FDD Items 5 & 6 - Every Fee a Franchise Can Charge You
Items 5 and 6 of the FDD disclose every fee the franchisor can charge you—upfront and ongoing. These two items, more than any others, determine the financial structure of your franchise relationship.
Read them carefully. Fees you don't know about become surprises you can't afford.
Item 5: Initial Fees
Item 5 covers all fees due before your franchise opens.
The Franchise Fee
The headline number—typically $20,000 to $50,000 for most concepts, though it can range from under $10,000 to over $100,000.
| What to Understand | Why It Matters |
|---|---|
| Amount | Your upfront commitment |
| What it covers | Training, support, brand rights |
| Refundability | What happens if you don't open |
| Payment timing | When it's due |
The franchise fee is almost never refundable. Once you pay it, that money is gone whether or not you ever open a location.
Other Initial Fees
Beyond the franchise fee, Item 5 may list:
| Fee Type | Typical Range | Purpose |
|---|---|---|
| Training fee | $0 - $15,000 | If charged separately from franchise fee |
| Site selection fee | $0 - $10,000 | Assistance finding location |
| Grand opening marketing | $5,000 - $25,000 | Required opening promotion |
| Initial inventory | Varies | Required starting stock |
| Technology setup | $2,000 - $10,000 | POS, software, hardware |
| Signage package | $5,000 - $30,000 | Required brand signage |
The Hidden Initial Costs
Some "fees" aren't listed as fees because they're framed as purchases:
- Required equipment packages
- Initial supplies from approved vendors
- Architectural/design fees
- Permit and licensing assistance
These may appear in Item 7 (estimated initial investment) but understanding what's truly required versus recommended matters for your financial planning.
Item 6: Other Fees
This is where most franchisees get surprised. Item 6 lists every ongoing fee—and there are usually more than you expect.
Royalty Fees
The primary ongoing fee, typically calculated as a percentage of gross sales.
| Royalty Structure | How It Works |
|---|---|
| Percentage of gross | Most common: 4-8% of all revenue |
| Flat fee | Fixed amount regardless of sales |
| Sliding scale | Percentage changes based on volume |
| Minimum royalty | Floor amount even if sales are low |
Key point: Royalties are calculated on gross sales, not profit. A 6% royalty on $800,000 in sales is $48,000—regardless of whether you made money.
Marketing/Advertising Fund
Almost every franchise requires contributions to a system-wide marketing fund.
| Typical Structure | Details |
|---|---|
| Percentage | Usually 1-3% of gross sales |
| Control | Franchisor directs spending |
| Local requirements | Often additional local marketing required |
| Transparency | Varies by franchisor |
You're paying into a fund controlled by the franchisor. The FDD should explain how these funds are used, but you have limited say in spending decisions.
Technology Fees
Increasingly common as franchises become more tech-dependent:
| Technology Fee Types | Typical Range |
|---|---|
| POS system | $100 - $500/month |
| Proprietary software | $50 - $300/month |
| Website/digital | $50 - $200/month |
| Reporting systems | $50 - $150/month |
These can add up to $500-$1,000+ monthly before you've paid royalties or marketing fees.
Additional Fees You'll Find in Item 6
| Fee Type | What It Covers |
|---|---|
| Transfer fee | If you sell your franchise (often $5,000-$25,000 or % of sale) |
| Renewal fee | At end of initial term (often 25-50% of current franchise fee) |
| Audit fee | If franchisor audits your books and finds discrepancies |
| Training fee | For additional/replacement employee training |
| Conference fee | Required attendance at annual meetings |
| Insurance | Required coverage types and minimums |
| Relocation fee | If you move your location |
| Product testing | For new menu items or services |
The "As Incurred" Trap
Many fees in Item 6 are listed with amounts "as incurred" or "currently $X, subject to change."
This means:
- The fee can increase without amending the FDD
- You're agreeing to pay whatever it becomes
- Budget projections may understate actual costs
When building your financial model, assume "as incurred" fees will be at the higher end of any stated range, and that they'll increase over time.
Calculating Your True Fee Load
Add up everything in Items 5 and 6 to understand your total fee obligation.
Example for a $750,000 annual revenue location:
| Fee | Calculation | Annual Cost |
|---|---|---|
| Royalty (6%) | $750,000 × 6% | $45,000 |
| Marketing fund (2%) | $750,000 × 2% | $15,000 |
| Technology fees | $400/month | $4,800 |
| Required insurance | $500/month | $6,000 |
| Total ongoing fees | $70,800 |
That's $70,800 annually—9.4% of gross revenue—before rent, labor, supplies, or any other operating costs.
The Percentage That Matters
Calculate your total fee load as a percentage of gross sales:
| Your Sales | Total Fees | Fee as % of Sales |
|---|---|---|
| $500,000 | $55,000 | 11% |
| $750,000 | $70,800 | 9.4% |
| $1,000,000 | $86,600 | 8.7% |
Higher sales dilute the fixed-fee components, improving your percentage. Lower sales concentrate them.
Questions to Ask
After reviewing Items 5 and 6:
About Initial Fees:
- What exactly does the franchise fee cover?
- What triggers additional fees during the opening process?
- Under what circumstances would I owe additional fees before opening?
About Ongoing Fees:
- How have fees changed over the past 5 years?
- What fee increases are planned or anticipated?
- How is the marketing fund spent, and can I see a breakdown?
About Fee Enforcement:
- What happens if I'm late on royalty payments?
- How are audits conducted?
- What triggers penalty fees?
The Reality Check
Franchise fees aren't optional costs—they're the cost of being in the system. Before signing, make sure you can:
- Pay all initial fees without stretching your capital too thin
- Cover ongoing fees from projected cash flow
- Absorb fee increases that will likely come over your term
- Accept the fee structure as the permanent cost of this business model
If the fees don't work in your financial model, the franchise doesn't work—no matter how much you like the brand.
Talk to our team about what the process actually looks like at unitlockfranchising.com/get-started.
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