The Franchise Disclosure Document (FDD) Item 5 Explained

27.11.22 07:56 PM By Stacey Riska

The Franchise Disclosure Document (FDD) Item 5 Explained

We're going to be covering section/item five of the Franchise Disclosure Document (FDD), which is the initial franchise fee. These are the fees involved in acquiring the franchise, typically the franchise fees, advertising fees, and your royalties here. So essentially it's what are you going to put out of your pocket to the franchisor before you even get to the point where you're going to start operating. 

In section/item five it's going to be the upfront cost that you're going to need to invest monetarily, which would include your franchise fee. In addition, sometimes there's inventory, equipment, and signage. These are the types of costs that are all going to be outlined in section/item five of the FDD. Now, to give you the big picture, sections/items five, six, and seven really all kind of relate together. They're just broken up into different sections and we’re not really sure why they do that. 

So section/item five is kind of those initial hard costs that you're going to have to invest to become a franchisee. Section/Item six is more about the ancillary costs say if there are training or marketing fees, those kinds of fees. And then the most important is item seven which lays it all together and shows your true total investment.

What we’ve seen in the FDDs that we have had the opportunity to look at is that they're not always consistent. Sometimes the fees get moved between these sections, so be careful. The key is that you want to make sure that you have a clear understanding of everything you're going to need to put out of your pocket to one get up and operating, and number two to stay operating. It's not always as clear as it should be in our opinion. This is where doing a really good job of due diligence in talking to the franchisees can fill in some of those blanks. You want to make sure you're asking them the right questions regarding these fees and basically validating that they're correct in the Franchise Disclosure Document versus what their franchisees are seeing.

To add another layer to that is to understand where and how the franchisor gets paid because some things are paid immediately like upon signing the franchise agreement. But for other things like paying for equipment or signage or inventory you're going to want to know who is getting paid for those. Is it the franchise or is it a vendor? When and where and how is that money paid? Like is it paid upfront? Is it net 30 days? So, understand the monetary transactions of these because that's going to help you build out your budget.

When we think about it, you're likely going to pay these fees at different times. It's an ongoing process from the time that you pay the franchise fee until you're up and operating and until you're actually in business and you're starting to see some of the recurring payments that you would see in section six and or section seven.

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 Author Bio

I’m Stacey Riska aka “Small Business Stacey”, your franchise placement specialist. I help aspiring business owners find the PERFECT franchise so they can get to the next level in life and business.
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