive overview of all expenses.

Why It Matters to You: This is the cornerstone for crafting your business plan and securing financing. This table serves as your financial launch checklist. It typically provides both a low-end and high-end range, giving you a comprehensive understanding of your funding requirements.

I recall coaching an entrepreneur, Mr. Li, several years ago as he prepared to franchise a trendy frozen yogurt brand. He initially focused only on the $50,000 franchise fee, thinking it was manageable. But when I walked him through analyzing Item 7 line by line, his expression changed.

A typical Item 7 table might look like this:

Mr. Li gasped when he saw the TOTAL figure. He realized his total investment could reach nearly $400,000-not the $50,000 he'd initially imagined. Particularly the "Additional Funds" category, which many overlook. This money serves as "lifeblood" to cover employee salaries, utilities, and supplier payments during the initial startup phase before the business stabilizes.

[Deep Dive] Red Flags to Watch For:

A wide estimate range (e.g., low and high estimates differing by more than double) may indicate the franchisor's own weak cost control.

An underestimated "Additional Working Capital" could plunge you into a cash flow crisis during the opening phase.

Omission of hidden costs like legal fees, accounting fees, travel expenses, and licensing fees.

[Deep Dive] Key Questions to Ask:

"What geographic area or store type does this range estimate cover? In my city, should I reference the high or low estimate?"

"Regarding ‘additional working capital,' what sales assumptions underpin this estimate? If initial sales are weak, how long would this fund last?"

"Beyond the items listed in the spreadsheet, what other ‘soft costs' might I personally need to cover?" "

[Tool Integration] Action Point:

• Step 1: "Now, grab a pen and paper or open an Excel sheet. Realistically, create your own budget based on Item 7, tailored to your local market. I strongly recommend using the high valuation for initial planning. Remember, cash is king-it never hurts to prepare more funds than expected."

• Step 2: "After completing your budget, input your total investment amount (TOTAL) into our website's  ROI Calculator. Combine this with the potential revenue data from Item 19 (which we'll cover shortly) to preliminarily estimate your investment payback period and profitability."

• Step 3: "This detailed investment budget will form the core of your business plan. You can integrate it directly into our Business Plan Generator  to prepare for loan applications or presentations to other investors."

3-2: Item 19 (Financial Performance Representations): Decoding the Profit Code

What It Is: Item 19, abbreviated as FPR, is the only place in the FDD where franchise financial performance data can legally be presented to you. However, providing Item 19 is optional for the franchisor, not mandatory.

Why It Matters to You: If Item 7 tells you how much you need to spend, Item 19 is the only place that officially tells you "how much you could potentially earn." This is crucial for your decision-making. If a brand provides Item 19, you need to analyze it meticulously like a detective. It may include:

• Gross Sales: The most common figure, yet also the most misleading, as it reflects no costs.

• Cost of Goods Sold: Shows what proportion of revenue goes toward raw materials.

• Gross Profit: Total sales minus cost of goods sold.

• Net Profit or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): This is the most valuable data, but also the least common.

Back to Mr. Li's case. The yogurt brand he was considering happened to offer a seemingly attractive Item 19, claiming that the top 25% of stores averaged over $1 million in annual gross sales. Mr. Li was thrilled. But I reminded him to pay attention to the details:

• Who is the sample? Does the data come from all franchise locations, or just the company-owned stores in prime locations?

• What exactly is the data? If $1 million is gross sales, what is the net profit? In the food service industry, a 10%-15% net profit margin is considered healthy. This means $1 million in sales might only yield $100,000 to $150,000 in pre-tax net profit.

• What do the footnotes say? The devil is often in the footnotes of an FDD. Mr. Li's FDD footnotes stated: "This data excludes franchisees' royalty fees, advertising costs, rent, and labor expenses." This implies that the so-called "profit" isn't real profit before deducting these major expenses.

[Deep Dive] What to do if there is NO Item 19? If a brand chooses not to provide Item 19, its sales personnel are strictly prohibited by law from making any verbal or written suggestions about income or profitability to you. If a salesperson secretly tells you "one of our stores made XX million a year," this is illegal and a major red flag. In such cases, your only legal recourse is to use Item 20 to contact as many existing franchisees as possible and inquire about their actual business performance.

[Deep Dive] Red Flags to Watch For:

• Providing only total sales figures while remaining silent about costs and profits.

• Data samples are extremely small or include only the top-performing minority of stores.

• Footnotes contain numerous exclusions that render the data unreliable.

• Salespeople attempt to provide "unofficial" profit data outside of Item 19.

[Deep Dive] Key Questions to Ask:

• "Is the Item 19 data based on company-owned or franchise stores? How many locations are included? What percentage of the total?"

• "Can you provide a more detailed per-store model (Pro-forma P&L) to help me understand the full process from gross sales to net profit?" (Even if they can't provide official figures, this question tests their professionalism and transparency)

• (If Item 19 is absent) "Since there's no official financial performance statement, I understand you can't provide any profitability projections. Could you then share the most critical operational metrics determining a store's success?"

[Tool Integration] Action Point:

• "Input the most conservative revenue data from Item 19, along with estimated cost data from Items 6 and 7, into our  ROI Calculator. This will provide a more realistic and credible return-on-investment analysis."

• "When evaluating multiple franchise opportunities, Item 19 is key for comparison. Use our  Opportunity Comparison tool to compare different brands' initial investment (Item 7), ongoing costs (Item 6), and potential revenue (Item 19) side-by-side-their strengths and weaknesses become immediately clear."

4: Quick Overview of Remaining FDD Sections (Items 8-18, 20-23)

We've conquered the toughest part. While the remaining sections still require careful reading, they're relatively easier to grasp. I'll quickly outline their core value for you.

4-1: Item 8: Restrictions on Sources of Products and Services

Interpretation: This clause specifies whether you must purchase equipment, raw materials, etc., from headquarters or designated suppliers. This impacts your ability to control costs. If the headquarters is the sole supplier, be vigilant about potential markups to generate extra profits.

4-2: Item 9: Franchisee's Obligations

Interpretation: This is an extremely useful "checklist of obligations," summarizing all your primary responsibilities under the franchise agreement in tabular form. I recommend printing it out and posting it on your wall as a constant reminder.

4-3: Item 10: Financing

Interpretation: This section clarifies whether the franchisor offers direct or indirect financing assistance. Many franchisors partner with third-party financial institutions, which can streamline your loan application process.

4-4: Item 11: Franchisor's Assistance, Advertising, Computer Systems, and Training

Interpretation: This outlines the support the franchisor commits to providing. The more specific the details, the better. For example, "two weeks of initial training" is far more valuable than simply stating "training provided." Carefully examine what support the headquarters offers before opening, during launch, and throughout ongoing operations. This is one of the core services you receive when purchasing a franchise.

4-5: Item 12: Territory (区域保护)

Interpretation: Defines your operational territory. Will you receive a "protected" or "exclusive" territory? If so, how large is this territory? Can headquarters sell products within this territory through other channels (e.g., online sales, supermarket retail)? Territory protection terms directly impact your future competitive environment. I believe a clear and reasonably scoped exclusive territory clause is a key indicator of a responsible franchise brand.

4-6: Item 13: Trademarks

Interpretation: Confirm that the brand trademarks you will use are legally registered and protected.

4-7: Item 14: Patents, Copyrights, and Proprietary Information

Interpretation: Addresses any patented technologies or proprietary operational manuals you may access.

4-8: Item 15: Obligation to Participate in the Actual Operation

Interpretation: Specifies whether headquarters requires your personal involvement in day-to-day management. This is particularly important for investors seeking a hands-off approach.

4-9: Item 16: Restrictions on What the Franchisee May Sell

Interpretation: Mandates that you may only sell products or services approved by headquarters to ensure brand consistency.

4-10: Item 17: Renewal, Termination, Transfer, and Dispute Resolution

Interpretation: This is one of the most legally binding sections in the FDD. It outlines how to renew the contract upon expiration, under what circumstances the contract may be terminated early, how you may transfer your franchise, and how disputes are resolved (typically through arbitration). You should review this section clause by clause with your attorney.

4-11: Item 18: Public Figures

Interpretation: If the brand has engaged celebrities as endorsers, this section discloses the relevant collaboration details.

4-12: Item 20: Outlets and Franchisee Information

Interpretation: This is another "treasure trove" list. It presents, in tabular form, changes in the franchise system's store count over the past three years (openings, closings, transfers, etc.). More importantly, it provides contact information for existing franchisees! A healthy system typically has significantly more store openings than closings. If you see a high closure rate, this is one of the most dangerous warning signs.

4-13: Item 21: Financial Statements

Interpretation: Here are the franchisor's audited financial statements for the past three years. Have your accountant analyze them to assess the headquarters' financial health. A headquarters consistently operating at a loss or heavily indebted will struggle to provide you with long-term, stable support.

4-14: Item 22: Contracts

Interpretation: This section contains all contract templates you'll need to sign, most notably the Master Franchise Agreement.

4-15: Item 23: Receipt

Interpretation: The final two pages of the FDD are the receipt. You must sign here to confirm receipt of this document. The signature itself carries no legal binding force; it serves solely as proof of receipt.

Part 4: From Information to Action: Using Your New Knowledge

5: You've finished reading the FDD. What's next?

Congratulations! You've completed a thorough review of the FDD. But knowledge alone doesn't create value-action does. Now, you need to turn this information into your decision-making tool. Here's the "Three-Step Action Plan" I've designed for you.

Step 1: Validate Everything - Talk to Existing Franchisees

This is the single most crucial step in your entire due diligence process-no contest! Item 20 provided you with a list. Now it's time to pick up the phone. I know calling strangers might make you a bit nervous, but trust me-most franchisees are eager to share their experiences because they've been right where you are now.

1. Read the FDD -> 2. Prepare your list of questions -> 3. Contact existing franchisees -> 4. Consult with your lawyer/accountant -> 5. Make your final decision

What should you ask them?

• "Were you satisfied with the training and startup support from headquarters? Did it match what was promised in Item 11?"

• "Did your actual total investment end up higher or lower than the estimate in Item 7? Were there any unexpected major expenses?"

• "Regarding Item 19 (if applicable), do you feel it accurately reflects the brand's true profit potential? Or, if you're comfortable sharing, what was your approximate return on investment timeline?"

• "Do you feel the royalty and advertising fees charged by headquarters (Item 6) were worth the cost?"

• "Is communication with headquarters smooth? When you encounter issues, do you receive timely assistance?"

• The most crucial question: "If given the chance to choose again, would you still join this brand?"

I recommend speaking with at least 5-10 franchisees, including successful ones and those who may have left the system (if you can find them). This will give you a balanced, comprehensive perspective.

Step 2: Assess Your Fit

Before getting swept up by a brand's potential, ask yourself: Is this opportunity truly right for me? Entrepreneurship isn't just about money-it's about your lifestyle, skills, and passion.

Are you a hands-on manager or an investor who excels at strategic planning? (Refer to Item 15)

What is your risk tolerance? Can you accept an investment return cycle that may span several years?

Do your personal skills align with this industry?

[Tool Integration] Action Point:

"To help you gain a more scientific understanding of yourself, we've designed an Entrepreneur Assessment. Spend 5 minutes answering questions, and it will analyze your entrepreneurial profile from multiple dimensions, helping you determine whether franchising-and this specific industry-truly aligns with you."

Step 3: Consult the Professionals

You are not fighting this battle alone. Before making your final decision, you must seek assistance from two professionals:

• Franchise Attorney: He/she will help you review the FDD and Franchise Agreement (Item 22), identify unfavorable terms, and may represent you in limited negotiations with headquarters.

• Accountant: He/she will analyze Item 7's investment budget, Item 19's financial data, and Item 21's headquarters financial statements to ensure your business plan is financially viable.

Yes, this costs money, but compared to the hundreds of thousands or even millions you're about to invest, this consultation fee is the wisest investment you can make.

Part 5: Conclusion - Your Path to a Confident Decision

6: My Personal Perspective and Final Recommendations

At this point, I want to step beyond the specific clauses of the FDD and discuss broader considerations. In my view, an FDD is not merely a legal document-it's the brand's "autobiography" written for you.

Between the lines, you can discern the brand's "character." Is it an open, transparent partner eager to share success with franchisees, or a secretive, guarded "Big Brother"? You can gauge the harmony of its relationship with the franchisee family through Item 3's litigation history and Item 20's closure rates. You can sense whether it genuinely wants you to succeed by examining the level of support in Item 11 and the candor in Item 19.

Numbers matter, but the stories behind them matter more. I've seen brands with dazzling Item 19 figures yet fractured franchisee relationships that ultimately led to system collapse; I've also seen brands with modest data but robust headquarters support, healthy culture, and steadily growing franchisees. So don't just be an analyst-be a reader. Interpret the brand story behind this FDD.

Your due diligence fundamentally answers three questions:

• Can this business be profitable? (Analyze Items 7, 19, 21)

• Is this headquarters trustworthy? (Analyze Items 2, 3, 11, 20)

• Is this opportunity right for me? (Conduct self-assessment, discuss with family)

Only when all three answers are a resounding "yes" should you proceed.

7: Summary and Action Recommendations

We've walked through all 23 sections of the FDD, examined key clauses, and outlined your next steps. To summarize, your path should be:

• Carefully read the entire FDD, paying special attention to Item 7 and Item 19.

• Use our tools (ROI Calculator, Opportunity Comparison, Business Plan Generator) to transform data into your personalized business plan.

• Pick up the phone and have genuine conversations with franchisees listed in Item 20.

• Complete a self-assessment (Entrepreneur Assessment) to confirm your fit.

• Engage professionals-make lawyers and accountants your trusted advisors.

• What is an FDD? Your Ultimate Guide to the Franchise Disclosure Documen

8: Final Risk Warning

Finally, I must reiterate: All investments carry risks, and franchising is no exception. No FDD can guarantee your success. Success ultimately depends on a combination of factors: a strong brand, strategic location, adequate funding, and most crucially-your own dedication and operational skills. This article and our tools aim to provide you with the strongest information and analytical support, but the ultimate decision and responsibility rest with you. Proceed with caution.

9. References:

Federal Trade Commission. "A Consumer's Guide to Buying a Franchise