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
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
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.