FDD Item 5: Initial Fees

Item 5 of the Franchise Disclosure Document lists the fees you pay the franchisor or its affiliates before your business opens. The largest is usually the initial franchise fee.

What Item 5 must show

The Franchise Disclosure Document (FDD) is the document a franchisor must give a buyer at least 14 calendar days before the buyer signs or pays anything. The Federal Trade Commission's Franchise Rule sets its 23 sections, which are called Items.

• The amount of each initial fee, and when it is due.
• Whether any part of the fee is refundable, and under what conditions.
• If the fee is not the same for every buyer, the range or the formula used to set it in the last fiscal year.

Fees that often appear in Item 5

• The initial franchise fee for one location.
• A development fee for the right to open several locations.
• Fees for training, an opening package, or software set up before opening, when they are paid to the franchisor.

How to use it in your budget

Item 5 fees are one line inside the total investment in Item 7. Check that the two match. Ask whether the franchisor has charged a lower fee to veterans, multi-unit buyers or conversions, because Item 5 must disclose a range when fees varied.

Common questions

Is the initial franchise fee refundable?

Item 5 must say whether any part of it is refundable and under what conditions. Many are not refundable once paid.

Where is the franchise fee listed in the FDD?

It is in Item 5, Initial Fees. It also appears as a line in the Item 7 initial investment table.

Sources

• FTC Franchise Rule, 16 CFR Part 436
• FTC, A Consumer's Guide to Buying a Franchise (PDF)

This page is an educational summary and is not legal advice. Read the FDD itself, and have a franchise attorney review it before you sign.