Item 5: Initial Fees | Franchise Disclosure Documents

Item 5: Initial Fees

Consistent with the UFOC Guidelines, Item 5 of the amended Rule requires the disclosure of any initial fees and any conditions on their refundability. “Initial fees” means “all fees and payments, or commitments to pay, for services or goods received from the franchisor or any affiliate before the franchisee’s business opens, whether payable in lump sum or installments.”

Uniformity of Fees Disclosure

In some instances, franchisors do not charge the same initial fees to every prospective franchisee. Where fees are not uniform, franchisors have a choice. They can disclose a range of fees paid in the last year. For example, fees may have varied over time because of increases in costs. In such instances, a range of fees is acceptable. In the alternative, franchisors can disclose the formula used to calculate the initial fees paid in the last fiscal year, along with any factors other than the formula itself that determined the fee amount. For example, franchisors may calculate initial fees based on a dollar amount per number of potential consumers in the prospective franchisees’ territory.

If a franchisor only occasionally sells company-owned outlets to franchisees, such isolated sales may not reflect the typical initial fees paid by franchisees. Inclusion of the fees charged in such sales in Item 5 (and on the cover page), even in the calculation of a range of initial fees, could skew the disclosure of initial fees franchisees typically pay the franchisor. Thus, fees from occasional sales of company-owned outlets need not be included in Item 5, and should not be included if doing so would make the fee disclosure misleading.

Refunds

Item 5 requires a disclosure about the refundability of initial fees. Franchisors are not required to refund initial fees paid by prospective franchisees. Nevertheless, if the initial fees are refundable in whole or part, the franchisor must state the terms and conditions under which a refund can be obtained.

Installment Payments

Finally, if any initial fees may be paid on an installment basis, Item 5 requires a disclosure of the installment payment terms. Thus, where the initial fees include payments for goods, equipment, or other items on an installment basis, the franchisor must disclose the payment terms. The amended Rule makes clear that franchisors have the option of disclosing installment payment terms either in Item 5 or in Item 10 (the financing section) of the disclosure document.