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Required Disclosures – Initial Fees: Can Provide Prospective Franchisees with Negotiating Information

By Mario Herman, Esq.

Prospective franchisees should fully understand how much the initial franchise fee and is there an opportunity to negotiate lower fees. It’s also important to know if the franchise fee or any portion of the fee is refundable.

Pursuant to the Federal Franchise Rule, 16 C.F.R. 436, a franchisor must disclose to a prospective franchisee the initial fees and any conditions in which the fees are refundable. If the initial fees are not uniform, the franchisor must disclose the range or formula used to calculate the initial fees paid in the fiscal year before the issuance date of the Franchise Disclosure Document (FDD), and the factors that determined the amount. Pursuant to the Rule, ‘‘initial fees’’ means all fees and payments, or commitments to pay, for services or goods received from the franchisor or any affiliate before the franchisee’s business opens, whether payable in lump sum or installments.

It should be noted that the disclosure required regarding initial fees includes not only fees that are actually paid, but also commitments to pay. Another important item to note is whether the fees are refundable -- the franchisor must disclose under what conditions the fees are refundable. As such, one should pay careful attention if the FDD does not state any conditions under which the fees are refundable; they are then likely non-refundable.

A franchisor must also disclose a range of fees if its initial fees are not uniform throughout the system. A careful review of the disclosure of initial fees will give a prospective franchisee the information to determine whether the initial fees are uniform throughout the franchise system, which can be important information in determining whether a prospective franchisee or his or her franchise law attorney may be able to negotiate lower initial fees.

Mr. Herman, licensed in Washington, D.C., represents franchisees domestically and internationally in negotiation, mediation, arbitration, and litigation with their franchisors.

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