You may expect to put money down upon first opening a franchised business. But with such a large initial investment, you want to fully understand what your hard-earned money is going towards. Continue reading to learn what your initial investment in a franchise will cover and how one of the experienced franchise acquisition attorneys at FortmanSpann, LLC can support you through this significant financial situation.
What facets does my initial investment in a franchise cover?
First of all, you may have to pay for initial franchise fees, which essentially give you the license to own and operate the franchised business. What’s more, you may expect to pay for startup expenses, which may consist of purchasing necessary equipment; paying for the property build-out; making a down payment on a mortgage; making a security deposit on utilities; and more.
While these may be considered short-term expenses, you may also have to consider long-term expenses that come with initializing your franchised business. Essentially, these long-term expenses are not necessarily out-of-pocket fees. Rather, they may look to long-term legal obligations that you are automatically committing to when you commit to a franchised business. They may be viewed as a form of insurance if your business venture, unfortunately, does not pan out as you anticipate. Examples are as follows:
- The investment of your reserve capital: these are additional funds you may need to invest in the case that your franchised business goes through periods of unprofitability and negative cash flow.
- The investment of your post-termination restrictive covenants and fees: this is considered the cost of restrictions for what you can and cannot do in the case that you elect to shut down your franchise.
- The investment of your time: this is considered your missed opportunity costs and missed income in the case that your franchised business does not work out.
How should a franchisor disclose these initial costs?
As far as computable initial investments go, a franchisor must disclose these to you before you follow through in this transaction. That is, according to the franchise rule enforced by the Federal Trade Commission, a franchisor is required to share estimated initial investment expenses in Item 7 of their franchise disclosure document (FDD). This specific item of the FDD must be titled “YOUR ESTIMATED INITIAL INVESTMENT” and be followed by five columns in tabular format. The five columns are as follows:
- Column 1: the type of expenditure.
- Column 2: the amount of expenditure (i.e., low to high estimate range).
- Column 3: the method of payment.
- Column 4: the due date of payment.
- Column 5: to whom the payment must be made.
You must take the initiative and reach out to one of the skilled franchise law attorneys as soon as you possibly can. Our team at FortmanSpann, LLC will be awaiting your phone call.