We are picking up where we left off. We are reviewing the different items that are in the Franchise Disclosure Document (FDD). We've covered all the way up to Item 10 in our previous episode. So please go back and watch those if you get a chance. You'll learn a lot about Item 11 if you do that. We want to start this session with a disclaimer we are not attorneys, so you should seek professional legal advice in addition to what you're learning here today.
Item number 11 is a very, very, very important item because it really covers all of the fees that you would be paying as a franchisee to the franchisor to stay in good standing in that franchise. These fees are basically broken up into about five different pieces, and they're not one size fits all. Some franchise FDDs may have these, and some may not.
Number one is the initial franchise fees, and we'll get into these in depth.
Number two is royalties and advertising fees.
Number three is training and support.
Number four is a territory, which is very important obviously.
Number five is other expenses.
This is a big one … Item 11 is probably the densest and most comprehensive item in the FDD. There's so much information, valuable information that you need to review to understand the numbers of what you're investing in.
So let's talk about the different sections of this Item 11. We'll just go through these a little bit at a time and give an overview of what these entail, and then a little bit about maybe our experience with these.
Number one is the initial franchise fee and it is really what you are paying to acquire that franchise in the very beginning. This is for the rights to use the name, the logo, and the brand. This section will delineate what you're paying for, whether it's refundable or not, and under what situations that may be the case. So just understand almost every franchise has a franchise fee. Understand what it is, who it's paid to, and what you're getting for it.
Number two is royalties and advertising. This was an interesting one in our franchise in the way that they charged us for this. We will explain a little bit about what advertising fees and royalties are.
They're really two separate things. Royalties are a quote-unquote fee that is paid to the franchisor, and that would be outlined by that specific franchise. Most of the ones that we work with, they're paid on a monthly basis, but you may see them being paid weekly. In our franchise, there actually was no royalty.
The second one is an advertising fee. You want to understand whether the franchisor is putting any money into advertising, and what advertising, if anything they're doing on your behalf as the franchisee, but what you should really want to pay particular attention to is what are your advertising obligations. Some of the franchises we work with require a monthly fee be put into advertising. You'll want to understand if there's a co-op, and if so, how that money's paid, what the structure of it is. I know in some of the larger, more established franchises, there are both national, regional, and local types of marketing.
The next one is absolutely huge in that, particularly nowadays, we're seeing these be a much bigger part of the offerings of some of the franchisors we work with which is training and support. The most important thing is that you make sure, number one, they do have training and you do know what their support is like. Here in Item 11 we're talking about what they charge for these. So let’s talk about some of the training and support fees that we see sometimes when we're working with franchisor franchisors.
One thing that we haven't alluded to that's going to be included in item 11 is both pre and post-op opening obligations. So the franchise, for example, may have some pre-opening training requirements, and that may mean maybe you need to do training online, or maybe you need to go to their headquarters for training. Well, that's going to be delineated in this subsection. It's going to tell you who's responsible for paying. Do you have to pay for your travel, and your stay? Is there a training fee itself? Then once you're opened up are there any additional ongoing training? For example, in our franchise, one of the items that would be included there would be an annual conference or convention for franchisees. And it's mandatory that you pay, it's up to you whether you attend, but you're going to be charged whether you attend or not. So that's the type of item that would be delineated under training.
The next one that is also really large is territory. What is the geographic area that you are essentially being assigned by the franchisor? That is typically spelled out in this particular Item 11. Specifically meaning that you're assigned a region to operate your business, then that is the region that you're entitled to do business in and you are acquiring. Note that Item 12 is specifically for your assigned territory. So related to Item 12 in Item 11 is more of the monetary kinds of things like cost of territory checks, if any, or retail property assessment fees.
Finally are other expenses. You're going to want to look at computers, equipment and the things that you're going to need to own to operate your business. You need to understand what those financial obligations are, and to who you're paying the money. Is it the franchisor? Sometimes they'll have a leasing company set up for vehicles. What about computers? So for example, in our franchise, we had a store at an airport, and we had to have a whole POS system. Because most of the franchisees in our system weren't yet in brick-and-mortar, they allowed us to choose our own computer systems. Some more established franchises may have very specific equipment that you must buy from them and what the costs of those are.
So what's really critical about this section is that you really spend time understanding all of these fees that you're really going to be having to build into your budgets on a monthly basis. These fees really spell out what you're getting for what is paid which is really important in assessing and finding the right franchise for you. A lot of the franchisors we work with today have become a lot more self-service with doing things like call center support. They do marketing, full marketing support, and full accounting support. They may even let you acquire these services a la carte, meaning that you don't necessarily have to buy it upfront with your franchise, but you can snap it on later. That gets back to who are you paying and at what point? Are you paying the franchise or are you paying a third party?
Item 11 is a big item of the FDD so spend a lot of time here. Again, we highly encourage you to seek the advice of a good franchise attorney in addition to this video.
What's Your Next? - Podcast
 | Author BioI’m Stacey Riska aka “Small Business Stacey”, your franchise placement specialist. I help aspiring business owners find the PERFECT franchise so they can get to the next level in life and business. |
