What Is Validation
Validation is the process of contacting existing and former franchisees to verify the claims made by the franchisor in the Franchise Disclosure Document (FDD). You speak directly with operators who are currently running units or have recently closed them to confirm financial performance, operational support, territory quality, and actual franchise costs.
Why It Matters
The FDD contains Item 19, which discloses average unit volumes (AUV) and other financial performance claims. However, Item 19 is optional, and many franchisors do not provide it. Even when provided, these figures can be general and do not reflect your specific market. Validation is where you test whether a franchisor's stated support, territory protection, franchise fees, and renewal terms actually happen in practice.
Franchisees often report hidden costs, inconsistent enforcement of territory rights, renewal complications, or franchisor obligations that go unfulfilled. A franchisor might promise strong support but deliver minimal training. Territory rights may overlap with new units. Renewal terms might become punitive. Only by talking to operating franchisees can you surface these realities before you sign the franchise agreement.
The Validation Process
- Obtain franchisee contact lists. The FDD Item 20 lists all franchisees by location and unit status. Use this list to identify operators in markets similar to where you plan to open, as well as several who have closed or left the system within the past three years.
- Prepare specific questions. Move beyond general satisfaction. Ask about actual initial investment versus stated franchise fees, monthly royalties and marketing fund contributions, territory enforcement, franchisor responsiveness to problems, and whether renewal terms matched the original agreement.
- Schedule calls with 8-15 franchisees. Talk to a mix of high-performing, median-performing, and struggling operators. Include at least two who exited the system. Their perspective on franchisor obligations, franchise fee structure, and renewal disputes is invaluable.
- Dig into financial specifics. Ask franchisees to confirm total startup costs, monthly operational expenses broken down by category, and actual payroll. Compare these to the Item 19 claims or franchisor projections. Request permission to see redacted tax returns or profit and loss statements.
- Probe territory and renewal. Ask how territory rights are actually enforced, whether overlapping units exist, and what happened during renewal discussions. Did the franchisor attempt to increase royalties? Were renewal terms negotiable or non-negotiable?
- Document everything. Take notes during calls, record key figures, and note patterns across multiple franchisees. If three franchisees mention slow franchisor response times, that is a material operational risk.
What to Validate Specifically
- Franchise fees and total investment. The FDD states initial franchise fees, but validation reveals whether setup costs, training, site selection, and pre-opening support add thousands more. Many franchisees spend 20-40% beyond stated fees.
- Franchisor obligations. Review the FDD section on franchisor duties. In validation calls, ask whether the franchisor actually delivers on-site training, marketing support, supply chain management, and technology support at the frequency and quality promised.
- Territory rights. Confirm whether the franchisor honors exclusive or protected territories. Some franchisors define territory narrowly (a single zip code) while others use broader radius clauses. Ask if new units have been approved within claimed territories and how disputes were resolved.
- Renewal terms and costs. Some franchisors increase royalties or require expensive system upgrades at renewal. A 10-year agreement may look attractive until renewal costs appear. Ask franchisees about renewal negotiations and whether they felt pressured to accept unfavorable terms.
- Item 19 accuracy. If the franchisor provides Item 19 financial claims, ask franchisees whether their actual results align. Ask about store count, profitability claims, and whether performance varies significantly by geography or unit vintage.
When to Validate
Validation should begin immediately after you receive the FDD and well before attending a Discovery Day. You need franchisee feedback to ask informed questions during Discovery Day. Complete most validation calls at least two weeks before your in-person visit to the franchisor. This gives you time to identify gaps or red flags and follow up with additional franchisees if needed.
Red Flags to Watch For
- Franchisees declining to speak with you or franchisor instructing franchisees not to discuss performance.
- A high percentage of closed units within the past three years, especially if Item 20 shows closures concentrated in a specific region or time period.
- Consistent complaints about franchisor unresponsiveness, late payment processing, or lack of territorial enforcement.
- Significant gap between Item 19 AUV claims and what franchisees actually report earning.
- Franchisees indicating that renewal terms became substantially more expensive or restrictive than the original franchise agreement.
Common Questions
What if franchisees are reluctant to talk to me? Some franchisors pressure franchisees not to discuss financial performance. Others require a non-disparagement clause that creates legal risk for franchisees. If franchisees are unavailable or evasive, this suggests communication problems or potential business issues. Reach out to franchisees who have left the system, as they typically have fewer contractual restrictions. If the franchisor refuses to provide accurate Item 20 contact information or you cannot reach anyone willing to validate, consider it a serious warning sign.