1. What does the Item 19 Financial Performance Representation actually show?
Not all franchisors disclose financial performance data. The ones that do provide it in Item 19 of the FDD. Look for median performance (not just averages, which can be skewed by top performers), breakdowns by geography and unit age, and whether the data includes company-owned vs. franchisee-owned units.
2. What is the actual franchisee turnover rate?
Item 20 of the FDD shows how many franchisees left the system in the past three years. High turnover is a red flag. Ask the franchisor directly: why did they leave? Were they bought out, closed, or transferred? The answer reveals system health.
3. What do existing franchisees say about support after opening?
Pre-opening support is usually strong because the franchisor wants your franchise fee. The real test is what happens six months in. Call 5-10 existing franchisees (listed in Item 20) and ask about ongoing training, marketing support, and responsiveness.
4. How are territories defined and protected?
Some franchises offer exclusive territories; others do not. Understand exactly how your territory is defined (population, geography, zip codes) and what protections exist against encroachment from other franchisees or company-owned units.
5. What are the total ongoing costs beyond royalties?
Royalties are just one cost. Factor in marketing fund contributions, technology fees, required vendor purchases (often at markup), insurance requirements, and mandatory renovation or remodel schedules.
6. What does the ramp-up period actually look like?
Ask existing franchisees: how long until you broke even? How long until you took a salary? The franchisor's projections are optimistic by design. Real franchisee experiences give you the actual timeline.
7. What are the transfer and exit terms?
Item 17 covers transfer restrictions. Some franchises have right of first refusal, transfer fees (often 25-50% of the initial franchise fee), or approval requirements that can delay or block a sale. Know your exit before you enter.
8. How is the marketing fund actually spent?
You contribute to a marketing fund, but where does the money go? Ask for an accounting of marketing fund expenditures. Some systems spend heavily on national brand awareness that may not drive local traffic to your unit.
9. What technology systems are required, and who controls them?
POS systems, CRM, scheduling software, online ordering platforms — understand what is required, what it costs, and whether you are locked into proprietary systems. Technology lock-in can be expensive and limiting.
10. What happens if the franchisor is sold or goes bankrupt?
Your franchise agreement survives a sale, but the new owner may have different priorities. Ask about the franchisor's financial health (Item 21 of the FDD includes audited financials) and any pending litigation (Item 3).