What Fees are Listed in a Franchise Disclosure Document?
There are few documents more critical to a successful franchise business than the Franchise Disclosure Document (FDD). In an FDD, a franchisor is required to explain their business model, systems, and any restrictions or requirements a franchisee must agree to follow. Part of the franchisor’s disclosures include details about any fees related to purchase and ownership of a franchise, including the initial franchise fee and any ongoing costs payable to the franchisor. Understanding all of the fees included in the FDD can make choosing and comparing franchise opportunities a more straightforward process.
Buying a franchise is not like starting other businesses. In exchange for the right to use a franchisor’s name, and benefit from their business model, systems, and brand, a franchisee can expect to pay a number of expenses and fees. The cost of the initial franchise fees, while important, is just a starting point. Other expenses required to get your new franchise business up and running may include things such as rent or building costs, equipment, starting inventory, state or local operating licenses, and insurance.
In addition to these costs, a franchisor’s FDD will include a range of other payments they require from their franchisees. For example, some franchisors require each owner to pay royalties based on a percentage of their gross income. This could be a weekly or monthly amount, and may be required for the duration of the franchise agreement, whether your business makes a profit or not. Additionally, some franchisors will ask for a “grand opening” fee to promote the opening of a new location.
It is a good idea to check the FDD of any franchise opportunity carefully for any additional fees, including those related to advertising, technology use, or even training. Some national chains will provide professional marketing campaigns for their franchise locations, but require each franchise owner to pay a portion of the cost. Other fees that may be included in the FDD are costs of acquiring or upgrading technology and other equipment, much of which may be a necessary component of the franchisor’s proprietary systems.
In addition to fees, the FDD should be checked carefully for costs associated with services the franchisor has agreed to provide, such as business training. While most franchisors offer some kind of training to new franchisees, not all of them include the cost of training in the initial franchise fee. Knowing whether your top pick includes training, how much, what training entails and at what cost are all important details to have before making any final decisions. Whether any fees listed in the FDD are one-time-only or ongoing, they should be included in the overall cost of running your business.
While the fees charged by each franchisor may vary, it is important to read the entire FDD carefully to avoid unpleasant surprises. The FDD will typically be lengthy, requiring significant effort and focus to read and understand. Indeed, the Real Property Management FDD tops 300 pages in length. As a rule, the more information you have about your chosen franchisor the better. But before signing a contract, it’s important to understand what is on every page of your franchise agreement.