Buying a Franchise A Consumer Guide

FEDERAL TRADECOMMISSION
Buying a Franchise: A Consumer Guide
Buying a Franchise: A Consumer Guide

When you buy a franchise, you often can sell goods and services that 

have instant name recognition, and get training and support that can 

help you succeed. But purchasing a franchise is like every other 

investment: there’s no guarantee of success. 

The Federal Trade Commission, the nation’s consumer 

protection agency, has prepared this booklet to explain how 

to shop for a franchise opportunity, the obligations of a 

franchise owner, and questions to ask before you invest.



I. The Benefits and Responsibilities 

of Franchise Ownership 2

II. Advance Work: Before You Select 

a Franchise System 4

III. Selecting a Franchise 5

IV. Finding the Right Opportunity 6

V. Investigating Before You Invest 9

VI. Before You Sign the 

Franchise Agreement 16
Buying a Franchise: A Consumer Guide

I. The Benefits and Responsibilities 

of Franchise Ownership

A franchise enables you, the investor or franchisee, to 

operate a business. You pay a franchise fee and you 

get a format or system developed by the company 

(franchisor), the right to use the franchisor’s name 

for a limited time, and assistance. For example, the 

franchisor may provide you with help in finding 

a location for your outlet; initial training and an 

operating manual; and advice on management, 

marketing, or personnel. The franchisor may 

provide support through periodic newsletters, a 

toll-free telephone number, a website, or scheduled 

workshops or seminars.

Buying a franchise may reduce your investment risk 

by enabling you to associate with an established 

company. But the franchise fee can be substantial. 

You also will have other costs: for example, you may 

be required to give up significant control over your 

business while you take on contractual obligations 

with the franchisor.

Typically, franchise systems have several components. 

Costs 

In exchange for the right to use the franchisor’s 

name and assistance, you will pay some or all of the 

following fees.

Initial Franchise Fee and Other Expenses 

Your initial franchise fee, which will range from 

several thousand dollars to several hundred thousand 

dollars, may be non-refundable. You may incur 

significant costs to rent, build, and equip an outlet 

and to buy initial inventory. You also may have to 

pay for operating licenses and insurance, and a “grand 

opening” fee to the franchisor to promote your new 

outlet. 

Continuing Royalty Payments 

You may have to pay the franchisor royalties based 

on a percentage of your weekly or monthly gross 

income. Often, you must pay royalties even if your 

outlet isn’t earning significant income. As a rule, 

you have to pay royalties for the right to use the 

franchisor’s name. Even if the franchisor doesn’t 

provide the services they promised, you still may 

have to pay royalties for the duration of your 

franchise agreement. Indeed, even if you voluntarily 

terminate your franchisee agreement early, you may 

owe royalties for the remainder of your agreement. 

Advertising Fees 

You also may have to pay into an advertising fund. 

Some portion of the advertising fees may be allocated 

to national advertising or to attract new franchise 

owners, rather than to promote your particular 

outlet.

Controls 

To ensure uniformity, franchisors usually control 

how franchisees conduct business. These controls 

may significantly restrict your ability to exercise your 

own business judgment. Here are a few examples. 

Site Approval 

Many franchisors pre-approve sites for outlets, 

which, in turn, may increase the likelihood that your 

outlet will attract customers. At the same time, the 

franchisor may not approve the site you’ve selected. 

Design or Appearance Standards

Franchisors may impose design or appearance 

standards to ensure a uniform look among the 

various outlets. Some franchisors require periodic 

renovations or seasonal design changes; complying 

with these standards may increase your costs.


Restrictions on Goods and Services You Sell

Franchisors may restrict the goods and services you 

sell. For example, if you own a restaurant franchise, 

you may not be able to make any changes to your 

menu. If you own an automobile transmission repair 

franchise, you may not be able to perform other types 

of automotive work, like brake or electrical system 

repairs.

Restrictions on Method of Operation

Franchisors may require that you operate in a 

particular way: they may dictate hours; pre-approve 

signs, employee uniforms, and advertisements; 

or demand that you use certain accounting or 

bookkeeping procedures. In some cases, the 

franchisor may require that you sell goods or services 

at specific prices, restricting your ability to offer 

discounts, or that you buy supplies only from an 

approved supplier even if you can buy similar goods 

elsewhere for less. 

Restrictions on Sales Area

A franchisor may limit your business to a specific 

territory. While territorial restrictions may ensure 

that you will not compete with other franchisees for 

the same customers, they also could hurt your ability 

to open additional outlets or to move to a more 

profitable location. In addition, a franchisor may 

limit your ability to have your own website, which 

could restrict your ability to have online customers. 

Moreover, the franchisor itself may have the right to 

offer goods or services in your sales area through its 

own website or through catalogs or telemarketing 

campaigns. 

Terminations and Renewal 

You can lose the right to your franchise if you breach 

the franchise contract. Franchise contracts are for a 

limited time; your right to renew is not guaranteed. 
Buying a Franchise: A Consumer Guide

Franchise Terminations

A franchisor can end your franchise agreement for 

a variety of reasons, including your failure to pay 

royalties or abide by performance standards and sales 

restrictions. If your franchise is terminated, you may 

lose your investment. 

Renewals

Franchise agreements may run for as long as 

20 years. At the end of the contract, the franchisor 

may decline to renew. Renewals are not automatic, 

and they may not have the original terms and 

conditions. Indeed, the franchisor may raise the 

royalty payments, impose new design standards and 

sales restrictions, or reduce your territory. Any of 

these changes may result in more competition from 

company-owned outlets or other franchisees. 

II. Advance Work: Before You Select a 

Franchise System

Before you invest in a particular franchise system, 

think about how much money you have to invest, 

your abilities, and your goals. Be brutally honest. 

Your Investment 

How much money do you have to invest? 

How much money can you afford to lose? 

Are you purchasing the franchise alone or with 

partners? 

Do you need financing? Where’s it coming from? 

What’s your credit rating? Credit score? 

Do you have savings or additional income to live 

on while you start your business? 

Your Abilities 

Does the franchise require technical experience 

or special training or education (for example, 

auto repair, home and office decorating, or tax 

preparation)? 

What special skill set can you bring to a business, 

and, specifically, to this business? 

What experience do you have as a business owner 

or manager? 

Your Goals 

Write down your reasons for buying a particular 

franchise:

Do you need a specific annual income? 

Are you interested in pursuing a particular field? 

Are you interested in retail sales or performing a 

service? 

How many hours can you work? How many are 

you willing to work? 

Do you intend to operate the business yourself or 

hire a manager? 

Will franchise ownership be your primary source 

of income or a supplement to your current 

income? 

Do you get bored easily? Are you in this for the 

long-term? 

Would you like to own several outlets? 
III. Selecting a Franchise

Purchasing a franchise is like any other investment: it 

comes with risk. When you think about a particular 

franchise, think about the demand for the products 

or services it offers, competitors that offer similar 

products or services, the franchisor’s background, 

and the level of support you will receive.

Demand 

Is there a demand for the franchisor’s products or 

services in your community? Is it seasonal or evergreen? Could you be dealing with a fad? Does the 

product or service generate repeat business? 

Competition 

What’s the level of competition—nationally, 

regionally, and locally? How many franchised and 

company-owned outlets are in your area? Does 

the franchise sell products or services that are 

easily available online or through a catalog? How 

many competing companies sell similar products 

or services? Are they well-established or widely 

recognized by name in your community? Do they 

offer a similar product at a similar price? 

Your Ability to Operate the Business 

Sometimes, franchise systems fail. What will happen 

to your business if the franchisor closes up shop? 

Will you need the franchisor’s ongoing training, 

advertising, or other help to succeed? Will you have 

access to the same suppliers? Could you conduct 

the business alone if you have to cut costs or lay 

anyone off? 

Before you invest in 

a particular franchise 

system, think about 

how much money you 

have to invest, your 

abilities, and your goals. 

Be brutally honest.
Buying a Franchise: A Consumer Guide

Name Recognition 

Buying a franchise gives you the right to associate 

with the company’s name or brand. The more widely 

recognized the name, the more likely it is to draw in 

customers.

Consider:

name and brand recognition for the company and 

its product or service 

whether the company has a registered trademark 

how long the franchisor has been in business

whether the company’s reputation is for quality 

products or services

whether consumers have filed complaints against 

the franchise with the Better Business Bureau or a 

local consumer protection agency

Training and Support Services 

What training and continuing support does the 

franchisor provide? Does the franchisor’s training 

measure up to the training for workers in the 

particular industry? Can you compete with others 

who have more formal training? What backgrounds 

do the current franchise owners have? Is your 

education, experience, or training similar? 

Franchisor’s Experience 

Many franchisors operate well-established companies 

with years of experience both in selling goods or 

services and managing a franchise system. Some 

franchisors started by operating their own business. 

There is no guarantee, however, that a successful 

entrepreneur can successfully manage a franchise 

system. Find out:

how long the franchisor has managed a franchise 

system 

whether the franchisor has enough expertise to 

make you feel comfortable. If the franchisor has 

little experience managing a chain of franchises, take 

any promises about guidance, training, and other 

support with the proverbial grain of salt. 

Growth 

A growing franchise system increases the franchisor’s 

name and brand recognition and may enable you to 

attract customers. But growth alone doesn’t ensure 

successful franchisees. Indeed, a company that grows 

too quickly may not be able to support its franchisees 

with the support services it promises them. Investigate 

the franchisor’s financial assets and resources; are they 

sufficient to support the franchisees? 

IV. Finding the Right Opportunity

There are many, many ways to find franchise 

opportunities. Some franchisors have websites 

with information about their franchises. Franchise 

expositions are another good source of information, 

as are franchise brokers—companies or people that 

specialize in matching individuals with franchise 

companies. It’s always a good idea to visit franchised 

outlets in your area and talk to the owners about their 

experience with particular franchisors.

Shopping at a Franchise Exposition

Attending a franchise exposition allows you to see and 

compare a variety of franchise possibilities under one 

roof. Before you attend, research the kind of franchise 

that may best suit your budget, experience, and goals. 

When you attend, visit several franchise exhibitors who 

deal with the type of industry that appeals to you. 

Ask questions.


How long has the franchisor been in business? 

How many franchised outlets exist? Where are 

they? 

What is the initial franchise fee? What additional 

start-up costs can you expect? Are there 

continuing royalty payments? How much? What 

do other franchisees pay? 

What management, technical, and other support 

does the franchisor offer? 

What controls does the franchisor impose? 

Exhibitors may offer you incentives to attend a 

promotional meeting to discuss the franchise in 

greater detail. These meetings can be another 

source of information and another opportunity to 

raise questions. Be prepared to walk away from 

any franchise opportunity—and promotion—that 

doesn’t fit your needs. Using a Franchise Broker

Franchise brokers—who also refer to themselves as 

“business coaches,” “advisors,” “referral sources,” or 

“sales consultants”—help people who want to buy a 

franchise. They often advertise on the Internet and 

in business magazines that they will help you select 

among various franchise options. Typically, a broker 

reviews the amount of money you have to invest 

and then directs you to opportunities that match 

your interests and resources. A broker also may 

help you complete applications and the paperwork 

to consummate the sale. Remember that franchise 

brokers often work for franchisors, and get paid only 

if a sale is completed. 
 Buying a Franchise: A Consumer Guide

Limited Opportunities

Some franchise brokers may claim to be able to 

match you with “the perfect opportunity” because 

they represent a wide range of business sellers. That 

may be true—or not. In some instances, franchise 

brokers represent only a few franchisors, and, as a 

result, their suggestions may be limited. 

Selection Standards

Some franchise brokers may claim that they will 

suggest only those franchises that meet certain 

standards. You may think this means that your 

financial risk is limited because the broker is weeding 

out the poor investments. In fact, some brokers 

represent any franchisor willing to pay them a 

commission for a sale. If you rely on a broker, be 

skeptical: you may be directed to a franchise that is 

failing or that doesn’t have a track record. 

Upselling 

Some brokers earn a flat fee regardless of the price 

of the franchise they sell; others earn a commission 

pegged to the price of the franchise the broker 

sells. The more costly the franchise, the bigger the 

broker’s commission. Some brokers may steer you 

toward a more costly franchise to beef up their own 

commission. 

Unauthorized or Misleading Earnings 

Representations

To convince you to buy a particular franchise, a 

broker may make certain representations about 

income. Earnings claims may not be true, and 

sometimes, can be misleading even if literally true. 

For example, the figures may be based on earnings 

in an area where demand for the business’ goods or 

services is high. Or the earnings claimed may be 

based on outdated industry data. In some instances, 

earnings claims may be gross sales figures: when 

you factor in likely expenses, actual earnings can be 

far less. Because earnings representations may be 

misleading, many franchisors prohibit their sales 

representatives from making them. 

Before using a franchise broker, ask yourself: 

whether you need the services of a franchise 

broker. Can you get enough information 

shopping online or reading trade magazines?

whether the broker is paid by the franchisor. Are 

there any fees you must pay the broker? If so, 

how much you are willing to pay?

whether the broker’s commission depends on 

the price of the franchise. If it does, consider the 

fact that the broker may be leading you toward a 

higher-priced franchise. Ask about alternatives in 

the same field that may cost less. 

how many franchisors the broker represents. If 

it’s a small group, the potential match-ups may be 

limited. 

how the broker selects franchisors to represent. 

Are the selection criteria in writing? Ask to see 

them. How many franchisors has the broker 

turned down in the recent past?

about potential earnings claims. Verify whether 

the franchisor has authorized the claims. Ask the 

franchisor for the written documentation that 

lays out the basis for the claims. Think about 

consulting an accountant to determine whether 

the claims are reasonable and if they are applicable 

to where and how you intend to operate your 

business.

You should receive the names and contact 

information for other buyers of the franchise—

current and former franchisees. Talk to them, rather 

than relying on information from the broker alone. 
Speak to them about their experience within the 

franchisor.

V. Investigating Before You Invest

The All-Important Disclosure Document 

Before you invest in any franchise system, get a copy 

of the franchisor’s disclosure document. Under the 

Franchise Rule, which is enforced by the FTC, you 

must receive the document at least 14 days before 

you are asked to sign any contract or pay any money 

to the franchisor or an affiliate of the franchisor. You 

have the right to ask for—and get—a copy of the 

disclosure document once the franchisor has received 

your application and agreed to consider it. Indeed, 

you may want to get a copy of the franchisor’s 

disclosure document before incurring any expenses 

to investigate the franchise offering. 

The franchisor may give you a copy of its disclosure 

document on paper, via email, through a web page, 

or on a disc. The cover of the disclosure document 

should have information about its availability in 

other formats. Make sure you have a copy of the 

document in a format that is convenient for you, and 

keep a copy for reference. 

Read the entire disclosure document. Don’t be shy 

about asking for explanations, clarifications, and 

answers to your questions before you invest. Among 

the key sections in a complete disclosure document 

are: 

Franchisor’s Background

This section tells how long the franchisor has been 

in business, likely competition, and any special 

laws that pertain to the industry, like any license or 

permit requirements. This will help you understand 

the costs and risks you are likely to take on if you 

purchase and operate the franchise. 

Read the entire 

disclosure document. 

Don’t be shy about 

asking for explanations, 

clarifications, and 

answers to your 

questions before you 

invest. 
10 Buying a Franchise: A Consumer Guide

Business Background 

This section identifies the executives of the franchise 

system and describes their experience. Pay attention 

to their general business backgrounds, their 

experience in managing a franchise system, and how 

long they’ve been with the company. 

Litigation History 

This section discusses prior litigation—whether the 

franchisor or any of its executive officers have been 

convicted of felonies involving fraud, violations of 

franchise law, or unfair or deceptive practices law, 

or are subject to any state or federal injunctions 

involving similar misconduct. It also says whether 

the franchisor or any of its executives have been held 

liable for—or settled civil actions involving—the 

franchise relationship. A number of claims against 

the franchisor may indicate that it has not performed 

according to its agreements, or, at the very least, 

that franchisees have been dissatisfied with its 

performance. 

This section also should say whether the franchisor 

has sued any of its franchisees during the last year, 

a disclosure that may indicate common types of 

problems in the franchise system. For example, a 

franchisor may sue franchisees for failing to pay 

royalties, which could indicate that franchisees are 

unsuccessful, and therefore, unable or unwilling to 

make their royalty payments. 

Bankruptcy 

This section discloses whether the franchisor or 

any of its executives have been involved in a recent 

bankruptcy, information that can help you assess 

the franchisor’s financial stability and whether the 

company is capable of delivering the support services 

it promises. 

Initial and Ongoing Costs 

This section describes the costs involved in starting 

and operating a franchise, including deposits or 

franchise fees that may be non-refundable, and costs 

for initial inventory, signs, equipment, leases, or 

rentals. It also explains ongoing costs, like royalties 

and advertising fees. In addition, ask about:

continuing royalty payments 

advertising payments, both to local and national 

advertising funds 

grand opening or other initial business 

promotions 

business or operating licenses 

product or service supply costs 

real estate and leasehold improvements 

discretionary equipment, such as a computer 

system or a security system 

training 

legal fees 

financial and accounting advice 

insurance 

the costs of compliance with local ordinances, 

such as zoning, waste removal, and fire and other 

safety codes 

health insurance 

employee salaries and benefits 
11

Starting your business may take several months. 

Estimate your operating expenses for the first year 

and your personal living expenses for up to two years. 

Compare your estimates with what other franchisees 

have paid and with competing franchise systems. 

You may be able to get a better deal with another 

franchisor. An accountant can help you evaluate this 

information. 

Restrictions 

This section tells whether the franchisor limits:

suppliers from whom you may purchase goods 

the goods or services you may offer for sale 

your customers 

where you can sell goods or services 

your use of the Internet to sell goods or services 

to customers in and out of your territory and the 

right of the franchisor (or other franchisees) to 

use the Internet to solicit customers or to sell in 

your territory

These kinds of restrictions may limit your ability to 

exercise your own business judgment in operating 

your outlet. That said, if the franchisor does not 

limit the territory where each franchisee can sell, the 

franchisor and other franchisees may compete with 

you for the same customers, either by establishing 

their own outlets, or by selling to customers in your 

area through the Internet, catalogs, telemarketing, 

and the like. 

Terminations 

This section spells out the conditions under which 

the franchisor may end your franchise and your 
12 Buying a Franchise: A Consumer Guide

obligations to the franchisor after termination. It 

also defines the conditions under which you can 

renew, sell, or assign your franchise to others. 

Training 

This section explains the franchisor’s training and 

assistance program. Check for information about: 

who is eligible for training 

whether new employees are eligible for training 

and, if so, at what cost. Who pays?

how long the training sessions take. How much 

time is spent on technical training, business 

management training, and marketing? 

who conducts the training and their qualifications 

whether the company offers ongoing training and 

at what cost 

support staff available for trouble-shooting: 

Are they assigned to your area and how many 

franchisees they are responsible for?

whether on-site individual assistance is available 

and at what cost 

The training you need will depend on your business 

experience and your knowledge of the franchisor’s 

goods and services. If you have doubts about 

whether the training offered is sufficient to give you 

the tools you need to handle day-to-day business 

operations, consider another franchise opportunity.

Advertising 

This section has information on advertising costs. 

Franchisees often are required to contribute a 

percentage of their income to an advertising fund. 

Find out: 

what part of the advertising fund is devoted to 

administrative costs 

what other expenses are paid from the advertising 

fund 

whether franchisees have any control over how the 

advertising dollars are spent 

what advertising promotions the company has 

already engaged in and what’s on the drawing 

board 

what percentage of the fund is spent on national 

advertising 

what percentage of the fund is spent on 

advertising in your area 

what percentage is devoted to selling more 

franchises 

whether all franchisees contribute equally to the 

advertising fund 

whether you need the franchisor’s consent to 

develop and buy your own advertising 

whether there are rebates or advertising 

contribution discounts if you do your own 

advertising 

whether the franchisor gets any commissions or 

rebates when it places advertisements, and who 

benefits from those—you or the franchisor 

Current and Former Franchisees 

This section has very important information about 

current and former franchisees. Many franchisees 

in your area may mean more competition for 

customers. The number of terminated, cancelled, 

or non-renewed franchises may indicate problems. 
13

Some companies may repurchase failed outlets and 

list them as company-owned outlets. 

Look for contact information for current franchisees 

and franchisees who have left the system within the 

last year; talking to them may be the most reliable 

way for you to verify the franchisor’s claims. Visit or 

phone as many of the current and former franchisees 

as possible to chat about their experiences, and the 

volume and type of business they’re doing. Note 

that some of them may have signed confidentiality 

agreements that prevent them from speaking with 

you. If that’s the case, try contacting others on the 

list. 

If you buy an existing outlet that was reacquired 

by the franchisor, the franchisor must tell you who 

owned and operated the outlet for the last five years. 

Several owners in a short time may indicate that 

the location isn’t profitable or that the franchisor 

hasn’t supported that outlet as promised. Consider 

contacting several previous owners to learn more 

about their experience operating the particular outlet. 

You will want to learn: 

how long the franchisee operated the franchise 

where the franchise was located 

whether they were able to open the outlet in a 

reasonable time 

their total investment, including any hidden or 

unexpected costs

how long it took them to cover operating costs 

and earn a reasonable income 

whether they were satisfied with the cost, delivery, 

and quality of the goods or services they sold 

their backgrounds before becoming a franchisee 

Talking to current 

franchisees and 

franchisees who have 

left the system within 

the last year may be 

the most reliable way 

for you to verify the 

franchisor’s claims.
14 Buying a Franchise: A Consumer Guide

whether the franchisor’s training was adequate 

whether the franchisor provided ongoing help 

their satisfaction with the franchisor’s advertising 

program 

whether the franchisor fulfilled its contractual 

obligations 

whether the franchisee would invest in another 

outlet 

whether the franchisee would recommend the 

investment 

Some franchisors may give you a separate reference 

list of franchisees to contact. To ensure that you 

get the full picture, you may want to contact at least 

some references listed in the disclosure document 

that are not on the separate list.

Associations of Franchisees Operating 

Similar Outlets

There’s no question that the disclosure document 

is critical reading for potential franchisees. 

Associations of franchisees who are operating similar 

outlets are another important source of information. 

Whether or not these associations are sponsored 

or endorsed by the franchisor, they can provide 

information about the state of the relationship 

between the franchisor and its franchisees. You may 

want to ask a franchisee association about:

its membership

its history 

its goals 

its relationship with the franchisor 

any benefits in buying from one franchisor versus 

a competitor 

any problems franchisees are facing in the 

operation of their outlets

Earnings Information

You may want to know how much money you can 

make if you invest in a particular franchise system. 

Be careful. Earnings information can be misleading. 

Insist on written substantiation for any information 

you may receive that suggests your potential income 

or sales.

Franchisors are not required to disclose information 

about potential income or sales, but if they do, the 

law requires that they have a reasonable basis for 

their claims and that they make the substantiation 

for their claims available to you. When you review 

any earnings claims, consider: 

Sample Size

Say a franchisor claims that franchisees in its 

system earned $50,000 last year. The claim may be 

deceptive if it doesn’t represent the typical earnings 

of franchisees. The disclosure document should 

tell the sample size and the number and percentage 

of franchisees who reported earnings at the level 

claimed. 

Average Incomes

A franchisor may claim that the franchisees in its 

system earn an average income of, say, $75,000 a year. 

Average figures tell very little about how individual 

franchisees perform. An average figure may make the 

overall franchise system look more successful than it 

is because just a few very successful franchisees can 

inflate the average. 
1

5

Gross Sales

Some franchisors provide figures for the gross sales 

revenues of their franchisees. These figures don’t 

really tell about the franchisees’ actual costs or profits. 

An outlet with a high gross sales revenue on paper 

may be losing money because of high overhead, rent, 

and other expenses. 

Net Profits

Franchisors often do not have data on net profits of 

their franchisees. If you get net profit information, 

ask whether it includes information about companyowned outlets; they often have lower costs because 

they can buy equipment, inventory, and other items 

in larger quantities, or they may own, rather than 

lease, their property. 

Geographic Relevance

Earnings may vary with geography. If it’s reported 

that a franchisee earned a particular income, ask 

about the franchisee’s location. The disclosure 

document should note geographic or other 

differences among the group of franchisees whose 

earnings are reported and your likely location. 

Franchisees’ Backgrounds

Keep in mind that franchisees have different skill sets 

and educational backgrounds. The success of some 

franchisees doesn’t guarantee success for all. 

Reliance on Earnings Claims

Franchisors may ask you to sign a statement—

sometimes presented as a written interview or 

questionnaire—that asks whether you received any 

earnings or financial performance representations 

during the course of buying a franchise. If you heard 

or got any earnings representations, report it fully 

during an interview or on a questionnaire or other 

statement. If you don’t, you may be waiving any 

right to contest the earnings representations that 
16 Buying a Franchise: A Consumer Guide

were made to you and that you used to make your 

decision to buy. 

Financial History 

The disclosure document gives important 

information about the company’s financial status, 

including audited financial statements. You can 

find explanatory information about the franchisor’s 

financial status in notes to the financial statements. 

Investing in a financially unstable franchisor is a 

significant risk; the company may go out of business 

or into bankruptcy after you have invested your 

money.

It’s a good idea to hire a lawyer or an accountant to 

review the franchisor’s financial statements, audit 

report, and notes. They can help you understand 

whether the franchisor: 

has steady growth 

has a growth plan 

makes most of its income from the sale of 

franchises or from continuing royalties 

devotes sufficient funds to support its franchise 

system 

VI. Before You Sign the Franchise 

Agreement

The company’s disclosures may change between the 

time you receive the disclosure document and the 

time you sign the franchise agreement. For example, 

the company may have updated its disclosures; it is 

required to do that at least annually after its fiscal 

year ends. You have the right to ask for a copy of any 

updated information before you sign the franchise 

agreement. An updated disclosure document may 

indicate the filing of new suits by or against the 

franchisor, changes in the franchisor’s management 

team, new financial data, and more current financial 

performance data, among other information. 

Additional Sources of Information

Accountants and Lawyers

In addition to reading the company’s disclosure 

document—including any updates—and speaking 

with current and former franchisees, consider talking 

to an accountant and a lawyer. An accountant 

can help you understand the company’s financial 

statements, develop a business plan, assess any 

earnings projections and the assumptions they’re 

based on, and help you pick a franchise system that 

is best suited to your investment resources and 

your goals.

A lawyer can help you understand your obligations 

under the franchise contract. These contracts 

usually are long and complex. A contract problem 

that arises after you have signed the contract may 

be very expensive to fix—if it can be fixed at all. 

Choose a lawyer who is experienced in franchise 

matters, but rely on your own lawyer or accountant 

for a recommendation, rather than the franchisor’s 

recommendation. 

Banks and Other Financial Institutions 

These organizations can offer an unbiased view of 

the franchise opportunity you are considering. They 

should be able to get a Dun and Bradstreet report or 

similar financial profile of the franchisor. 
17

Better Business Bureau 

Check with the local Better Business Bureau 

(BBB) in the city where the franchisor has 

its headquarters. Ask whether there are complaints 

on file about the company’s products, services, or 

personnel. 

Government 

Several states regulate the sale of franchises. Check 

with the state office that regulates franchising—it 

may be the Office of the Attorney General—for 

more information about your rights as a franchise 

owner in your state. 

The Federal Trade Commission (FTC) enforces 

the Franchise Rule. The FTC publishes a number 

of business guides—for example, Getting Business 

Credit, Dot Com Disclosures, Business Guide to the 

Mail and Telephone Order Merchandise Rule, and 

Complying with the Telemarketing Sales Rule that 

may be helpful to your business. 

The FTC works for the consumer to prevent 

fraudulent, deceptive, and unfair business practices 

in the marketplace and to provide information to 

help consumers spot, stop, and avoid them. To file 

a complaint or to get free information on consumer 

issues, visit ftc.gov or call toll-free, 1-877-FTCHELP (1-877-382-4357); TTY: 1-866-653-

4261. The FTC enters Internet, telemarketing, 

identity theft, and other fraud-related complaints 

into Consumer Sentinel, a secure online database 

available to hundreds of civil and criminal law 

enforcement agencies in the U.S. and abroad.

FEDERAL TRADE COMMISSION 

For the Consumer

1-877-FTC-HELP

ftc.gov 

In addition 

to reading the 

franchisor’s disclosure 

document—including 

any updates—and 

speaking with current 

and former franchisees, 

consider talking to 

an accountant and a 

lawyer.
F

EDERAL TRADECOMMISSION

600 Pennsylvania Avenue, NW

Washington, DC 20580

1–877–FTC–HELP (1–877–382–4357)

ftc.gov