Embarking on the journey of business ownership is an exciting prospect, especially within the supportive structure of a franchise model. However, the critical due diligence process always seems to temper that excitement with paperwork to review and legal details to maneuver. Still, nothing is more central to that process than the Franchise Disclosure Document (FDD).
The North American Securities Administrators Association (NASAA) has consistently championed transparency in franchising. In mid-2025, they released critical guidance that significantly raises the bar for how franchisors must handle financial disclosures amid economic volatility. This shift is all about moving past vague warnings and demanding concrete, up-to-date figures. Let’s dig in closer to what NASAA says about transparency and thorough FDD reviews.
How the Mid-2025 NASAA Guidance is Reshaping Franchise Disclosure - The most recent North American Securities Administrators Association (NASAA) guidance is reshaping franchise disclosure. - With the new guidance, franchisors can no longer rely on general statements about "economic uncertainty." - The new guidance focuses on three key areas of the FDD that are most vulnerable to economic shifts: estimated initial investment (Item 7), opening timeline (Item 11), and financial performance representations (Item 19). - Key due diligence steps for prospective franchisees to take when scrutinizing any FDD in light of the new NASAA guidance, include: look for ranges and formulas in Item 7, scrutinize the "Additional Funds" estimate in Item 7, ask for justification from the franchisor when warranted, and review the basis for the financial performance representation (if offered). |
The End of Vague Disclaimers
Franchisors can no longer rely on general statements about "economic uncertainty" or cautionary language suggesting that prospective franchisees "should not rely" on the figures provided. These vague statements can create a lot of confusion among potential franchisees.
The recent NASAA guidance emphasizes that market shifts and economic factors, like inflation, supply chain issues, labor costs, and tariffs, do not excuse a franchisor from its duty to provide accurate, clear, and comprehensive disclosures. If market conditions have materially changed the expected costs or performance, the franchisor must update the FDD in a timely manner.
More specifically, the guidance focuses on three key areas of the FDD that are most vulnerable to economic shifts:
- Estimated Initial Investment (Item 7): This Item includes all costs needed to open the business, as well as the crucial "Additional Funds" section, which relates to the operating capital needed for the first three months of operation. If the cost of equipment, construction, or inventory has spiked, the disclosed figures must reflect that.
- Opening Timeline (Item 11): Supply chain disruptions, equipment backlogs, or permit delays must be clearly addressed in the disclosure of a typical time from signing to opening.
- Financial Performance Representations (FPRs) (Item 19): If the franchisor provides earnings claims, it must ensure the data remain accurate, and if changes have occurred, the FDD must be amended.
If potential costs, timelines, or performance are affected by economic factors, the franchisor must disclose either a range (low to high) or a formula for calculating those figures to ensure transparency.
Your Actionable Due Diligence Checklist
As a prospective franchisee, this new guidance is a powerful tool in your hands. It provides you with the leverage to demand better, more transparent data. Here are the key due diligence steps to take when scrutinizing any FDD in light of the new NASAA guidance:
Look for Ranges and Formulas in Item 7
In the Estimated Initial Investment section (Item 7), use a range (low to high) for higher costs, such as equipment, inventory, and leasehold improvements, rather than a single fixed number. If only a single number is provided, ask the franchisor how they can guarantee that figure in the current economic climate.
Scrutinize the "Additional Funds" Estimate
This section estimates the money you’ll need to cover operating expenses for the first three months. Ask current franchisees whether the three-month estimate is realistic given current inflation rates, rising labor costs, and higher utility expenses in their markets. Many franchisees find they need more than the bare minimum to get to profitability.
Ask for the Compliance Justification
Ask the franchisor directly: "How are you tracking and justifying your cost estimates to comply with the new NASAA guidance on shifting market conditions?" This question forces them to explain their internal process for monitoring supply chains and cost changes. A compliant franchisor will be able to articulate this clearly and confidently.
Review the Basis for FPRs
If the franchisor offers an Item 19 (Financial Performance Representation), review the data they used. Is the historical performance data relevant to today's costs? If gross sales are up but the cost of goods sold is significantly higher due to inflation, net profitability may be lower than indicated by historical figures.
Bottom Line
The ultimate goal of the FDD is to help you make an informed investment decision. This new guidance ensures that the information you receive is as accurate and current as possible, giving you a better foundation for your successful business launch.
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Kimberly Crossland is a copywriter, content strategist, and creator. Her goal is to inspire meaningful change through a strategic and thoughtful approach to life and business. In her free time, you can find her homeschooling her kids or on the road looking for a new adventure together with her boys.