Within Item 6, the franchisor must disclose all other fees that a franchisee must pay to the franchisor throughout the terms of the franchise agreement. These fees typically include ongoing royalties, brand development funds, marketing, technology, training and other fees specific to the franchisor.
For franchisors in the process of developing their first Franchise Disclosure Document (FDD) and franchisees reviewing an FDD, navigating the fee disclosures in the document can sometimes get confusing.
Similar to Item 5, which requires the disclosure of initial fees, Item 6 is designed to help prospective franchisees understand the capital requirements for opening a franchise business before entering into an agreement with the franchisor. Because of that, franchisors must disclose the correct fees in Item 6 to ensure the information provided to franchisee candidates is accurate and complete.
In this article, we’ll explore the types of fees and information that must be disclosed in Item 6 of the FDD for it to be compliant with federal franchise laws.
Types of Fees to Disclose in Item 6
According to 16 C.F.R. § 436.5(f), within Item 6 franchisors must disclose “all other fees that the franchisee must pay to the franchisor or its affiliates, or that the franchisor or its affiliates impose or collect in whole or in part for a third party” in tabular format. Franchisors are also required to disclose any purchasing or advertising cooperatives and the participation in, and control over, such cooperatives by a franchisor-owned outlet.
Common fees disclosed in Item 6 include, but are not limited to, recurring fees like ongoing royalties, marketing, and brand development as well as occasional fees for additional training, technology and more. Because the fees associated with operating a franchise vary by business and industry, franchisors should consult an experienced franchise attorney when preparing Item 6 of their FDD.
Tabular Format of Disclosures in Item 6
The amended Franchise Rule requires that the fees disclosed in Item 6 be presented in tabular format within the FDD. The title “OTHER FEES” must be stated above the table in capital letters and in bold type.
Fee Information in Columns
Per the amended Franchise Rule, the fee disclosure table in Item 6 should include four columns that contain specific information about each fee.
Column 1: The type of fee (such as royalties, lease negotiations, etc.);
Column 2: The fee amount;
Column 3: The fee’s due date;
Column 4: Remarks related to the fee that are necessary for clarification.
Remarks in Column Four
According to the amended Franchise Rule, column four should include “remarks, definitions, or caveats that elaborate on the information in the table.” In situations where remarks are long, franchisors are permitted to use footnotes. The remarks in the fourth column must address:
Whether fees are only payable to the franchisor;
Whether fees are imposed and collected by the franchisor;
Whether the fees are refundable and, if so, the circumstances for obtaining a refund;
Whether the fees are imposed on and collected from franchisees uniformly;
The voting power of franchisor-owned outlets on any fees imposed by cooperatives. If franchisor-owned outlets have controlling voting power, the maximum and minimum fees that may be imposed must be disclosed in the remarks column.
In situations where fees may increase, franchisors must disclose either the maximum amount of the increase or the formula used to calculate the increase. For example, a franchisor may state a percentage of gross sales as the formula for determining a fee increase, so long as the franchisor defines the term “gross sales.”
Types of Payments Covered in Item 6
The fees disclosed in Item 6 should address only those payments made directly by the franchisee to the franchisor or their affiliate, or which are collected directly by the franchisor or their affiliate from the franchisee to benefit a third party. Any payments made directly to a third party by the franchisee (such as the costs of utilities) should not be included in Item 6.
For franchisors in the process of developing their FDD, making sure the document is legally compliant is critical. This includes ensuring that all fees are disclosed accurately and completely in Item 6. A qualified franchise attorney can help you assess your FDD’s legal compliance and offer recommendations for improvements.
For franchisees in the process of reviewing an FDD before investing in a franchise, it’s important to keep in mind that the fees disclosed in Items 5 and 6 don’t necessarily tell the whole story when it comes to the capital requirements for opening a new franchised business. In some situations, actual startup expenses can exceed the fees disclosed in the FDD.
Whether you’re a franchisor or a franchisee, seeking the advice of an experienced franchise attorney when developing or reviewing an FDD is critical for making sure you’re legally protected and franchising the right way.