FRANCHISE LAW
Franchise Fee Structure Checklist for Franchisors
Before you sell a single franchise, every charge a franchisee will ever pay you needs to be defined, justified, and written into the Franchise Disclosure Document — because under the FTC Franchise Rule you can only collect fees you have disclosed. This checklist walks the full fee structure in the order it appears in the FDD: the one-time initial fee (Item 5), then the recurring and occasional fees (Item 6), then the build-out costs that round out a franchisee’s total investment (Item 7). Use it to make sure nothing is missing before your document goes to a state examiner or a buyer’s attorney.
It pairs with our guide on setting the right fee and royalty structure, which covers how to land on the actual numbers; this page is the inventory of what to define.
Initial Franchise Fee (FDD Item 5)
The one-time fee a franchisee pays to join the system. Confirm each of these:
- The amount — a single figure or a stated range, and the basis for any variation (territory size, multi-unit deals, veteran or conversion discounts).
- What it covers — recruiting, initial training, site-selection help, and pre-opening support. The fee should track your real cost to open a unit, not function as a profit center.
- When it’s paid — at signing, in full or in installments.
- Refundability — almost always nonrefundable; say so plainly.
- Deferral or escrow — whether registration-state financial-assurance requirements force you to defer collection until the franchisee opens.
Recurring and Occasional Fees (FDD Item 6)
Item 6 is a table of every fee charged during the relationship. Don’t leave gaps — undisclosed fees can’t be collected. Work through this list:
| Fee | What to define |
|---|---|
| Royalty | Rate, the base (almost always gross sales), payment frequency, and any minimum |
| Advertising / brand fund | Contribution rate, what the fund may be spent on, local vs national split |
| Technology fee | POS, software, and platform charges, fixed or per-period |
| Training fees | Cost of additional or replacement-staff training beyond the initial program |
| Transfer fee | Charged when a franchisee sells the business to a new owner |
| Renewal fee | Charged to sign a successor agreement at term end |
| Audit / late fees | Charges triggered if reporting is short or payments are late |
| Local advertising minimum | Required spend in the franchisee’s own market |
For the franchisee-side explanation of the biggest ongoing charge, see what a royalty fee means in a franchise agreement.
Initial Investment (FDD Item 7)
Item 7 is not a fee you collect, but it belongs in the structure because it sets the franchisee’s all-in cost to open. It states a low-to-high range covering real estate and build-out, equipment, signage, opening inventory, the initial fee, and — critically — additional funds, the working capital needed to cover the first three months or so of operation. An Item 7 that omits realistic working capital is a common red flag and a frequent source of franchisee disputes.
The Legal Layer
Three rules govern the whole structure:
The Franchise Rule applies once an arrangement includes a required payment of at least $500 in the first six months (one of the three definitional elements), and a July 2024 inflation adjustment exempts arrangements requiring less than $735 in initial payments. Real franchise systems sit well above both thresholds and must disclose.
Every fee must appear in the FDD before you charge it, stated as a formula or range. You may negotiate different terms with different franchisees, but material deviations have to be disclosed, and several states require attaching the range of negotiated terms from the prior year.
Finally, registration states review your Item 21 financial statements and may condition registration on fee deferral, escrow, a bond, or a parent guarantee if your balance sheet is thin. That can delay when you actually receive initial fees, which is why the checklist flags deferral under Item 5. Where these requirements apply is mapped in FDD registration states.
Final Pre-Sale Check
Run this last pass before issuing the FDD: every charge above is either listed in Item 5/6 or consciously excluded; each amount is a defensible figure or range, not a guess; Item 7 includes realistic working capital; and the numbers you’ll actually charge match the numbers on the page. If all four hold, your fee structure is ready for state review.
Frequently Asked Questions
What fees must be disclosed in the FDD?
The initial franchise fee goes in Item 5; royalties and all other recurring or occasional fees — advertising contributions, technology, training, transfer, renewal, and audit or late fees — go in Item 6. Total estimated startup cost, including the initial fee and working capital, is disclosed as a range in Item 7.
Can a franchisor charge a fee that isn’t in the FDD?
No. Under the FTC Franchise Rule a franchisor may only collect fees disclosed in the FDD. Charging undisclosed fees creates compliance exposure and is a common basis for franchisee complaints and state action.
What is the difference between Item 6 and Item 7?
Item 6 lists ongoing and occasional fees the franchisee pays the franchisor during the relationship. Item 7 estimates the franchisee’s total initial investment to open — build-out, equipment, the initial fee, and working capital — most of which is paid to third parties, not the franchisor.
Do all franchisors charge the same fees?
No. Structures vary widely by industry and brand. What is consistent is the obligation to disclose every charge in the FDD before collecting it and to apply the structure consistently across franchisees.
A clean, defensible fee structure is the backbone of an FDD that survives state review. Reidel Law Firm builds complete franchise programs — FDD, franchise agreement, and state registration filings — for emerging franchisors on transparent flat fees. Launch your franchise the right way.
