One of the most pivotal roles you hold as a franchisor is creating your franchise disclosure documents (FDD). Out of the 23 specific items in the FDD, Item 7 covers the “estimated initial investment.” Continue reading to learn more about what is included in Item 7 and how one of the experienced franchise law attorneys at FortmanSpann, LLC can help you assess this.
What is Item 7?
Simply put, Item 7 is the item in which a franchisor must disclose the lowest and highest estimate of how much it is going to cost a prospective franchisee to establish and open the franchised business.
Evidently, deciding to buy into a franchise is a major business decision for a prospective franchisee. And this initial investment may just make or break their financial stability. This is why it is so important for a franchisor to provide an accurate assessment of what the expected initial capital requirements are going to be.
What is included in this specific item of the franchise disclosure document?
Importantly, there are specifics that a franchisor must include in Item 7 of the FDD that go far beyond a simple low and high estimated cost. The Federal Trade Commission’s amended Franchise Rule rolls out what content needs to be included in this specific item.
What’s more, this federal law also holds that this content must be presented uniformly. This presentation must be in a tabular format that contains five specific columns. Above the table, the title “YOUR ESTIMATED INITIAL INVESTMENT” should be written in bold type and capital letters. And the five specific columns must overview the following:
- Column 1: the type of expenditure: this requires specific typical expenses to be disclosed, when applicable to the franchised business, such as initial franchise fees, training expenses, real property, equipment, inventory, and prepaid expenses.
- Column 2: the amount of expenditure: this requires a low to high estimate range to be disclosed if the exact amount is unknown. And if there are uncertain property costs that cannot be stated in a low to high estimate range, then this requires property size and planned locations to be disclosed.
- Column 3: the method of payment: this requires a “lump sum” or “as incurred” method of payment to be disclosed.
- Column 4: the due date of payment: this requires an “at the signing of the franchise agreement,” “during training,” “prior to opening,” or “as incurred” due date of payment to be disclosed.
- Column 5: to whom payment must be made: this requires a “franchisor,” “vendor,” “supplier,” or “employee” as a recipient of the payment to be disclosed.
With all that being said, you must comply with the federal regulations set forth for Item 7 of the FDD. It should go without saying that you must consult with one of the skilled franchise law attorneys immediately. Give us a call whenever you can.