Below is the full checklist. Bookmark this page or enter your email above to get a formatted version you can reference while reviewing any FDD.
Fee Structure Red Flags
CriticalUncapped technology or marketing fees
If the FDD says the franchisor can "modify" or "adjust" technology, marketing, or advertising fees without a stated maximum, you're signing a blank check. A $200/month fee today could become $500/month next year with no recourse.
Minimum royalty floors regardless of revenue
Some franchisors impose a minimum dollar amount in royalties even when your revenue is low. During a slow season or ramp-up period, you pay the floor amount regardless of what you actually earn. This creates cash flow pressure exactly when you can least afford it.
Mandatory vendor relationships with no alternatives
When the FDD requires you to purchase from specific vendors - especially if the franchisor or its affiliates receive revenue from those vendors - you're locked into pricing you can't negotiate. Check whether the franchisor discloses these relationships.
Brand fund with no spending accountability
Many franchises collect 1-2% of revenue for a "brand fund" or "advertising fund." If the FDD doesn't require the franchisor to report how brand fund dollars are spent - or if spending can include "administrative costs" - your marketing dollars may not be marketing your location.
Transfer fees that make exiting expensive
Transfer fees of 25-50% of the initial franchise fee (plus legal costs, training for the new owner, and mandatory renovations) can make it financially devastating to sell your franchise if things don't work out.
Financial Transparency Red Flags
CriticalNo Item 19 financial performance data at all
Franchisors are not required to provide financial performance representations. If they choose not to include Item 19 data, you have zero official data on what existing locations earn. Ask yourself: if results were good, why wouldn't they share them?
Item 19 shows only gross revenue (not expenses or profit)
Gross revenue means nothing without knowing expenses. A location doing $500K in revenue could be losing money after rent, payroll, royalties, marketing fees, and supplies. If Item 19 shows revenue without any expense or profit data, you cannot determine whether locations are actually profitable.
Cherry-picked location data in Item 19
If the financial representation is based on "top-performing locations" or excludes locations open less than 2 years, the numbers don't represent what a typical new franchisee will experience. Look for what percentage of locations are included in the data.
Initial investment range that's unrealistically narrow
If the FDD estimates startup costs of $150K-$170K, the real number is almost certainly higher. Actual franchisee spend frequently exceeds the FDD high-end estimate by 15-30% when you account for local permitting, buildout overruns, and working capital needs during ramp-up.
Territory & Competition Red Flags
CautionTerritory exceptions for "alternative channels"
Your territory may technically be "exclusive" - but if the franchisor reserves the right to sell within it through websites, apps, third-party partnerships, or mobile units, your exclusivity is an illusion.
Right to reduce your territory after signing
Some FDDs allow the franchisor to modify territory boundaries upon renewal or if you fail to meet performance targets. This means the territory you thought you bought can shrink.
High saturation in your market
Check Item 20 for the number of existing and planned locations in your state and metro area. A franchise with 15 locations in your city and plans for 10 more may leave you fighting for scraps in an oversaturated market.
Operational Reality Red Flags
CriticalHigh franchisee turnover in the last 3 years
If the system has had significant closures, terminations, or transfers relative to total units, something is wrong. Calculate the turnover rate from Item 20 data. A healthy system should have minimal closures and few forced terminations.
Vague or minimal operational support commitments
If Item 11 describes the franchisor's operational support in generic terms ("we will provide ongoing support") without specific deliverables, frequency, or accountability measures, you may be buying a brand name without a functioning support system.
Short or superficial training program
A training program under 2 weeks for a complex business is a warning sign. Also watch for training that's purely classroom-based with no hands-on component at an operating location. You need to learn the business, not just hear about it.
The franchisor is also the landlord or supplier
When the franchisor controls your lease, your supply chain, or your required technology, they profit from your business in ways beyond royalties. This creates misaligned incentives - they may benefit financially even if your location struggles.
Exit & Legal Red Flags
CautionBroad non-compete that survives termination
If the non-compete clause prevents you from operating a similar business for 2+ years after termination within a wide geographic radius, you could be locked out of your own industry if the franchise fails. You lose the business AND the ability to use your expertise.
Mandatory arbitration in franchisor's home state
If disputes must be resolved through arbitration in the franchisor's home state (not yours), the cost and logistics of pursuing a claim become prohibitive for most franchisees. This effectively eliminates your legal leverage.
Termination triggers that are easy to trip
Review the conditions under which the franchisor can terminate your agreement. If termination can be triggered by failing to meet subjective "brand standards" or by a single late royalty payment, you're operating with very little margin for error.
Pending litigation against the franchisor
Item 3 discloses lawsuits. Multiple franchisee lawsuits - especially alleging fraud, misrepresentation, or failure to provide support - are a serious warning. One lawsuit could be a disgruntled owner. Five or more suggests a pattern.
Franchisor's management team is inexperienced or has high turnover
If the leadership team has changed significantly in the last 2-3 years, or if key executives lack industry experience, the "system" you're buying into may still be figuring itself out. You're paying franchise fees to follow a proven playbook - make sure one actually exists.
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This checklist is for educational purposes. It does not constitute legal or financial advice. Always consult a qualified franchise attorney before signing any franchise agreement.