franchise disclosure document

  • How Much Do Franchise Owners Make? How to Work Out the Real Number

    How Much Do Franchise Owners Make? How to Work Out the Real Number

    How much do franchise owners make? It is usually the first question people ask me, and the one most websites answer worst. Search it and you will find confident averages, salary ranges and “top earning franchises” lists. None of them can tell you what you would take home from a specific unit, in a specific market, with the money you actually have to invest.

    That is not a dodge. Franchise income depends on the brand, the format, your territory, how you finance the deal and how involved you are day to day. What I can give you is a way to work out a defensible number for any franchise you are considering, using the documents franchisors are required to hand you and the people who already own units. Before franchise consulting I spent eight years as a business broker valuing operating businesses, and nine years running my own. This is the same exercise, done before you sign instead of after.

    Why There Is No Honest Single Number

    Two owners of the same brand can have very different results. One bought a strong territory, runs the unit herself and financed it with cash. The other hired a manager, carries an SBA loan and opened in a trade area that took longer to build. Their units might even post similar sales, and their personal income can still look nothing alike.

    Industry matters just as much. A home services van, a fitness studio and a quick-service restaurant have completely different cost structures: labor, rent, inventory and equipment all weigh differently. An average that blends them together describes nobody. That is why any franchise income figure that is not tied to a named brand, a defined group of units and a stated time period should be treated as marketing, not information.

    So the useful question is narrower: for this franchise, what do units like the one I would open actually earn, and what would be left for me after everything else is paid?

    How Much Do Franchise Owners Make? Start With Item 19

    The Franchise Disclosure Document has 23 items, and Item 19 is the one that deals with money. It is where a franchisor may include a financial performance representation — historic sales, costs or profits from existing units, or occasionally a forecast. Under the FTC Franchise Rule, including one is optional. A franchisor that does not make one has to say so, and in general it cannot make earnings claims to you outside Item 19 either, with narrow exceptions such as sharing the actual records of an existing outlet you are buying.

    When a franchisor does include an Item 19, the rule requires a reasonable basis and written substantiation for it, a statement of whether the figures are historic or a forecast, and a warning that your own results may differ. It must also state that the written substantiation is available on reasonable request. Ask for it.

    Then read the Item 19 closely, because what it measures is rarely what you want to know:

    • Gross sales or profit? Many financial performance representations report revenue only. Sales tell you nothing about what an owner keeps until you subtract every cost below them.
    • Which units? Item 19 may cover a subset — units open at least a certain number of years, the top performers, or one region. Check how many units are included and how many were left out.
    • Average or median? The FTC’s own buyer’s guide warns that a few very successful franchises can inflate an average and make a system look stronger than it is. A median, or a breakdown by quartile, is more telling.
    • Company-owned or franchised? If company-owned units are blended in, ask whether they carry the same royalty, rent and management costs a franchisee would.
    • What is missing? A figure that stops at “unit-level profit” often excludes debt service, owner or manager pay, and depreciation. Find out exactly where the line was drawn.

    If the franchise you are looking at has no Item 19 at all, that is not automatically a red flag, but it does move almost all of the work onto your own conversations with franchisees. Our guide on how to read a Franchise Disclosure Document covers the other items that feed an income estimate.

    From Gross Sales to What You Take Home

    Whatever the Item 19 shows, you still need to walk it down to your own pocket. Every franchise is different, but the order is broadly the same:

    1. Gross sales — what the unit brings in.
    2. Cost of goods — food, product, parts or supplies, if the model sells anything physical.
    3. Labor — wages, payroll taxes, workers’ compensation and benefits. For most service and food concepts this is the largest controllable cost.
    4. Occupancy — rent, common area charges, utilities and insurance, or vehicle costs for a mobile model.
    5. Royalty and brand fund — in most systems a percentage of gross sales, owed whether or not the unit is profitable. Some add technology or software fees on top.
    6. Other operating costs — local marketing, repairs, professional fees, merchant fees.
    7. Debt service — loan payments on the money you borrowed to open.
    8. Manager pay — if someone other than you runs the unit day to day.
    9. Taxes — which depend on your entity and your personal situation.

    What remains is what the franchise actually pays you. Notice how far down the list that is, and how many lines sit between the sales figure people quote and the income figure people mean. The royalty line in particular deserves attention, because it comes off the top rather than out of profit. Our breakdown of franchise fees and royalties explains what those payments cover, and Items 5, 6 and 7 of the FDD set out the fees you will owe.

    Salary, Distributions and Owner’s Pay

    “Salary” is a slightly misleading word for franchise income. Most owners do not draw a fixed wage the way an employee does. They take what the business can afford, in whatever form their entity and their accountant recommend.

    If your franchise is set up as an S corporation, for example, the IRS expects owners who work in the business to pay themselves reasonable compensation as wages before taking other distributions. In an LLC taxed as a partnership or sole proprietorship, the money is handled differently. The structure changes how income is taxed, not how much the business earns — but it does change the number you will see on your own tax return, so settle it with a CPA before you open.

    When I valued businesses as a broker, the figure buyers cared about was seller’s discretionary earnings: the profit available to one full-time owner-operator before that owner’s own pay, interest, depreciation and personal perks run through the books. It is a useful lens for franchises too. It answers “what does this unit produce for the person running it?” and it forces a second question: if I do not want to run it myself, what does it produce after I pay someone who will?

    Why Year One Looks Different From Year Three

    Item 19 figures usually describe established units. Yours will not be established on opening day. Most new units need time to build a customer base, and during that ramp the costs arrive in full while sales do not.

    The FDD acknowledges this. Item 7, which estimates your initial investment, includes a line for additional funds to cover expenses during an initial period of operations, and the franchisor has to say how long that period is. Read that figure as a floor rather than a comfortable cushion, and ask franchisees whether it was enough for them.

    It also matters how you paid for the unit. Loan payments are due every month from the start, and they come before the owner is paid. A buyer who financed most of the investment can own a unit with healthy operating profit and still take very little home for the first stretch. Our guide to franchise break-even walks through how to estimate that timeline, and why it varies so much between systems.

    Owner-Operator, Semi-Absentee and Multi-Unit

    How involved you are is one of the biggest drivers of what you personally make, and it is where a lot of buyers talk themselves into the wrong model.

    • Owner-operator. You work in the business and replace a manager’s wage with your own labor. The unit keeps more, and so do you, but the income is tied to your hours.
    • Semi-absentee. You hire a general manager and oversee the business around another job. Your income is whatever is left after the manager is paid, which on a single unit can be thin. Many franchise systems that market semi-absentee ownership expect owners to grow into several units for that reason.
    • Multi-unit. Owners with several locations can spread management, marketing and overhead across them. The upside is real, but so is the added capital, the added debt and the management load. A development agreement to open several units commits you to a schedule before the first one has proved itself.

    Be honest about which of these you want. If you need the franchise to replace a corporate salary within a year, a semi-absentee single unit is a hard model to make work. If you have a runway and plan to scale, the calculation for unit one looks different.

    Getting a Real Number From the People Who Own Units

    The most reliable source of income information is not the franchisor. It is the franchisees. Item 20 of the FDD lists current franchisees with their outlet contact details, along with franchisees who left the system during the most recent fiscal year. The FTC’s Consumer’s Guide to Buying a Franchise puts it plainly: talking to them may be the most reliable way to verify the franchisor’s claims.

    Owners are not obligated to share their numbers, and many will not give you exact figures. Most will answer questions framed around their experience:

    • How long was it before you paid yourself anything?
    • Did the Item 7 estimate cover what you actually spent to get open?
    • Is your unit above or below the Item 19 figures, and why?
    • What costs surprised you in the first two years?
    • Knowing what you know now, would you buy this franchise again?

    Call owners who opened recently and owners who have been in the system for years, in markets like yours if you can. And call some of the former franchisees on the list. Their reasons for leaving tell you what the Item 19 cannot. Our guide to franchisee validation calls has a fuller list of questions.

    Once you have a model you believe, have a franchise attorney — not a general business attorney — review the FDD and franchise agreement before you sign, and take your projections to an accountant who works with franchise buyers.

    Keep Reading

    Ready to Talk It Through?

    A good income estimate comes from putting the FDD, franchisee conversations and your own finances side by side. That is exactly the work I do with buyers, and it is often where a promising brand drops off the list or a less obvious one moves up.

    My work is free to you. Franchisors pay a placement fee when a candidate comes through a consultant, so I have no interest in steering you toward any particular brand. The goal is the right fit, for you and for the franchisor. I consult in English and Spanish.

    Book a free, no-pressure conversation and we can work through the numbers for the franchises you are considering.

    Frequently Asked Questions

    How much do franchise owners make per year?

    There is no honest single figure. Owner income depends on the brand, the industry, the territory, how the purchase was financed and whether the owner runs the unit or pays a manager. The best starting point for a specific franchise is its Item 19 financial performance representation, if it has one, followed by conversations with current and former franchisees and a model built on your own costs and financing.

    What is Item 19 in a Franchise Disclosure Document?

    Item 19 is the section of the FDD where a franchisor may disclose financial performance information, such as historic sales or profits from existing units. Including it is optional under the FTC Franchise Rule. When a franchisor does include it, the figures must have a reasonable basis and written substantiation, and the franchisor must make that substantiation available on reasonable request. Check whether the figures show sales or profit, and which units are included.

    Do franchise owners pay themselves a salary?

    Most owners do not draw a fixed salary the way an employee does. They take what the business can support, in a form that depends on their entity. An owner of an S corporation who works in the business is generally expected to take reasonable compensation as wages before other distributions. A CPA should help you decide the structure before you open.

    How long does it take before a franchise owner makes money?

    It varies considerably by franchise and market. New units usually need time to build sales, and loan payments start before the owner is paid. Item 7 of the FDD includes an estimate of additional funds for an initial period of operations, but the most useful answer comes from asking franchisees how long it took before they paid themselves anything.

    Can I ask a franchisor how much its owners make?

    You can ask, but a franchisor can generally only share financial performance information that appears in Item 19, with narrow exceptions such as the actual records of an existing unit you are buying. Current and former franchisees listed in Item 20 are free to talk about their own experience, and they are often the most reliable source.


    Next steps

    Questions? Call or text 925-705-0193 for a free 15-minute call. English or Español. There is no cost to you.

  • How to Read a Franchise Disclosure Document (FDD)

    The Franchise Disclosure Document, or FDD, is one of the most important documents you’ll review before buying a franchise, but its length and legal language can make it intimidating. Understanding its structure and knowing what to focus on can help you get real value out of the document instead of just skimming past it.

    What the FDD Actually Is

    The FDD is a legal disclosure document that franchisors are required to provide to prospective franchisees under federal and, in some states, state law. It’s organized into 23 standardized items covering everything from the franchisor’s business background to fees, litigation history, and financial statements, which makes it easier to compare across different franchise opportunities using a consistent format.

    Key Sections Worth Extra Attention

    Item 19, the Financial Performance Representations section, is often the most scrutinized part of the FDD, though not every franchisor chooses to include earnings claims. Item 20 lists the number of franchised and company-owned outlets, along with how many have opened, closed, or transferred in recent years, which can reveal a lot about a system’s stability and growth. Item 21 includes the franchisor’s financial statements, and Item 7 outlines the estimated initial investment range.

    Which FDDs you are handed in the first place depends partly on where you are buying. A number of states require a franchisor to register its offering before it can be sold there, so a brand that has not filed in your state will not appear on your list at all, however well it would suit you. That filter is worth understanding before you start comparing documents — the guides to franchise opportunities in Illinois and to franchise consulting in Washington walk through how it works in two of those markets.

    Litigation and Bankruptcy History

    Item 3 discloses any relevant litigation involving the franchisor and its executives, while Item 4 covers bankruptcy history. Some litigation is normal for larger, established systems, but patterns of franchisee-initiated lawsuits or disputes over specific issues are worth researching further.

    Don’t Skip the Franchise Agreement

    The FDD includes the franchise agreement itself as an exhibit, and it’s worth reading closely since it’s the contract that will actually govern your relationship with the franchisor. Pay attention to territory rights, renewal terms, termination conditions, and any post-termination restrictions like non-compete clauses.

    Before you sign anything

    Read the FDD and the franchise agreement yourself. It is your business, and you should understand what you are agreeing to. But have a franchise attorney review both before you sign. Not a general business attorney: someone who works in franchising specifically and reads these contracts every week. I recommend this to every client without exception, and I am glad to point you toward attorneys who do this work.

    Ready to Talk It Through?

    Reviewing an FDD on your own can be overwhelming, and it’s easy to miss details that matter. Going through it with a franchise consultant is free. You can schedule a free call with Gabriel to review an FDD together.

    Frequently Asked Questions

    What is a Franchise Disclosure Document (FDD)?

    The FDD is a legally required document that franchisors must provide to prospective franchisees before any sale. It contains 23 standardized sections (called Items) covering fees, obligations, litigation history, the franchisor’s background, and more, and it’s designed to help you make an informed decision.

    Which parts of the FDD are most important to read?

    While the whole document matters, buyers often pay special attention to the sections on fees and total investment (Items 5 to 7), the franchisor’s and franchisees’ obligations (Items 8, 9, and 11), litigation and bankruptcy history (Items 3 and 4), the list of current and former franchisees (Item 20), and any financial performance representation (Item 19).

    Does the FDD tell me how much money I’ll make?

    Not always. Earnings information appears in Item 19 as a financial performance representation, but franchisors aren’t required to include one. When it is provided, it’s still a general representation rather than a guarantee, which is why speaking with current franchisees is an important complement.

    How long should I take to review the FDD?

    U.S. rules generally require that you receive the FDD at least 14 calendar days before signing an agreement or making a payment, giving you time to review it. Many buyers use that window, and often more, to read it carefully and have an attorney review it before committing.

    Should I have a lawyer review the FDD?

    Yes. I recommend it to every client without exception. Read the FDD yourself first, because it is your business and you should understand what you are agreeing to, but have a franchise attorney (not a general business attorney) review the FDD and the franchise agreement before you sign. Against a contract that binds you for a decade, it is the cheapest insurance in the whole process.


    Next steps

    Questions? Call or text 925-705-0193 for a free 15-minute call. English or Español. There is no cost to you.

  • What’s Really Included in a Franchise’s Total Investment

    Franchise total investment is the number most prospective owners fixate on when comparing opportunities, and for good reason: it’s typically the largest figure disclosed in the Franchise Disclosure Document. When you research a franchise opportunity, you’ll usually see a total investment range listed there. This figure is meant to give you a fuller picture than the franchise fee alone, but it’s still worth understanding exactly what falls inside your franchise total investment and what might fall outside it.

    What the Total Investment Range Usually Includes

    The total investment range typically bundles together the initial franchise fee (often $20,000-$50,000 for many concepts), build-out or leasehold improvement costs, equipment and signage, initial inventory, technology and point-of-sale systems, training-related travel expenses, and a recommended amount of working capital to carry the business through its early months. Franchisors disclose these figures in Item 7 of the Franchise Disclosure Document, and reputable brands break out each line item so you can see exactly where your money goes rather than handing you a single lump sum.

    Why the Range Is Often Wide

    You’ll often notice this figure is presented as a range rather than a single number, sometimes spanning tens or even hundreds of thousands of dollars. That’s because actual costs vary by location, square footage, local construction and labor costs, and whether you’re leasing or purchasing property. A build-out in a major metro area will typically land near the top of the range, while a smaller footprint in a lower-cost market may come in near the bottom. Comparing the low end and high end can help you gauge how much variability to expect in your specific market, and asking existing franchisees where their own franchise total investment landed within the published range can be one of the most useful data points you gather during due diligence.

    Costs That Can Fall Outside the Range

    Some costs aren’t always captured in the total investment figure, including real estate purchase costs (as opposed to leasing), certain licensing or permitting fees specific to your state or municipality, legal fees for reviewing the franchise agreement, and additional working capital if your ramp-up period takes longer than projected. It’s worth asking directly what is and isn’t included before you finalize your budget, and it’s smart to build in a cushion above the high end of the disclosed range rather than planning around the low end.

    Why Working Capital Matters More Than People Expect

    One of the most common mistakes new franchise owners make is underestimating how much cash they’ll need before the business becomes self-sustaining. Even profitable locations often take months to build a customer base, and having enough working capital set aside can be the difference between weathering that ramp-up period and running into cash flow trouble. Many franchisors recommend budgeting for three to six months of operating expenses beyond your initial franchise total investment, and lenders evaluating your financing application will often want to see that cushion clearly documented before approving a loan.

    How to Verify the Numbers Before You Sign

    The figures in Item 7 are estimates, not guarantees, so it’s worth cross-checking them against Item 20’s list of current and former franchisees. Calling several current owners and asking what their actual franchise total investment ended up being, versus what was originally disclosed, can reveal whether a brand’s estimates run realistic or consistently low. A franchise consultant who works with multiple brands can also help you compare investment ranges across concepts side by side.

    Frequently Asked Questions

    What’s typically the biggest single line item in a franchise total investment?

    For most brick-and-mortar concepts, build-out or leasehold improvement costs make up the largest share, though this varies significantly by industry. A service-based franchise run from a home office may have a much smaller build-out cost than a retail or food concept.

    Does the franchise total investment include ongoing royalty fees?

    No. Royalty fees and marketing fund contributions are ongoing operating costs, not part of the one-time total investment figure. Item 7 covers only what you need to open your doors; Item 6 covers the recurring fees you’ll pay afterward.

    Ready to Talk It Through?

    Reading through a Franchise Disclosure Document’s estimated initial investment section can raise more questions than it answers if you’re doing it alone. Reviewing it with a franchise consultant is free. You can schedule a free call with Gabriel to go over the numbers together.


    Next steps

    Questions? Call or text 925-705-0193 for a free 15-minute call. English or Español. There is no cost to you.