Item 5 contains the initial franchise fee and any other fees a franchisee must pay the franchisor or affiliate before opening the franchised outlet. Other fees may include items like equipment, software, marketing materials, pre-opening inventory or vehicle wrap. Only goods and services purchased from the franchisor or an affiliate before opening belong in Item 5. If these items are purchased from a third-party supplier, we don’t include those expenditures here.
Keep in mind that the total of the initial fees is referenced on the cover page. A franchisor will usually get the question each year about why a franchisee’s range of initial fees paid to the franchisor is so high. You have to remember to explain to your prospective franchisees that it is more than just an initial franchise fee, it is all fees paid to the franchisor or an affiliate, and these fees will all be listed in this section.
Discounts for Candidates
Franchisors can choose to offer discounted franchise fees to qualified candidates. Many offer discounts, the amount is up to you, to U.S. Veterans, first responders, first “x” amount of franchisees, etc. If you are going to offer discounts, first you should organize what requirements are needed to be met to be eligible to receive them and what the percentage or dollar amount they will be discounted. If a franchise candidate is applicable for a discount you will need to note this within an addendum for their agreement.
If you are considering offering discounts to honorably discharged U.S. veterans, you can learn more about marketing this through VetFran, if interested.
Tips
Not sure how much to charge for your franchise fee… converse with your consultant or reach out to your Spadea Lignana team for further assistance. You are also encouraged to research your competitors too.
Sample Item 5-1
ITEM 5: INITIAL FEES
All Belmont Muffler Shops franchisees pay a $42,000 lump sum franchise fee when they sign the franchise agreement. Belmont will refund the entire amount to you if we do not approve your application within 45 days. Belmont will refund $9,000 of this fee if you do not satisfactorily complete your two-week training. No refunds are available under any other circumstances.
This is a sample section from a fictional FDD for Belmont Muffler Shops that was prepared by the Federal Trade Commission as a compliance guide for franchisors preparing their FDD. These are used to provide an idea of what these items may look like in an FDD, but keep in mind, your FDD will most likely vary significantly from these examples.
Sample Item 5-2
ITEM 5: INITIAL FEES
You must pay a franchise license fee of $1,000 per thousand licensed drivers who reside within your exclusive area when the franchise agreement is signed. The number of licensed drivers is determined by the latest abstract of the state agency which issues driver’s licenses. The minimum fee is $20,000. When you send your application, you must pay a non-refundable $500 application fee. You must pay an additional $5,000 when you receive your equipment. The balance of your fee is payable in 12 equal monthly installments of $1250 in the case of the minimum fee. The first installment payment is due 1 year after your shop opens. Belmont charges 10% interest, on an annual basis, on the unpaid balance. Interest compounds daily and accrues from the date that you receive your equipment. All buyers pay this uniform fee and receive the same financing terms on the fee. If your application is not accepted, Belmont retains the $500 for investigative costs, but you are not liable for the remainder of the initial fee. Belmont does not give refunds under any other circumstances.
This is a sample section from a fictional FDD for Belmont Muffler Shops that was prepared by the Federal Trade Commission as a compliance guide for franchisors preparing their FDD. These are used to provide an idea of what these items may look like in an FDD, but keep in mind, your FDD will most likely vary significantly from these examples.
