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Disclosure Requirements – Other Fees

By Mario Herman, Esq.

Prospective franchisees need to be aware of all of the fees they can pay to the franchisor. These fees are presented in the FDD and should be carefully reviewed by the franchise prospect.

In addition to the “initial fees” a franchisor is required to disclose to a prospective franchisee, a franchisor must disclose the tabular form, 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. These fees must be disclosed in a table entitled ‘‘OTHER FEES’’ in capital letters using bold type. The franchisor must include any formula used to compute the fees.

The table must include in the first column, a list of the type of fee (i.e., royalties, fees for lease negotiations, construction, remodeling, additional training or assistance, advertising, advertising cooperatives, purchasing cooperatives, audits, accounting, inventory, transfers, and renewals). 

In a second column the franchisor must set forth the amount of the fee. 

In a third column the franchisor must state the due date for each fee. 

In a fourth column the franchisor is required to include remarks, definitions, or caveats that elaborate on the remaining information in the table. If the remarks are long, the franchisor may use footnotes instead of the remarks column. If applicable, the franchisor must include the following information in the remarks column or in a footnote: (i) Whether the fees are payable only to the franchisor; (ii) Whether the fees are imposed and collected by the franchisor; (iii) Whether the fees are nonrefundable or describe the circumstances when the fees are refundable; (iv) Whether the fees are uniformly imposed; (v) The voting power of franchisor owned outlets on any fees imposed by cooperatives. If franchisor-owned outlets have controlling voting power, the franchisor must disclose the maximum and minimum fees that may be imposed.  In addition, if fees may increase, the franchisor is required to disclose the formula that determines the increase, or the maximum amount of the increase. For example, a percentage of gross sales is acceptable if the franchisor defines the term ‘‘gross sales.’’

A careful review of these fees is important to any prospective franchisee, not only as to amount but as to whether they are standard throughout the system.  If the fees are not standard throughout the system, then the prospective franchisee or the prospective franchisee’s attorney may be able to negotiate a lower rate for him/her.  One should also carefully review the due dates, as well as whether the franchisor can automatically debit the franchisee’s checking account on a date chosen by the franchisor, thereby removing from the franchisee’s control, at least to some extent, the franchisee’s cash management. 

A skilled franchise law attorney will be able to review these fees, and compare the fees to those charged by other franchisors, and perhaps negotiate lower fees for the term of the prospective franchisee’s agreement. 

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

202-686-2886 (ph)


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