Signing a franchise agreement is a major commitment — often 10 years or more. Before you put pen to paper, make sure you have clear, honest answers to these seven questions.
1. What Does Item 19 of the FDD Actually Tell Me?
Item 19 is where franchisors disclose financial performance data. Crucially, they’re not required to disclose it. When a franchisor doesn’t provide Item 19 data, that’s a significant red flag. When it is provided, scrutinise whether the data covers franchised or corporate units, what percentage of the system is represented, and whether figures are gross revenue or net profit.
2. What Is the Franchisee Turnover Rate?
Item 20 of the FDD shows how many franchisees left the system in the past 3 years and why. High turnover is a major warning sign. Ask directly: “What percentage of your franchisees renewed at the end of their initial term?”
3. Can I Speak With Franchisees Who Have Exited the System?
The franchisees the development team introduces you to are hand-picked. Seek out franchisees who didn’t renew, who transferred their unit, and those in markets similar to yours. Ask them: “Knowing what you know now, would you do it again?”
4. What Does the Royalty Cover — and Is It Worth It?
Royalties typically range from 4–8% of gross revenue. Strong franchisors provide ongoing field support, national marketing campaigns, technology platforms, R&D, and group purchasing power. If franchisees consistently feel the royalty isn’t justified, that’s a clear sign of a weak franchisor.
If franchisees consistently feel the royalty isn’t justified by the support they receive, that’s one of the clearest signs of a weak franchisor.
5. What Is the Total Investment — Including Working Capital?
The FDD investment figure often excludes adequate working capital for months 1–12, personal living expenses during ramp-up, and pre-opening marketing costs. Add 20–30% to the published investment range as a conservative planning buffer.
6. What Are My Territorial Rights?
Read your territory clause carefully. Is your territory exclusive? What happens if the franchisor opens a corporate location nearby? How is the territory defined — by ZIP code, radius, or population threshold?
7. What Does the Exit Look Like?
Your franchise is an investment — your ability to sell it for fair value is critical. Ask about the average resale multiple in the system, whether the franchisor assists with resales, transfer fees, and right of first refusal. A franchise system with strong resale demand is dramatically more valuable.
Our team can connect you with both IFPG-certified consultants and experienced franchise attorneys. Start with a free consultation today.
