What Franchisees Should Review Before Signing a Franchise Disclosure Document (FDD)

Disclaimer: This article is for informational purposes only and is not legal advice. Reading it does not create an attorney–client relationship. Todd Nurick and Nurick Law Group are not your attorneys unless and until there is a fully executed written fee agreement with Todd Nurick or Nurick Law Group.

Introduction

Buying a franchise can be an excellent way to start or expand a business, but the investment is significant and the legal obligations are substantial. The Franchise Disclosure Document (FDD) is the key document that franchisees must analyze before signing a franchise agreement. Todd Nurick of Nurick Law Group, a business attorney licensed in Pennsylvania and New York, helps franchisees nationwide understand the risks, requirements, and financial commitments contained in the FDD.

Understanding the Purpose of the FDD

The FDD is required under the Federal Trade Commission (FTC) Franchise Rule. It contains twenty three distinct sections (called Items) that provide the information a prospective franchisee needs in order to evaluate the franchise system. The franchisor must give the FDD at least fourteen days before any agreement is signed or any money is paid.

The purpose is to provide transparency. It is not designed to persuade but to inform.

Key FDD Items Franchisees Must Review Carefully

Item 1 (The Franchisor and Its Predecessors)

This section explains the franchisor’s history, corporate structure, and business model. Franchisees should understand how long the company has operated, whether it has changed ownership, and whether it has a parent or affiliate that affects operations.

Item 3 (Litigation)

Active or past litigation involving the franchisor or its executives can reveal significant risks. Repeated lawsuits involving franchise relationships, advertising funds, system practices, or termination patterns may be warning signs.

Item 4 (Bankruptcy)

This section discloses whether the franchisor or its key personnel have been involved in a bankruptcy matter. A history of bankruptcy can affect system stability and support.

Item 5 (Initial Fees) and Item 6 (Other Fees)

Initial fees, ongoing royalties, advertising fund contributions, technology fees, renewal fees, and transfer fees are all disclosed here. Franchisees must calculate the actual cost of ownership beyond the initial fee.

Item 7 (Estimated Initial Investment)

This item presents the expected total cost of opening the business. Franchisees should compare the estimates with independent research since actual costs may vary based on geography and market conditions. Pennsylvania and New York have very different cost structures, so franchisees in those states should adjust their expectations accordingly.

Item 8 (Restrictions on Sources of Products and Services)

Some franchisors require franchisees to purchase products, software, equipment, or supplies only from approved suppliers. Franchisees should understand whether these requirements increase operational costs.

Item 11 (Franchisor’s Obligations)

This section outlines what the franchisor must provide. It often includes site selection assistance, training programs, marketing support, software systems, and operational guidance. Franchisees should assess whether the promised support matches their expectations.

Item 12 (Territory)

Territory rights vary widely. Some franchises provide protected territories while others allow open competition. Franchisees must understand whether nearby franchisees or company owned outlets may compete directly.

Item 19 (Financial Performance Representations)

This optional item presents financial performance information. If Item 19 is provided, franchisees should analyze it carefully and request clarification when necessary. If Item 19 is not provided, franchisees should gather independent financial data.

Item 20 (Outlets and System Growth)

This item shows the growth and closures of franchise outlets. A system with high turnover or numerous terminations may require further investigation.

Reviewing the Franchise Agreement

The FDD includes the franchise agreement as an exhibit. The franchise agreement is binding and governs all operational and financial obligations. Key provisions include:

• Term and renewal rights

• Termination provisions

• Dispute resolution methods

• Royalty schedule

• Advertising fund requirements

• Personal guarantees

• Transfer rights

• Training and operational standards

Nurick Law Group reviews these agreements for franchisees and explains practical risks in plain language.

State Specific Considerations for PA and NY Franchisees

PennsylvaniaPennsylvania is not a franchise registration state. Franchise sales are governed primarily by the FTC Franchise Rule and general business contract law. Franchisees must therefore rely heavily on the disclosures in the FDD and the negotiated terms of the agreement.

New YorkNew York is one of the most active states in franchise oversight. Franchisors offering franchises in New York must register their FDD with the New York State Department of Law. This adds additional review and stricter disclosure requirements.

Franchisees in New York benefit from enhanced oversight but still need independent legal review.

Why Franchisees Should Seek Legal Review

The FDD is lengthy and technical. Franchisees may not understand the long term implications of financial obligations, territorial limits, or termination clauses. As outside general counsel, Todd Nurick and Nurick Law Group help franchisees:

• Identify financial risks

• Understand system stability

• Evaluate litigation history

• Review restrictive clauses

• Assess renewal and termination provisions

• Negotiate points where appropriate

A careful review can prevent costly surprises later.

Conclusion

Franchising can provide a proven business model, but franchisees must enter agreements fully informed. Reviewing the FDD and franchise agreement with qualified legal counsel helps prospective franchisees understand their obligations, rights, and risks.

Todd Nurick and Nurick Law Group provide trusted guidance to franchisees in Pennsylvania, New York, and nationwide, ensuring clarity and confidence before any franchise investment is made.

Sources

• Federal Trade Commission (FTC) Franchise Rule

• New York Franchise Act

• FTC Franchise Compliance Guides

• State specific franchise disclosure requirements