Most prospective franchise buyers ask about the brand, not the system. They want to know if the concept is growing, whether the territory looks good, and what the marketing looks like. These questions are understandable — they are just not the ones that determine whether you will make money. The 10 questions below go deeper. They are drawn from the Franchise Disclosure Document, from franchisee validation calls, and from the financial modeling that separates a viable investment from a well-branded trap. Work through all 10 before you make a commitment. Start with our complete franchise buying guide for the broader framework.
What Does Item 19 Actually Show?
Item 19 of the Franchise Disclosure Document is the Financial Performance Representation — the only section where a franchisor can legally share financial data about what franchisees actually earn. It is also the section that most franchisors handle in the most self-serving way possible.
Some franchisors omit Item 19 entirely. The FDD is still legally valid without it, and a franchisor that provides no financial performance data is simply declining to show you the economics of their system. That is a significant red flag on its own. The question you need to ask is not whether Item 19 exists — it is what it contains and what it omits.
Common presentations you will encounter: gross revenue averages (which tell you nothing about profit), top-quartile earnings (which are not representative of the median franchisee), and figures for company-owned locations (which often benefit from favorable real estate or lower marketing costs that independent franchisees do not enjoy). When you read Item 19, ask yourself: does this figure represent what a typical owner-operator, in a market like mine, actually takes home after royalties, rent, labor, and debt service? If the answer is unclear, the presentation is designed to obscure, not illuminate.
Ask the franchisor for median net income (not average, not gross revenue) for franchisees who have been open more than two years. If they cannot or will not provide it, use your validation calls with existing franchisees to build the income statement yourself.
What Is the Transfer and Termination History?
Item 20 of the FDD contains a table of all franchise outlets — how many opened, how many transferred, and how many were terminated or not renewed in each of the past three fiscal years. This table is one of the most analytically useful pieces of data in the entire document, and it is the one most buyers skip entirely.
What you are looking for: the ratio of terminations to transfers. A transfer means a franchisee chose to sell their location — typically a positive signal because it means there was a buyer willing to pay for it. A termination means the franchisor ended the relationship, often because the location was underperforming. A high termination rate relative to the total system size is a direct signal of unit-level economics failure.
Also look at the net unit count trend. Is the system growing, flat, or shrinking? A franchisor selling you on an “exciting growth phase” while their FDD shows net unit decline for two consecutive years is selling you a story that the data contradicts. Count the openings and closures yourself. The math does not lie even when the sales pitch does.
Who Are the Last 10 Franchisees to Leave, and Why?
Item 20 also lists the contact information for all franchisees who left the system in the past year — including those who were terminated, transferred out, or chose not to renew. This list is required by law, and it is the most important list in the FDD. These are the people the franchisor most wants you not to call.
Call them. Not all of them will respond, but the ones who do will tell you things that no validation call with a current franchisee — someone who still has a financial relationship with the franchisor — will tell you. Ask open-ended questions: Why did you leave? What would you tell someone who was about to sign? Were there issues with the support, the territory, the brand, the supply chain? What was your actual financial performance in the final year?
Former franchisees have no incentive to protect the franchisor. Their candor is the most valuable signal you will collect during the entire diligence process. Budget 30 minutes per call and aim to reach at least 5 former franchisees before you form a conclusion.
If the franchisor actively discourages you from contacting franchisees on the Item 20 list, or implies that the franchisees who left were uniquely bad operators rather than a reflection of systemic issues, treat this as a serious warning about how the franchisor handles adverse information.
What Territory Am I Getting, and Is It Protected?
Territory is one of the most negotiated and most misunderstood elements of a franchise agreement. Most buyers assume they are getting an exclusive geographic area where no other franchisee can compete. The reality, for many modern franchise systems, is considerably more complicated.
Territory protection clauses typically specify a geographic radius or a defined area (zip codes, census tracts, a city boundary) within which the franchisor cannot grant another franchisee. But there are standard carve-outs that effectively limit this protection: airports, stadiums, military bases, hospitals, and other captive venues are often excluded. More significantly, most franchise agreements explicitly carve out digital and online sales — meaning the franchisor (or another franchisee serving an adjacent market) can sell products online to customers in your territory with no restriction.
Ask for the exact territorial definition in writing, and read it with your franchise attorney. Ask specifically: Can the franchisor open company-owned locations in or adjacent to my territory? Can other franchisees deliver or serve customers in my area through digital channels? What constitutes an encroachment, and what is the remedy if one occurs? The answers to these questions determine whether your “exclusive” territory is actually exclusive.
What Does My Full Investment Look Like, Including Working Capital?
Item 7 of the FDD presents the estimated initial investment, broken into line items: franchise fee, build-out and equipment, training costs, initial inventory, working capital, and miscellaneous pre-opening expenses. This table exists because regulators require it. What it shows and what you will actually spend are often meaningfully different numbers.
Item 7 is based on franchisee-reported actuals, but the build-out ranges are often wide and skew optimistic. Construction costs have increased significantly in recent years — the mid-point of a 2022 Item 7 range may be the bottom of the 2026 actual range for the same concept. Get quotes from local contractors before you sign, not after.
Working capital is the line item most prone to understatement. Item 7 typically shows 3 months of working capital. The reality for most new franchise locations is that you need 6–12 months of operating expenses before revenue stabilizes to a break-even level. Use the full cost breakdown methodology to model your first-year cash position, not the Item 7 working capital figure. The gap between those two numbers is where first-year franchise failures happen.
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How Does the Royalty Structure Affect My Unit Economics?
Royalties are the franchisor’s primary revenue stream, and they are almost always calculated as a percentage of gross revenue — not profit. This distinction matters enormously. A 7% royalty on 00,000 in annual gross revenue is 5,000 per year regardless of whether your location made 0,000 in net income or broke even. The royalty comes off the top.
Before you sign, build the full unit-level P&L with royalties factored in from day one. Your model should include: gross revenue, cost of goods sold, labor, rent and occupancy, marketing fund contribution (typically 2–4% of gross revenue, separate from royalties), technology fees, insurance, debt service, and your own draw. What remains is your return on the investment and the years of effort you are committing.
A system with a 8% royalty and a 3% marketing fund contribution is extracting 11% of your gross revenue before you cover a single operating expense. At 00,000 in annual revenue, that is 4,000 per year flowing to the franchisor. Model what your net income looks like in a scenario where you hit 80% of your projected revenue in year one — which is not uncommon for a new location — and ask yourself whether the economics still work. If they do not, the model is fragile.
What Ongoing Support Actually Looks Like
Every franchise sales presentation includes a list of support offerings: initial training, a dedicated franchise business consultant, marketing support, proprietary technology, supply chain negotiation, and ongoing operational guidance. These are real things that franchisors provide — the question is the quality, frequency, and actual accessibility of each.
The only way to evaluate support is through your validation calls. Ask existing franchisees specific questions: How often does your franchise business consultant actually visit or call? When you had a problem in the first 90 days, who did you call and how quickly did they respond? Did the technology platform work as described when you opened? Were the training programs sufficient for the operational realities you faced?
Support quality is one of the sharpest differentiators between strong franchise systems and weak ones, and it is almost impossible to assess from materials alone. A franchisor with 1,200 locations and three regional support staff has a fundamentally different support capacity than one with 120 locations and 15 dedicated consultants. Ask about the franchisee-to-support-staff ratio and what that means for your access when you need help.
Is the Brand Growing, Flat, or Shrinking?
Net unit count trend is one of the cleanest leading indicators of franchise system health. Pull the unit count from Item 20 for the past three years and calculate the net change: new openings minus closures (terminations plus non-renewals plus transfers out of the system). A growing system adds net units year over year. A declining system is losing locations faster than it is adding them.
A declining unit count means one of several things: the economics are not working for franchisees, the brand has a consumer relevance problem, the support structure is failing, or the franchisor has grown faster than their operational infrastructure can sustain. Any of these is a serious concern. A system with declining unit counts that is still actively selling new franchises deserves extra scrutiny — ask specifically why the overall system is shrinking while they continue to pursue new buyers.
Also distinguish between organic openings (new franchisees entering the system) and acquired openings (the franchisor purchasing competitor brands and converting locations). Organic growth is the signal you want. Acquisition-driven unit count growth can mask organic attrition.
What Do Your Validation Calls Tell You?
Validation calls — conversations with existing franchisees in the system — are the single most important part of franchise due diligence, and they are the step most buyers either skip or approach passively. Do not call only the franchisees the franchisor recommends. Call franchisees in markets similar to yours, franchisees who have been in the system for different lengths of time, and franchisees in both high-performing and average markets. Aim for 10–15 calls.
Structure each call around specific questions rather than an open-ended conversation: What were your gross sales in years 1, 2, and 3? What is your current net income after all expenses, including royalties and your own draw? What was the biggest surprise in your first year? If you were starting over, would you choose this franchise? If not, what would you change?
Listen for patterns across calls, not individual anecdotes. One franchisee who struggled in a difficult market is noise. Five franchisees who describe the same support failures, the same supply chain problems, or the same disconnect between promised and actual earnings is a signal. Consistent themes across independent validation calls are the most reliable data you will collect in this entire process.
After your calls, review the full diligence checklist to make sure you have covered every area before you proceed to the attorney review.
What Does Your Attorney Find in the FDD?
Hiring a franchise attorney is not optional, and hiring a general business attorney who has “looked at a few franchise agreements” is not the same thing. Franchise law is a specialized practice. The provisions that create the most post-close problems — termination triggers, transfer restrictions, encroachment language, personal guarantee scope, post-term non-competes — are provisions that a generalist may miss or underweight.
A qualified franchise attorney will review all 23 items of the FDD, flag material risks, identify provisions that are negotiable versus standard, and advise on the specific terms of the franchise agreement you will sign. Budget ,000–,000 for this review. It is the most cost-efficient risk mitigation available in the entire franchise purchase process.
Key items your attorney should specifically address: Item 6 (fees, including all recurring obligations beyond the royalty), Item 8 (required purchases from approved suppliers and whether those terms are favorable), Item 12 (territory rights and encroachment provisions), Item 17 (renewal, transfer, dispute resolution, and termination), and the specific non-compete language post-termination or expiration. Understanding what you are agreeing to in Item 17 before you sign is more valuable than any amount of positive validation calls after.
You have maximum negotiating leverage before you sign. Once the franchise agreement is executed, the terms are fixed. Any items your attorney identifies as negotiable — opening timeline, transfer fee, personal guarantee carve-outs — should be raised before you commit, not after.
Pulling It Together: A Decision Framework
Work through these 10 questions in order. Questions 1 and 2 are document reviews that you can complete alone or with your attorney — they give you the quantitative foundation before you invest time in conversations. Questions 3, 7, and 9 are validation-based and require scheduling calls with franchisees. Questions 4, 6, and 10 require your attorney’s input. Questions 5, 8, and the system growth analysis (Question 8) require your own financial modeling.
The most common mistake buyers make is running these in parallel and signing before the full picture has emerged. Validation calls reveal information that changes how you read Item 19. Your attorney’s review reveals provisions that change how you model the unit economics. The process is sequential by design: let each step inform the next before you move toward a commitment.
A thorough process takes 60–90 days. A franchisor who is pressuring you to close in 30 days is prioritizing their sales calendar over your financial security. If you want expert guidance navigating this process from someone who knows the local market and can review your specific deal, connect with a business acquisition advisor. Browse franchise and business-for-sale opportunities on the listings page to see what is currently available in your target market.