FDD Red Flags Checklist: Franchise Buyer Review Before Signing

Watch for no Item 19 financial performance representation, Item 19 numbers without clear sample context, royalties or brand-fund fees that apply to gross sales regardless of profit, a wide Item 7 investment range with thin working capital, and required supplier costs that current franchisees say are hard to absorb.

None of these issues automatically means do not buy. Together, they mean the buyer should build a conservative model and validate assumptions with current and former franchisees.

High-severity control issues include no protected territory, broad franchisor reserved rights, alternate-channel carve-outs, online or delivery rights that bypass the unit, strict supplier control, mandatory upgrades, and weak remedies for encroachment.

Read Item 12 and Item 8 with the agreement. Then ask whether the franchisor can compete with you directly or indirectly in ways that do not violate the contract.

Item 17 deserves special attention when the agreement requires a general release at renewal, allows termination for broad or hard-to-cure defaults, restricts transfers heavily, gives the franchisor a broad right of first refusal, or includes post-term covenants.

Mandatory arbitration, class waiver, jury waiver, venue, and dispute-cost language should be treated as legal-review items. This guide does not state whether a particular clause is enforceable.

Repeated litigation, bankruptcy disclosures, high closures, terminations, non-renewals, distressed transfers, weak franchisor financial statements, and aggressive growth without support capacity all deserve deeper review.

The most reliable next step is structured franchisee calls. Ask current and former franchisees about startup cost, sales ramp, support, disputes, supplier cost, exit, renewal, and whether they would buy again.