Franchise 101
How to buy a franchise. The complete guide.
Everything you need to know before investing in a franchise, explained in plain English. No jargon, no sales pitch, just the facts.
What is franchising?
Franchising is a business model where you (the franchisee) pay a company (the franchisor) for the right to operate a business under their brand. You get their name, systems, training, and support. In exchange, you pay an initial franchise fee and ongoing royalties, typically a percentage of your gross revenue. There are over 800,000 franchise establishments in the US across nearly every industry.
What is an FDD?
A Franchise Disclosure Document (FDD) is a legal document that every franchisor must provide to prospective franchisees at least 14 days before signing any agreement or accepting payment. It's required by the FTC and contains 23 Items covering everything from the franchisor's history and lawsuits (Items 3-4) to fees (Items 5-6), estimated investment (Item 7), territory rights (Item 12), and financial performance (Item 19). FDDs are typically 200-400 pages long and are updated annually.
Key franchise costs explained
- Franchise Fee (Item 5)
- A one-time upfront payment to the franchisor when you sign the franchise agreement. Typically $10K–$100K. This is NOT the total investment. It's just the license fee.
- Total Investment (Item 7)
- Everything you need to open: franchise fee + build-out + equipment + inventory + working capital + real estate. This is the real number. Ranges from $50K for a home-based service to $30M+ for a hotel.
- Royalty (Item 6)
- An ongoing fee paid weekly or monthly, usually 4-8% of gross sales. This is the franchisor's main revenue. Some brands charge flat fees instead of percentages.
- Ad Fund (Item 6)
- A separate ongoing fee (usually 1-5% of gross sales) that goes into a national or regional advertising pool. You don't control how it's spent.
What is Item 19 and why does it matter?
Item 19 is the Financial Performance Representations section of the FDD. It's the ONLY place a franchisor can legally tell you what franchisees actually earn. Some brands include detailed revenue, expenses, and profit data. Others include just a one-line disclaimer saying they don't make financial performance representations. Brands that disclose Item 19 data are generally more transparent, and the data helps you build realistic financial projections. On CommonFranchise, we flag every brand that discloses earnings so you can filter for transparency.
Territory rights (Item 12)
Item 12 tells you whether you get an exclusive territory, meaning an area where the franchisor won't place another franchise. Some brands grant strong territorial protection (e.g., a 3-mile radius). Others grant NO exclusive territory at all (including major brands like Subway, McDonald's, and Planet Fitness). This matters because without territorial protection, you could face competition from another franchisee of the same brand right across the street.
How to compare franchises
Don't compare based on marketing brochures. Compare based on FDD data: franchise fee, total investment, royalty rate, ad fund, territory rights, and most importantly Item 19 earnings data. CommonFranchise extracts all of these from actual FDD filings so you can compare brands side by side on the same standardized data points.