What Item 6 Contains
Item 6 is presented as a table listing every fee (beyond the initial franchise fee) that you may pay during your franchise relationship. This is one of the most important items for financial planning.
Common Ongoing Fees
| Fee Type | Typical Range | Basis |
|---|---|---|
| Royalty | 4-8% | Gross Sales |
| Advertising/Marketing Fund | 1-4% | Gross Sales |
| Local Advertising Requirement | 1-3% | Gross Sales |
| Technology Fee | $200-$1,000/mo | Flat Monthly |
| Transfer Fee | $5,000-$25,000 | If You Sell |
| Renewal Fee | $5,000-$25,000 | At Term End |
Why Item 6 Matters for Franchise Buyers
Ongoing fees directly reduce your profit margin. A franchise with 6% royalty and 3% ad fund takes 9% off your gross sales before you pay rent, labor, or supplies.
Example: Impact of Fees on Profitability
Annual Gross Sales: $800,000
Royalty (6%): $48,000
Ad Fund (2%): $16,000
Technology ($500/mo): $6,000
Total Fees to Franchisor: $70,000/year
This $70,000 comes directly out of your potential profit before any other expenses.
Royalty Fee
Pays for ongoing support, brand development, and franchisor operations. This is the franchisor's primary revenue source from you.
Advertising Fee
Funds national/regional marketing campaigns. You often have no control over how this money is spent.
Technology Fee
Covers POS systems, software, apps, and IT support. Increasingly common and can be $500-$1,000+ monthly.
Hidden Costs
Required purchases from franchisor or affiliates at marked-up prices are effectively hidden fees.
What to Look For in Item 6
Total Fee Burden
Add up all percentage-based fees. Royalty + ad fund + any other percentages = your total fee burden on gross sales.
Fee Basis Definition
Is it based on "gross sales" or "net sales"? How is that defined? Some definitions include things like sales tax, others exclude it.
Fee Increase Provisions
Can the franchisor raise fees during your term? Look for caps on increases or language like "as determined by franchisor."
Minimum Payments
Some franchises have minimum royalty payments regardless of sales. This protects the franchisor but hurts you during slow periods.
Red Flags in Item 6
Above 10% Total Fees
Combined royalty + ad fund exceeding 10% is high and significantly impacts profitability.
"As Determined" Language
Fees that can be set or changed at the franchisor's discretion give you no predictability.
High Transfer/Renewal Fees
Transfer fees above 50% of current franchise fee, or renewal fees equal to full franchise fee, limit your exit options.
Many Small Fees
Audit fees, mystery shop fees, convention fees—they add up. Calculate your total annual fee exposure.
Questions to Ask the Franchisor
- 1.What is the total percentage of gross sales I will pay in fees?
- 2.How is the advertising fund money spent? Can I see an accounting?
- 3.Have any fees increased in the past 5 years? By how much?
- 4.Are there minimum royalty payments even if my sales are low?
- 5.What technology fees should I expect, and what do they cover?
Frequently Asked Questions
What is FDD Item 6?
Item 6 discloses all recurring and occasional fees you will pay throughout your franchise relationship. This includes royalties, advertising/marketing fees, technology fees, transfer fees, renewal fees, audit fees, and any other payments to the franchisor or its affiliates.
What is a typical royalty fee?
Royalty fees typically range from 4% to 8% of gross sales, with 5-6% being most common. Some franchises charge flat monthly fees instead of percentages. Fast food and restaurants tend to be 4-6%, while service businesses often charge 5-8%.
What is the advertising/marketing fee?
Most franchises require contributions to a national or regional advertising fund, typically 1-4% of gross sales. This money funds brand marketing that benefits all franchisees. You may also be required to spend additional amounts on local marketing.
Are ongoing fees negotiable?
Ongoing fees are rarely negotiable for individual franchisees since they must be uniform across the system. However, some franchisors offer reduced royalties during the initial months of operation (ramp-up period) or for multi-unit operators.
What happens if I do not pay fees on time?
Late fees and interest charges are common. Persistent non-payment can lead to default notices and ultimately termination of your franchise agreement. Item 6 should disclose late payment penalties and the consequences of non-payment.