When a franchisor is building their franchise disclosure document (FDD), they must confirm that they are disclosing all upfront fees that a franchisee must pay before they open their franchised business. Importantly, they must inform of this in Item 5: Initial Fees. Continue reading to learn what you should expect from Item 5 of the FDD and how one of the experienced franchise law attorneys at FortmanSpann, LLC can help you prepare for this.
What is included in Item 5 of the FDD?
To reiterate, Item 5 of the FDD covers initial fees. With this, the Federal Trade Commission (FTC) defines initial fees as “all fees and payments, or commitments to pay, for services or goods received from the franchisor or any affiliate before the franchisee’s business opens, whether payable in lump sum or installments.”
The reason why franchisees must pay initial fees is so that they can compensate the franchisor for the license granted to use their trademarks, systems, and proven processes, along with compensating the franchisor for their administrative tasks and pre-opening support.
What else can I expect from Item 5?
In addition to the initial fee, there are also upfront pre-opening fees and other franchise fees that are disclosed in Item 5 of the FDD. Some examples of such are as follows:
- Upfront pre-opening fees: these fees may relate to that of training, pre-opening inventory, necessary equipment, marketing, etc. These may vary by franchise and industry, but nonetheless must be disclosed so that a franchisee can assess the full cost associated with investing in a franchise.
- Installment payments: this disclosure states whether a franchisee is required to pay for initial fees in a lump sum or on an installment basis. If on an installment basis, the franchisor must detail the terms and schedule for the payments.
- Uniformity of fees disclosure: this disclosure states whether these initial fees are charged uniformly for every franchisee candidate. If not charged uniformly, the franchisor must detail the range of fees paid during the last fiscal year or the formula used to calculate the fees during the last fiscal year.
- Refundability of fees disclosure: this disclosure states whether a franchisor elects to make any of the initial fees partially or wholly refundable. The FTC does not require this, but if a franchisor still chooses this route, they must detail the terms and conditions of the refund.
With that being said, if you require assistance with navigating this section of the FDD, then you must seek the advice of a skilled franchise law attorney. We will ensure that the contents of Item 5 are accurate and free of any misleading information. Nonetheless, we urge you to contact FortmanSpann, LLC at your earliest convenience. We look forward to hearing from you.