Initial and Ongoing Costs: FDD Items 5-7

So you’ve found the franchise concept that seems like the perfect fit for your skills, interests and lifestyle. But what is the “down payment” (or initial cost) going to be? And equally important, what do ongoing fees look like to remain supported by the franchise system?

Enter items five through seven of the Franchise Disclosure Document (FDD). These items cover initial fees, other fees and the overall estimated initial investment.

The initial fee details the cost for ownership rights. In some instances, incentives or discounts are offered to benefit certain groups, e.g., existing employees that buy the franchise, multi-unit operators that agree to open multiple locations, or a specific demographic, like armed forces veterans. There may also be additional “territory fees” for business models in which franchisees can service more than one city under one territory.

Young Kim, a former consumer product merchandiser from the Northeast, recently went through the franchise selection process and noted that keeping the big picture in mind is a useful tactic for prospects to select a franchise that will be profitable long after the initial investment is made.

“I didn’t look at the investment simply as an initial fee,” Young said, when he recently invested in The Cleaning Authority of Newtown, Pennsylvania. “I didn’t look at the decision as an individual franchise fee or territory fee. That was just one ingredient of a larger investment, so I tried to look at the whole picture.”

Beyond the initial fee, item six details other fees where prospective franchisees can investigate elements like royalty fees, national ad and marketing fund fees, call center resources, trainings and audits. Essentially, this section lays out the cost of the “extras” that a franchise brand can provide, which independent business owners don’t get rolled into a neatly presented package if they start a business.

“I often advise franchise prospects to understand and evaluate the value of these fees in comparison to the cost it would involve to set up these resources independently,” said Iric Wexler, chief development officer for The Cleaning Authority. “About 60 percent of our franchise prospects are savvy MBA level business people and understand the value of the fees for the model we have established.”

Item seven provides a summary section for the franchisor to lay out a detailed explanation of all costs involved in initial investment. The section is routinely presented as a chart that includes cost ranges for the various elements that involve cost. Franchisees have the option to invest the minimum value in the range to keep initial costs down, although franchisees like Kim advised investing high upfront in order to increase the return on invest in the long term.

Darryl Nevins, a franchisee of Mosquito Joe* in Kingwood and The Woodlands, Texas bought into the brand specifically because it was a franchise option with a low initial investment. With a typical total initial investment of $94,500, the brand is known as a great option for entrepreneurs looking to pursue small business ownership without breaking the bank.

“Beyond trusting the FDD, I would advise any franchise prospect to ‘trust their gut’ as well as spend as much time as possible doing validation calls with other franchisees involved with the brand to really understand what goes into business ownership,” Nevins said.

Wexler echoed a similar sentiment when it comes to advice for prospects in the selection process.

“There are very few things in an FDD that are going to determine whether or not you’re going to be successful if the brand doesn’t match your strengths and interests,” Wexler said. “Franchising is a brilliant business model as long as you bring the right operator into the right model.”