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Does the FDD include an Item 19 earnings claim?
AI-generated analysis based on publicly available data and industry benchmarks. Not legal or investment advice. Learn more
A Franchise Disclosure Document (FDD) is a legally required document containing 23 "Items" that every franchisor must provide to prospective franchisees at least 14 days before signing. It's the single most important document in franchise due diligence — and most investors don't know how to read it.
FDD red flags are specific data points within these 23 Items that indicate higher-than-normal risk. They don't automatically mean "don't invest" — but they do mean "investigate more carefully before committing." Understanding the difference between a minor yellow flag and a serious red flag can save you six figures.
The 7 areas our checker analyzes are the same categories that experienced franchise attorneys focus on first:
Most FDDs run 200-400 pages. You don't need to read every word — you need to know which Items to focus on first. Here's the framework used by professional franchise consultants:
To spot a red flag, you need to know what "normal" looks like. These benchmarks are derived from analysis of thousands of active franchises across all major industries:
| Metric | 🟢 Green (Normal) | 🟡 Yellow (Elevated) | 🔴 Red (High) |
|---|---|---|---|
| Franchise Fee | Under $35,000 | $35,000–$75,000 | Over $75,000 |
| Royalty Rate | Under 6% | 6–8% | Over 8% |
| Ad Fund Rate | Under 2.5% | 2.5–3.5% | Over 3.5% |
| Franchisee Closure Rate | Under 6%/yr | 6–12%/yr | Over 12%/yr |
| Years in Business | 12+ years | 5–12 years | Under 5 years |
| Total Units | 200+ units | 50–200 units | Under 50 units |
| Item 19 Available | Yes — full disclosure | Partial disclosure | No Item 19 |
Important context: Benchmarks vary significantly by industry. A fast-food franchise might justify a higher royalty rate because of its massive marketing support and brand recognition. A new home services franchise might have a lower royalty but weaker support. Always compare within the same industry category, not across all franchises.
If you only check one thing in an FDD, check Item 19. Here's why it matters so much: without it, you're making a six-figure investment decision with zero verified financial data.
When Item 19 is present, the franchisor voluntarily discloses historical financial performance data — this can include average gross revenue, median revenue by percentile, operating expenses, or even net profit figures. This is gold. You can validate whether the franchise actually generates the income the sales team is pitching.
When Item 19 is absent, the franchisor legally cannot make verbal or written earnings claims. The franchise sales rep telling you "our franchisees average $500K/year" — if there's no Item 19, that's a potential FTC violation and you have no way to verify it. Ask the franchisor directly: "Why don't you disclose earnings?" The answer will tell you a lot.
Red flags even when Item 19 is present:
The biggest FDD red flags are: (1) No Item 19 — you can't verify any income claims. (2) High franchisee closure rates — check Item 20 for 3 years of data. (3) Excessive litigation in Item 3 relative to system size. (4) Royalty + ad fund above 10% combined. (5) Franchisor with fewer than 5 years in business. (6) Franchise fee in the top 15% of its category. (7) Franchisor financial statements showing operating losses.
Not always — context matters. Some premium brands with strong market recognition (think major QSR or fitness chains) charge higher franchise fees because the brand premium is real. The question is: does the fee justify the value? A $75,000 franchise fee for a brand with 2,000 units and strong Item 19 data is very different from the same fee for a 50-unit system with no earnings disclosure. Always benchmark against brands in the same industry category.
Item 20 contains a table showing franchise openings, transfers, and closures for each of the past 3 years. Calculate the closure rate: (units closed / total units at start of year) × 100. Above 8% per year is elevated; above 15% is a serious red flag. Also look at the trend — is the system growing (more openings than closures) or shrinking? And always distinguish between transfers (franchisee sold to another operator) and terminations (franchisor cancelled the agreement).
For a final investment decision — yes, absolutely. A franchise attorney reviews the legal terms, territory provisions, renewal and termination clauses, and other issues that go beyond financial metrics. Expect to pay $1,500–$3,500 for a full FDD review. Our tool is designed for early-stage due diligence to quickly filter out obvious red flags before you invest hours in a full review. If our checker shows multiple red flags, that saves you attorney time. If it shows green across the board, you know where to focus deeper investigation.
A red flag means "investigate this before proceeding." A dealbreaker is when investigation confirms the worst. For example, no Item 19 is a red flag — but after calling 10 franchisees who all report strong profitability, it might not be a dealbreaker. Conversely, a moderate royalty rate (yellow flag) combined with a weak Item 19 and 20% annual closure rates becomes a dealbreaker in aggregate. Experienced investors look at the total picture, not individual data points in isolation.