SPECIAL SECTION: PART 1
Breaking Down Y
the FDD
Item 7: Estimated Initial Investment
ou’ve heard it before: Be sure you understand your Franchise Disclosure Document (FDD) before you buy into a franchise. The advice makes sense—after all, the document is there to protect you by listing everything the Federal Trade Commission (FTC) believes you need to know about your franchisor. But given that it’s a 150-page legal document, many prospective franchisees aren’t always clear on the details. It’s complicated, we get it. So, to help you understand the finer points of the FDD, we’ve enlisted Nicole Micklich, a franchise attorney. In the next six issues of Franchise Dictionary Magazine, she will highlight some common misunderstandings about the document and clarify them. Here, we launch with the topic that everyone needs to be clear on: Money. Item 7 requires franchisors to use a table like this to set out a franchisee’s entire estimated initial investment. Franchisors must list to whom payments are made. When payments are due must be noted. Franchisors must disclose the method of payment Franchisors must disclose the amount of payment The table should disclose all expenses included in the franchise agreement that a franchisee has to pay to open for business, including those that are to be paid to third parties, like rent.
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Some of the costs set out in the Item 7 table may be difficult for the franchisor to estimate and the franchisor may use ranges or variables
