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Decoding the Franchise Disclosure Document, from A-Z – Item #5

Items #5-7 cover the fees and investments required to open your franchise. To begin, Item #5 gives a comprehensive overview of the initial fees owed directly to the franchise upon signing your franchise agreement. These fees essentially pay for your right to use their brand. It’s a one-time, lump-sum payment to join their exclusive club.

What you’ll learn:

  • Any and all up-front fees owed to the franchise (including negotiable ranges, if applicable).

Item #5 really contains some very important information as it specifies one of the main fees you will pay for the franchise.

Why is this important

Often, a prospective franchisees final decision has a lot to do with the investment required at the beginning. You should have a good idea of what your start-up budget is, including how much you can cover in franchise fees, which range anywhere from $10,000 to hundreds of thousands. If the initial fees alone account for a considerable part of your budget, then you may want to reconsider and look into less expensive franchises with lower initial fees.

In addition, consider what you are getting for your initial fee. Remember, this fee is a significant part of the overall fee you are paying in exchange for the right to use someone else’s brand. If it’s a fairly small franchise, with only a handful of locations, but their initial fees are at the higher end, don’t be afraid to ask why. In other words, make sure you’re getting what you pay for. And visa-versa; if the initial fees are low, and you were expecting more because you’re buying into a fairly large franchise, look into why they might be so low. Have they recently reduced their initial fees? Have they had current problems that may have caused them to drop their prices? Are their royalties higher? Point being, make sure that the initial fees are a fair representation of what you’re getting for them.

Finally, initial franchise fees used to be non-negotiable. In recent years, however, many franchises have discounted their fees to match economic conditions. You may see a range of fees in the FDD. If so, ask what the qualifications are to pay the lower range. This is entirely up to the franchise, but they’re giving negotiable ranges for a reason, so it definitely doesn’t hurt to ask how it works.

The bottom line is that item #5 represents your initial cost to the franchise in return for the use of their name. This is the entire reason for buying a franchise; to purchase into a proven system, brand and reputation. Consider this initial fee carefully and make sure that you’re getting your moneys’ worth and staying within your own budget.

Next week we’ll tackle Item #6 which discloses the other fees involved, including those that are ongoing.