What to Know Before Buying a Franchise
Before buying a franchise, get and study the Franchise Disclosure Document, which federal law requires the franchisor to give you at least 14 calendar days before you sign or pay. Review all fees and royalties, financial performance claims, litigation history, territory protections, renewal, transfer and termination terms, and talk to current and former franchisees. Have a franchise lawyer and accountant review it.
A franchise lets you operate under an established brand and system, but the franchise agreement is written by the franchisor and governs your business for years.
The Franchise Disclosure Document
The FTC Franchise Rule requires franchisors to give prospective buyers a Franchise Disclosure Document (FDD) at least 14 calendar days before signing a binding agreement or paying any money (16 CFR 436.2). The FDD has 23 required items (16 CFR 436.5), including:
- Business experience and litigation history of the franchisor and its executives
- Bankruptcy history
- Initial fees and other ongoing fees
- Estimated initial investment
- Restrictions on suppliers
- Territory
- Trademarks and patents
- Financial performance representations, if the franchisor makes any
- Outlet data: openings, closings, transfers and terminations
- Audited financial statements
- Contact information for current and former franchisees
Key business terms
- Royalties and marketing fees, often a percentage of sales
- Territory: is it exclusive, and can the franchisor open nearby or sell online into your area?
- Term and renewal: how long, and on what conditions
- Transfer: can you sell the business, and what approval is required?
- Termination: what counts as default, and cure periods
- Post-term non-compete and obligations after the franchise ends
- Dispute resolution: arbitration, venue and governing law
Due diligence
- Call several current and former franchisees from the FDD lists.
- Review closures and turnover in the outlet tables.
- Compare any earnings claims with your own projections.
- Check your state's franchise registration and any additional disclosure rules.
- Get financing and lease terms reviewed.
The FTC's consumer guide explains questions to ask before buying.
Red flags
High turnover, pressure to sign quickly, earnings promises not in the FDD, vague territory language, frequent litigation with franchisees.
When a franchise ends
Termination or non-renewal disputes often involve breach of contract claims and non-compete clauses; see breach of contract.
A business lawyer with franchise experience should review the FDD and agreement before you sign.
Sources
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This article is general legal information, not legal advice, and reading it does not create an attorney-client relationship. Laws differ by state and change over time; talk to a licensed attorney in your state about your situation.