How to Buy a Franchise: Exploring Items 6 and 7 of the FDD

When reviewing a brand’s Franchise Disclosure Document (FDD), you’ll want to pay particular attention to Items 6 and 7. These cover the initial fees required to open your business as well as the ongoing costs you’ll incur as a franchisee. In this episode of the “How to Buy a Franchise” Masterclass, 1851 Franchise publisher Nick Powills delves into Items 6 and 7 to provide a better understanding of these FDD sections. 

What You Need to Know

As mentioned in a previous Masterclass, Item 6 provides information related to ongoing costs (such as royalty fees and marketing funds) required to run a franchise, while Item 7 gives a detailed estimate of the total investment needed to open the franchise and keep it running. 

One element disclosed in Item 6 is the royalty fee, which is expressed as a percentage of your sales and represents a continuous financial commitment to the franchisor. By examining the specifics of the royalty fee laid out within Item 6, you can project the impact on your overall profitability and plan for sustained financial success. 

Estimated Initial Investment

When conducting your due diligence and reviewing these sections, make sure to note the initial investment range presented by the franchisor in Item 7. While there might be a range, we recommend that you keep the higher number in mind, as it typically reflects a more accurate representation of the actual costs involved. That said, some franchises do have a lower cost of investment that provides an opportunity for aspiring franchisees to enter at a more affordable rate. But, as Powills notes, this can lead to discrepancies between the franchisee-franchisor relationship. 

“The problem is, when a franchisor sells on the lower number and the number is higher, then automatically, very early on in the relationship, there’s some turbulence,” said Powills.

As part of your research, it’s recommended that you reach out to other past and current franchisees within the system. Ask them about their initial investments and if they encountered any unexpected expenses during the ramp-up process. This will help you prepare for any potential blind spots as you make the same journey. 

Item 7 includes a variety of different costs associated with the initial investment, including the franchise fee, construction and leasehold improvements, equipment, inventory, point of sales systems, vehicles, insurance, and licenses and permits. These will vary based on the franchise, but many brands also have a section dedicated to “Grand Opening Marketing.” This baseline reveals the minimum you’ll be responsible for paying for marketing the opening of your franchise, but Powills suggests spending more to increase brand awareness. 

“Especially on unit one, you’re going to want to spend more on marketing your business and getting out there into your community,” said Powills. 

The Importance of Due Diligence 

The importance of franchise research simply cannot be overstated. When conducting your due diligence, you should analyze the FDD very carefully as it can serve as a guide to understanding your relationship with the franchisor and the financial commitments you’re signing up for. Knowing how to review Items 6 and 7 will not only prepare you for the initial investment but will also help you get a better grasp on how to plan for long-term success. 

Are you in the process of seeking out franchise opportunities? We can help! Check out https://1851growthclub.com/ for more information.