The Franchise Disclosure Document is 200+ pages of legal protection — for the franchisor. Every clause, every disclosure, every footnote exists because a lawyer decided it would help defend the company in court. The FDD is not written for your benefit. It is written to insulate them from you.

Most prospective franchisees skim the FDD, focus on Item 19 (the financial performance representations), and miss the clauses that will determine whether they succeed or fail. They sign a 10-year contract without understanding what they agreed to.

After reviewing hundreds of FDDs across dozens of franchise systems, I have identified five red flags that should stop you cold. These are not minor issues. These are structural problems that will extract money from your pocket every month, limit your options, and potentially destroy your investment.

If you see any of these in an FDD, walk away — or negotiate them out before you sign.

Red Flag #1: The Renewal Trap (Item 17)

Item 17 covers Renewal, Termination, Transfer, and Dispute Resolution. Most buyers glance at the initial term (usually 10 years) and assume renewal is automatic. It is not.

Here is the language that should terrify you:

"Franchisee must, at Franchisee's expense, complete such remodeling and upgrading of the Franchised Business as Franchisor may reasonably require to reflect the then-current standards and image of the System."

Translation: Before they let you renew for another 10 years, you may be required to remodel your entire location to match whatever the brand looks like in 2035. That "reasonable" remodel can cost $75,000 to $250,000 depending on the brand.

The franchisor updates their store design every 5-7 years. If you signed in 2020 and want to renew in 2030, you might be two design generations behind. They can (and will) require you to gut and rebuild before granting renewal.

What to look for:

Is there a cap on remodel costs at renewal? (Most FDDs have no cap.)
Can you renew without remodeling if you remodeled within the last 5 years?
What happens if you cannot afford the remodel? (Usually: no renewal, and you forfeit the business.)

The worst-case scenario: You have built a profitable business over 10 years. Renewal comes up. The franchisor demands a $200,000 remodel. You cannot finance it. They decline to renew. Your franchise agreement expires. You lose everything.

This is not hypothetical. It happens every year.

Red Flag #2: Supplier Kickbacks (Item 8)

Item 8 discloses "Restrictions on Sources of Products and Services." This is where you find out whether the franchisor is making money off your supply chain.

There are three models:

Model A: Open Sourcing. You can buy supplies from any vendor that meets brand specifications. This is rare and franchisee-friendly.

Model B: Approved Vendors. You must purchase from a list of approved suppliers. The franchisor negotiates volume pricing but does not take a cut. This is acceptable.

Model C: Mandated Vendors with Rebates. You must purchase from designated suppliers, and the franchisor receives rebates, commissions, or volume incentives from those suppliers. This is a hidden tax on your business.

Look for language like this in Item 8:

"Franchisor or its affiliates may receive rebates, credits, or other payments from suppliers based on Franchisee purchases."

When the franchisor profits from your supply costs, they are incentivized to mandate expensive suppliers. They have no reason to negotiate lower prices for you — higher prices mean higher rebates for them.

The real cost: I have seen franchisees paying 30-50% above market rates for commodity items like paper goods, cleaning supplies, and food ingredients. On a $800,000 revenue location with 30% COGS, a 10% supplier markup costs you $24,000 per year. Over 10 years, that is $240,000 transferred from your pocket to the franchisor's — on top of royalties.

Before signing, compare the cost of mandated supplies to what you could purchase independently. Calculate the "franchise tax" embedded in your COGS. If it exceeds 5% of revenue, you are subsidizing the franchisor's profit margin.

Red Flag #3: Excessive Termination Rights (Item 17)

Back to Item 17. This section also lists all the reasons the franchisor can terminate your agreement. Some are reasonable: fraud, bankruptcy, abandonment. Others are weapons.

Watch for these termination triggers:

"Failure to meet performance standards." If the franchisor can terminate you for not hitting revenue or profitability targets, they can effectively force out underperforming locations and resell the territory to a new franchisee. You take all the risk of a bad location; they keep the upside of replacing you.

"Failure to complete required training." Some franchisors require ongoing certifications, annual training programs, or attendance at regional meetings. Miss one, and you are technically in default. This gives them leverage to extract concessions or threaten termination.

"Any violation of the Operations Manual." The Operations Manual is a living document that the franchisor can update at any time. If "any violation" is grounds for termination, you have agreed to follow rules that have not been written yet.

"Conduct that reflects materially and unfavorably upon the System." This is subjective and impossible to defend against. If you post a negative comment about the brand on social media, does that "reflect unfavorably"? The franchisor's lawyers will argue yes.

What to Negotiate

Push for "cure periods" — a defined window (30-60 days) to fix any violation before termination can proceed. Ensure termination requires written notice and an opportunity to respond. Avoid any FDD where the franchisor can terminate "immediately" for subjective reasons.

Red Flag #4: Encroachment Rights (Item 12)

Item 12 describes your territory rights — or lack thereof. This is where franchisors hide the encroachment clause.

Encroachment means the franchisor opens a competing location (company-owned or another franchisee) close enough to cannibalize your sales. You built the market. They harvest it.

The red flag language looks like this:

"Franchisor reserves the right to operate or grant franchises for locations outside your Protected Territory, including locations that may draw customers from your territory."

Or even worse:

"Franchisor reserves the right to sell products through alternative distribution channels, including online, grocery, and retail, without compensation to Franchisee."

That second clause means the franchisor can launch an e-commerce site, sell through Amazon, or place products in grocery stores — competing directly with your location without paying you a cent.

Real-world impact: A franchisee builds a loyal customer base over five years. The franchisor launches a direct-to-consumer website with lower prices (no franchisee overhead). Customers order online instead of visiting the store. Revenue drops 20%. The franchisee has no recourse.

What to demand:

Exclusive territory defined by zip codes or population, not just a radius
First right of refusal on any new location within a defined distance
Revenue sharing if the franchisor sells directly to customers in your territory
Protection against "alternative channels" that bypass your location

Red Flag #5: Churning Franchisees (Item 20)

Item 20 is the most underutilized section of the FDD. It contains a complete list of current franchisees (with contact information) and a three-year history of franchisee turnover.

The turnover tables show:

How many franchises were sold to new owners
How many were terminated by the franchisor
How many were not renewed
How many were reacquired by the franchisor
How many "ceased operations for other reasons" (code for: went bankrupt)

Here is how to calculate the churn rate:

Total Exits (Terminations + Non-Renewals + Ceased Operations + Reacquired)

÷ Total Outlets at Start of Year

= Annual Churn Rate

Healthy: Under 5% | Concerning: 5-10% | Red Flag: Over 10%

A franchise system with 15% annual churn is losing one in seven franchisees every year. That is not a system — that is a meat grinder.

Dig deeper: Item 20 also includes contact information for franchisees who left the system in the past year. Call them. Ask what happened. The franchisor legally cannot prevent them from talking to you, and they have no reason to sugarcoat.

Questions to ask former franchisees:

"Why did you leave the system?"
"Did the franchisor support you when you struggled?"
"Were the financial projections accurate?"
"Would you do it again?"

If you cannot reach former franchisees, or if they refuse to talk, that tells you something too.

How to Use This Information

Finding one of these red flags does not automatically mean "walk away." It means "negotiate hard" or "price the risk."

If the FDD allows unlimited remodel requirements at renewal, negotiate a cap ($50,000, adjusted for inflation). If the franchisor takes supplier rebates, calculate the cost and factor it into your pro forma. If the territory rights are weak, demand first right of refusal on adjacent territories.

Some franchisors will negotiate. The best ones actually respect franchisees who do their homework — it signals you will be a sophisticated, successful operator.

The franchisors who refuse to negotiate on any terms are telling you how they will treat you for the next 10 years. Believe them.

The Architect's Rule

Never sign an FDD without a franchise attorney reviewing it. The $3,000-$5,000 you spend on legal review can save you $300,000 in mistakes. And if the attorney finds multiple red flags that the franchisor refuses to address — that $3,000 just paid for itself by keeping you out of a bad deal.

5 FDD Red Flags That Should Kill The Deal Immediately