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Newsletter #0009 - The 1 Thing You Need to Understand
Nikolas Hulewsky
June 15, 2025
Happy Father’s Day!
Today is part 2 of my 4-part franchise deep dive and we are covering the Franchise Disclosure Document (FDD): what to look for, what’s important and how to navigate it.
But first, pleas take 5 seconds to make this Newsletter even better!👇👇
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How to Read a Franchise FDD (Without Getting Bamboozled)
Most people treat the Franchise Disclosure Document (FDD) like an iTunes terms & conditions page:
Click. Skip. Forget.
And that’s exactly how they get burned.
It holds all the important data. You just have to know how to decode it.
Because here’s the truth:
The difference between a $500K/year franchise and a $50K/year headache is buried in those 200 pages.
Today, I’ll show you how to read an FDD like a pro — what to look for, what to ignore, and what should send you running for the hills.
The FDD: What It Actually Is
Franchises are required by law to create an FDD and file it with the FTC.
It's 200+ pages of “here’s how this franchise works.”
Every FDD follows the same 23-section structure.
Boring? Yes.
But it's the single most important tool for evaluating a franchise — if you know where to look.
👉 Pro tip: You can access most FDDs for free on the Wisconsin state website, no sketchy paywalls required.
The 3 Most Important Sections (Don’t Skip These)
Item 7 – Startup Costs
This breaks down how much money you'll actually need to get up and running:
Territory fees, buildout, equipment, working capital — it’s all in here.
🚩 Red Flag: If the total looks too low, it usually means the franchisor isn’t providing much.
Be cautious with “$20K franchises” that offer little to no support.
📌 Item 19 – Earnings Claims (The Juicy Heart of the FDD)
This is the section everyone skips to — and for good reason.
It shows how much money actual franchisees are making.
But here’s the thing: Franchisors aren’t required to disclose earnings.
If they do, it’s because they want to — and they carefully curate what they share.
Which means this is where the BS lives. Let’s break it down.
✅ What to Look For in Item 19
Unit-level economics. Revenue and expenses, not just top-line hype
Median, not just average. A single outlier can skew the data
Context. How many units were included? What geography? What years?
Performance tiers. Top 25%, middle 50%, bottom 25% adds depth
Disclosures of exclusions. If they’re only showing 30 out of 200 franchisees?
🚩 Red Flags That Scream “Run”
No Item 19 at all. Either:
They’re too new
The numbers are bad
Or they don’t want you to know
(Any of those should make you pause.)
“Top 10% of franchisees…”
Pure sales spin. Assume you’re not one of them (yet).Only gross revenue disclosed.
You can’t spend revenue. You need:COGS
Labor
Royalties
Marketing
SDE or EBITDA
No time-in-system breakdown.
If they lump together 10-year veterans and newbies, it’s misleading.“Results may vary” without showing any variance.
If it’s not representative, why is it the only data point?Unaudited numbers.
If it’s not backed by franchisee-reported financials, assume it’s cherry-picked.
📦 The Smell Test
When in doubt, ask yourself:
Can I see the cost structure?
If you can’t estimate net margins, you can’t estimate viability.Is this data representative of new owners?
If not, expect a much slower ramp.Would I still be interested if I made half of what’s listed?
If the answer is no, keep looking.
Use this as your flashlight — not your greenlight.
📞 Pro Tip: Validation Beats Disclosure
Even the best Item 19 is just a starting point.
The real truth comes from franchisee validation — picking up the phone and asking current owners:
“Are your numbers close to what’s in the FDD?”
“What’s your actual take-home after expenses?”
“What support has the franchisor actually provided?”
This is where the truth lives. Don’t skip it.
📈 Item 20 – System Growth
This shows how many units have opened (and closed) over the past 3 years.
You want to see steady, sustainable growth.
🚩 Red Flag: If they’re adding 200 new units per year and closing 50, that’s not growth — that’s churn.
🚩 Bonus Flag: A high number of "terminated" or "reacquired" units often signals failed franchises the parent had to take back.
These are people who paid to quit. Don’t join them.
How to Spot a Money Grab Disguised as a Franchise
Franchise fees and royalties are fine — IF you’re getting value in return.
Ask yourself:
✅ Do they provide real training and onboarding?
✅ Do they help with marketing, tech, and vendor relationships?
✅ Do they have happy, profitable franchisees willing to talk?
If not, you’re not buying a system — you’re just renting a logo.
The Sneaky Stuff Most People Miss
Here are a few more FDD traps I learned from Connor Groce (franchise consultant who's helped 70+ people):
⚠️ No Exclusive Territory Clauses
You build the brand locally — and they sell your neighbor the same one.
⚠️ Absurd Fees Hidden in the Fine Print
Some brands charge for CRM access, call centers, “annual summits,” tech stacks, and more. It adds up.
⚠️ Support That Dies After Signing
They roll out the red carpet… until you wire the money. Then? Good luck.
What You Want to See in a Strong FDD
✅ Detailed Item 19 with transparent averages
✅ Growing system in Item 20 with low closures
✅ Real operational support spelled out
✅ Defined, protected territories
✅ Reasonable fees in Item 6 (royalty + marketing + tech)
If you see all of that?
You might have a real business on your hands.
TL;DR – How to Vet a Franchise Like a Pro
Start with the FDD (especially Items 7, 19, and 20)
Validate with 3–5 franchisees (not just the ones they recommend)
Run the numbers yourself — don’t trust the brochure
Look for post-sale support — not just a training video and a wave goodbye
Ask hard questions — the best franchises will have great answers
Coming Next: The Real Economics
In next week’s email, I’ll break down what these franchises actually cost and make:
Connor’s cost-per-lead and deal flow
Clayton’s $90K investment → $300K in revenue in 3.5 months
Tim’s Chick-fil-A money machine (and why you can’t buy your way in)
We’ll talk ROI, debt, ramp timelines, and real vs. advertised margins.
After that — Part 4: How to Get Started (finding the right fit, working with brokers, avoiding rookie mistakes)
Then we’re hosting a LIVE webinar with Connor Groce to break down his franchise evaluation framework and answer your questions.
Webinars
I’ve been lucky enough to interview and learn from hundreds of entrepreneurs over the past 1.5 years. Now I want to give you a chance to do the same LIVE!
I’ll be hosting webinars on how to get into entrepreneurship, with amazing guests who have ACTUALLY done the thing! Topics like:
Starting a business
Buying a business
Buying a franchise
Using AI in your business
At least once a quarter. Totally free.
First one is June 26th. More info here
This Week’s Nikonomics Podcast Summaries
🎙️ Guest: Connor Groce
Business: Smash My Trash + window cleaning/holiday lighting franchises
Insight: Franchising isn't "business with training wheels"—it's a smart path for operators who want structure, not reinvention.
Model: Low-capex service franchises with route density and repeat customers.
🎙️ Guest: Billy Howell
Business: Stupid Simple Apps—an agency helping non-techies build AI-powered tools Insight: You don’t need a coding background to launch AI tools—Billy built 70+ apps via “vibe coding” and now shows how anyone can build a chatbot using OpenAI, Google Sheets, and Replit.
Model: One-time builds for small businesses, low/no-code automation with GPT integrations.
🎙️ Guest: John Seiffer
Book: Output Thinking
Insight: To scale, stop being “grandma in the kitchen”—define outputs, document systems, and delegate based on frequency and fit.
Model: From solo hustler to hands-off CEO, use John’s 7-bucket framework + 1 “owner” bucket to build a real business.
🎙️ Guest: Chris Koerner
Idea 1: Secret backyard pickleball club—$200 in Facebook ads, 74 leads, full membership.
Idea 2: Bathtub refinishing biz—$500K+/yr, 30% margins, low comp, AI-proof.
Insight: Hyperlocal + AI + quizzes = instant validation & LTV clarity
AI Round Up
Check out how I turned a generic AI into a customized Chief of Staff (with nothing but prompts)!
How'd I Do Today? |
Ask Me Anything
Send me your questions via Twitter, Speakpipe or [email protected].
Thank you for reading, please share with a friend!
Nik Hulewsky