How to Choose a Franchise: A Buyer's Guide to Franchise Due Diligence
A franchise can be a good path to owning a business. It can also be one of the largest checks you ever write. This guide walks through what to check before you sign or pay anything. It uses public guidance from the Federal Trade Commission (FTC), state regulators, and other sources listed at the bottom of this page.
This guide is general education. It is not legal, financial, or investment advice.
About a month later, the company closed its headquarters. By mid-October, both of its co-founders had filed for personal bankruptcy.
When I first looked into that franchise, I filled in a form on what looked like the company's own website. Soon after, I was contacted by franchise brokers, and I ended up working with several of them. To me, the conversations felt more like coaching than selling. That is simply how it felt to me at the time.
I did not hire a franchise attorney before I signed. I wish I had.
I can't say what an attorney would have found. I do know I would have had someone on my side whose only job was to protect me. Most of what is on this page I learned afterward. I'm sharing it so you can learn it before.
Before you start: what a franchise is, and what it is not
When you buy a franchise, you pay for the right to use a company's name and system. You usually pay an upfront fee, then ongoing fees such as royalties and marketing contributions. You also follow the company's rules.
A few things are easy to miss:
The government does not approve franchises. Franchisors must give you a disclosure document, but no federal agency checks it for accuracy before you get it.
You often owe more than the purchase price. Many franchise agreements last for years. Many also require a personal guarantee, which can put your personal assets on the line.
A familiar brand is not a guarantee. Results vary a lot from one location to the next, and from one franchisor to the next.
Brokers, consultants, "coaches," and lead-generation sites
Many people first hear about a franchise through a third party, not the franchisor. These go-betweens use many names. The FTC says brokers "may call themselves 'business coaches,' 'advisors,' 'referral sources' or 'sales consultants.'" California's regulator lists titles such as "franchise consultant," "coach," and "broker network." A 2026 model law from state securities regulators (NASAA) also covers people who call themselves advisors, business coaches, consultants, lead generators, or referral sources.
The title does not change the role. Under the FTC's Franchise Rule, third-party brokers involved in franchise sales are "franchise sellers."
How they are usually paid
This section describes the industry in general. It is not a statement about any specific company.
The franchisor usually pays. The FTC says, "Brokers often work for franchisors, and are paid only if a sale is made." The International Franchise Association (IFA) says franchise sellers "represent the franchisor" and "do not represent you."
The fee is often a share of the franchise fee. A 2023 trade-press article in Franchise Update reported that broker commissions are typically 40% to 50% of the franchisor's initial franchise fee. Placement fees in that article averaged nearly $30,000.
Pay can shape advice. The FTC notes that a commission tied to price may lead a broker to steer you toward a more expensive franchise. California's regulator says compensation "may influence what brands a broker recommends." State regulators have also said brokers may push a franchise they represent "whether or not that franchise is a good fit."
"Free to you" usually means someone else pays. If you do not pay for the service, it is worth asking who does, and how much.
Lead-generation sites sell your contact details. Franchise "portals" are for-profit sites that collect and sell inquiries, often to more than one buyer. A trade article describes these leads as usually non-exclusive, so several franchisors or brokers may contact the same person. Some sites can look a lot like a brand's own page.
Many brokers and consultants are honest and helpful. The point is not that they are bad. The point is to know who pays them, so you can weigh what they tell you.
Signs you are talking to a broker or lead generator
You filled in a form, and someone other than the franchisor called you back.
They offer a "free" matching, coaching, or assessment service.
They suggest a short list of brands, usually from a set portfolio.
They talk about your goals and lifestyle more than about specific numbers.
They hand you off to a franchisor's sales team once you show interest.
Questions to ask a broker or consultant
The FTC and state regulators suggest questions like these:
Who pays you? How much, and when?
Does the amount change based on which brand I buy or how much it costs?
How many franchisors do you represent? How do you choose them?
Do you represent any brands that are not a good fit for me? Why are these on my list?
Are you registered as a franchise broker in any state? (New York and Washington require it today. California's program is being set up.)
Have you, or your firm, been involved in any lawsuits or regulatory actions?
Are you listed in Item 23 of the FDD for this brand?
Tip: The receipt page at the end of every FDD (Item 23) must list the name, address, and phone number of each franchise seller offering the franchise. If a broker is involved, their name should be there. Check it.
Why a franchise attorney matters
A franchise agreement is written by the franchisor's lawyers to protect the franchisor. It is usually long. It is usually not negotiated much. Once you sign it, it is hard to undo.
The FTC suggests you get help from a lawyer and an accountant. It advises choosing "a lawyer who is experienced in franchise matters." The U.S. Small Business Administration (SBA) gives similar guidance.
A few practical points:
Look for a franchisee-side attorney. Many franchise lawyers mainly represent franchisors. The IFA itself notes this. Ask an attorney whether most of their clients are franchisors or franchisees.
Bring them in early. It is easier to ask questions, and to walk away, before you pay anything.
Ask what the review covers. For example: the franchise agreement, the FDD, any personal guarantee, the lease, and the financing terms.
Compare the cost to the risk. A review fee is small next to an investment that can run to six figures.
Where to look: state bar referral services, the American Association of Franchisees & Dealers (AAFD) attorney resources, and published lists of franchisee lawyers. Check any attorney's license with your state bar.
The 14-day rule and your timeline
Under the FTC Franchise Rule, a franchisor must give you its Franchise Disclosure Document (FDD) at least 14 calendar days before you sign a binding agreement with, or pay any money to, the franchisor or its affiliate.
There is a second timing rule. If the franchisor makes a material change to the agreement on its own, you must get the final version at least 7 calendar days before you sign it.
Fourteen days is a minimum, not a deadline. You can take longer. If someone tells you a deal "expires" or that you must pay a deposit before you have had the FDD for 14 days, treat that as a warning sign.
Some states have their own timing rules. An attorney can tell you which ones apply to you.
How to read the Franchise Disclosure Document (FDD)
The FDD has 23 numbered sections, called Items. Every franchisor uses the same structure, so you can compare brands side by side.
All 23 Items at a glance
Item
Topic
1
The franchisor, its parents, predecessors, and affiliates
2
Business experience of key people
3
Litigation
4
Bankruptcy
5
Initial fees
6
Other fees
7
Estimated initial investment
8
Restrictions on sources of products and services
9
Franchisee's obligations
10
Financing
11
Franchisor's assistance, advertising, computer systems, and training
12
Territory
13
Trademarks
14
Patents, copyrights, and proprietary information
15
Obligation to participate in the actual operation of the business
16
Restrictions on what the franchisee may sell
17
Renewal, termination, transfer, and dispute resolution
18
Public figures
19
Financial performance representations
20
Outlets and franchisee information
21
Financial statements
22
Contracts
23
Receipts
The Items to read closely
Item 3: Litigation. This lists certain lawsuits and actions involving the franchisor and its key people. Look for patterns. Several franchisees suing over the same issue, such as earnings claims or missing support, can tell you a lot.
Item 4: Bankruptcy. This covers bankruptcies involving the franchisor, its parents or affiliates, and its officers and key people, generally over the past 10 years. Read it slowly. Personal finances of the people running a young company can matter.
Items 5, 6, and 7: Fees and startup costs.
Item 5 is the upfront fee.
Item 6 lists ongoing fees, such as royalties, marketing, technology, and training fees.
Item 7 estimates your total startup cost, including working capital.
Ask whether Item 7 covers your own living costs. It usually does not. Ask what costs are missing. The FTC has said that charging fees not disclosed in the FDD may violate the law.
Item 11: Franchisor's assistance and training. This explains what help you get before and after opening. Compare the promises in sales calls to what Item 11 actually commits to in writing.
Item 12: Territory. Check whether you get an exclusive or protected area. If you do not, the franchisor or other franchisees may be able to open nearby. The FTC notes this can affect your sales.
Item 19: Financial performance representations. This is the only place a franchisor may share earnings or sales figures with you. It is optional. If a franchisor includes it, read how the numbers were calculated, which locations were included, and how many met the figure. If there is no Item 19, any earnings figures you hear elsewhere deserve extra caution. The FTC suggests noting any such claims, and reporting them on any closing questionnaire.
Item 20: Outlets and franchisee information. This shows openings, closings, transfers, terminations, and non-renewals, usually for the last three years. It also lists contact details for current franchisees and for those who left the system in the last fiscal year. High turnover can be a warning sign. This list is also where you find people to call.
Item 21: Financial statements. These show the franchisor's financial health. Newer franchisors may provide less. Look at cash, debt, and whether the company depends mainly on new franchise sales to stay afloat. An accountant can help you read these.
Also worth reading: Item 1 (what the business is and who owns it), Item 2 (who runs it and their track record), Item 8 (required suppliers), Item 17 (how the relationship can end), and Item 22 (the actual contracts you will sign).
Questions to ask the franchisor
How many locations opened, closed, or changed hands in each of the last three years? Why?
How does the company make most of its money: from franchise fees or from ongoing royalties?
What exactly is included in training and opening support? Who provides it?
Is the territory protected? What happens if you open a location near mine?
Are there required suppliers? Does the company receive rebates from them?
What fees could be added or raised during my agreement?
Who are the officers? Have any of them had business failures, lawsuits, or bankruptcies?
Do you use brokers or third-party sellers? Who are they, and what do you pay them?
Can I talk to any franchisee in Item 20, including former ones, without your involvement?
What is your current financial position? Has anything material changed since the FDD date?
Ask for important answers in writing.
Questions to ask current and former franchisees
Item 20 lists current franchisees and those who recently left. Call people you pick yourself, not only the names the franchisor suggests. Talk to former franchisees too.
How long did it take you to break even? How long until you paid yourself?
How close was your startup cost to the Item 7 estimate?
Did the franchisor deliver the training and support it promised?
Were there fees or costs you did not expect?
How does the company respond to problems?
Did a broker or consultant introduce you to this brand?
Are you restricted from speaking freely about the company?
Knowing what you know today, would you still invest?
That last question comes from the IFA's own due diligence guidance. It is a good one.
Keep in mind that some franchisees may not feel free to talk. The FTC has said that franchisors cannot use contract clauses to stop franchisees from reporting problems to government agencies.
Franchise red flags
None of these proves something is wrong. Each one is a reason to slow down and ask more questions.
Pressure to sign or pay quickly, or a "special price" that expires soon.
A request for money before you have had the FDD for 14 calendar days.
Earnings figures that are not in Item 19, or someone telling you not to worry about Item 19.
Being discouraged from hiring an attorney or an accountant.
Claims that the franchise is "government approved" or "SBA approved."
High rates of closings, transfers, or terminations in Item 20.
A franchisor that seems to make most of its money from selling new franchises.
Litigation or bankruptcy history in Items 3 and 4 that no one explained.
Thin or weak financial statements in Item 21.
A broker or seller who will not say how they are paid.
A sales person whose name does not appear on the Item 23 receipt.
A closing questionnaire asking you to confirm you received no earnings claims, when you did.
Current franchisees who seem unwilling or unable to speak openly.
Answers that change between calls, or important promises that are not in writing.
State registration and public lookups
Some states require franchisors to register or file their FDD before selling there. These generally include California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin. Other states have notice filing or business opportunity laws.
Some states let you search filings or download FDDs for free:
To find the right office for your state, use the North American Securities Administrators Association's (NASAA) "Contact Your Regulator" page.
Franchise broker registration. As of today, only New York and Washington require franchise brokers to register. California passed a law requiring it; check the DFPI website for when registration starts. NASAA adopted a model broker registration act in May 2026, so more states may follow.
North Carolina. North Carolina does not have a general franchise registration law. It does have a Business Opportunity Sales Act, which covers some business offers. Many franchises that license a federally registered trademark fall outside it. You can search business opportunity filings through the NC Secretary of State (see the NC Secretary of State business opportunity sales FAQ). To report a concern, you can contact the NC Department of Justice consumer protection line at 1-877-5-NO-SCAM.
A registration is not an approval. It means paperwork was filed, not that the investment is sound.
Financing cautions
A loan approval is not a vote of confidence. The FTC notes that a lender approving your loan does not mean the franchise is a good investment.
An SBA directory listing is not an endorsement. The SBA says its Franchise Directory is not an endorsement or approval of any franchise.
SBA loan defaults happen. An FTC staff report from 2024 found that SBA-backed loans to franchises defaulted at a rate of 3.9%, compared with 3.5% for other small businesses. Loans to startups defaulted more often than loans to existing businesses.
Be careful with retirement money. Some buyers fund a franchise through a "Rollovers as Business Start-Ups" (ROBS) plan. In an IRS study, most ROBS-funded businesses either failed or were on the road to failure. Many people lost retirement savings. ROBS plans also have complex tax rules.
Personal guarantees and collateral. Many franchise loans and agreements require a personal guarantee. That can put your home, savings, or other assets at risk.
Plan for slow months. Budget for living costs and working capital beyond the Item 7 estimate. Ask franchisees how long it took them to earn a paycheck.
Ask who is arranging the financing. If the franchisor or broker points you to a specific lender or funding company, ask whether they get paid for the referral.
A step-by-step franchise due diligence checklist
Write down your limits. Decide how much you can afford to lose, how you'll pay your living costs, and how long you can go without income.
Identify everyone you talk to. Ask whether each person works for the franchisor, a broker, or a lead-generation site. Ask who pays them.
Get the FDD. Note the date you received it. Do not sign or pay anything for at least 14 calendar days.
Read the key Items. Start with Items 3, 4, 5–7, 11, 12, 19, 20, and 21. Check Item 23 for the names of everyone selling the franchise.
Call franchisees you choose yourself. Include former franchisees from Item 20.
Ask the franchisor your questions. Get key answers in writing.
Hire a franchisee-side attorney. Have them review the FDD, the franchise agreement, any personal guarantee, and any lease.
Have an accountant review the numbers. Include Item 21 and your own financial projections.
Check your financing. Understand loan terms, guarantees, collateral, and any retirement-account risks.
Take your time. If you feel rushed, slow down. Walking away is always an option before you sign.
Keep records. Save emails, notes from calls, and any figures you were given outside the FDD.
Where FranchiseXray fits
FranchiseXray started because of the experience Paul described above. Our reports summarize public records and the information in a franchisor's FDD. They are meant to help you organize your research and prepare questions for your attorney, accountant, and the franchisor.
Our reports are research summaries. They do not tell you whether to buy a franchise. They do not replace a licensed franchise attorney.
Not legal advice.This guide is general educational information. It is not legal, financial, investment, or other professional advice. Laws change and vary by state. No guarantee of accuracy. Verify everything with a licensed franchise attorney before signing or paying anything. Paul's story reflects his personal experience and recollection.