Where to start
The investment table, and the line that runs out first.
Item 7 sets out the estimated initial investment: the initial fee, real estate, construction, equipment, licences, and an "additional funds" line meant to cover the first three to six months of trading. That last line is the one most often short. Published due-diligence guidance is to stress it by a further 20% to 30%, for construction delays, slow permitting and a first season of sales that is slower than the franchisor's figures assume.
A unit that opens late spends working capital without earning any, and the Item 7 range does not move to reflect it. Plan against the top of the range plus that margin, not against its midpoint.
Scroll sideways to see all columns
| Item | What it discloses | What to test |
|---|---|---|
| Item 3 | Litigation involving the franchisor and its officers | Repeated franchisee claims of misrepresentation, unmet support or encroachment |
| Item 7 | Estimated initial investment, including additional funds | Stress the working-capital line by a further 20% to 30% |
| Item 19 | Financial performance representations, if any | Who is in the sample, what share reached the average, what was excluded |
| Item 20 | Three years of outlets opened, closed, transferred and reacquired | Annual turnover above about 10% is a warning sign |
| Item 21 | Audited financial statements | Whether cash comes from royalties or from selling new franchises |
Item 19
An earnings claim is only as good as its sample.
The FTC does not require a franchisor to disclose earnings. If it makes a financial performance representation at all, the representation belongs in Item 19 — and competitive pressure means most established brands now provide one. Reading it well means reading its footnotes.
An average-unit-volume figure drawn from mature company-owned stores says little about a franchisee's first year somewhere else. The claim describes the units in its sample; it cannot describe a trading area it did not include.
- Company-owned units, franchisee-operated units, or both?
- What share of units met or beat the stated average?
- Which units were excluded as atypical, and why?
- Gross sales (average unit volume), or four-wall profit after rent and labour?
Items 20, 21 and 3
Turnover, cash flow and the litigation record.
Item 20 reports three fiscal years of outlet movement: openings, transfers, terminations, non-renewals, reacquisitions by the franchisor and units that ceased operating for other reasons. Add the exits together and divide by the outlets open at the start of the year to get a turnover rate. Published guidance treats anything above about 10% a year as a warning sign of weak unit economics, saturated territories or friction between franchisor and franchisees.
Item 21 carries the franchisor's audited financial statements, and the question is where its cash comes from. A system funded by ongoing royalties is being paid by franchisees who are trading; one funded mainly by initial franchise fees needs to keep selling units to stay solvent. Item 3 lists litigation, and repeated franchisee claims of misrepresented earnings, unmet support or territorial encroachment are a pattern, not noise.
Item 20 also lists contact details for current franchisees and for those who left the system in the last fiscal year. Call both. Validation calls are where real ramp-up times, supply-chain markups, field-support quality and actual four-wall profit come out.
