What Is Item 6
Item 6 of the Franchise Disclosure Document (FDD) lists every recurring fee you'll pay to the franchisor or its affiliates during the term of your franchise agreement. This includes royalties, advertising fund contributions, technology fees, training fees, renewal fees, transfer fees, and any other mandatory payments beyond your initial franchise fee. The FTC requires franchisors to disclose the amount, timing, and conditions for each fee in this section.
What You Need to Know
Item 6 directly determines your ongoing cost structure. Most franchisees pay royalties between 4% and 8% of gross revenue, though some systems run as high as 12%. The advertising fund contribution typically ranges from 1% to 3% of revenue. Technology fees can add $500 to $5,000 monthly depending on the system. These aren't negotiable in most franchise agreements, so understanding the full load before signing is critical to your profit projections and cash flow planning.
Item 6 must specify whether fees are calculated on gross sales, net sales, or some other metric. This distinction matters significantly. A 6% royalty on gross sales costs more than 6% on net sales after discounts. The document must also state the timing of payments (monthly, quarterly, annually) and any circumstances under which fees are waived or reduced.
Cross-reference Item 6 with Item 19 of the FDD, which provides financial performance representations showing historical earnings of franchisees in the system. These earnings figures are calculated after Item 6 fees are paid, so you can see real-world profitability. If Item 19 is absent, the franchisor isn't required to provide earnings data, making Item 6 analysis even more important for building your own financial model.
Common Questions
- Can fees increase during my franchise term? Item 6 should specify whether royalty rates or advertising contributions are fixed or subject to annual increases. Many franchisors reserve the right to raise fees with renewal terms or when implementing system-wide changes. Review the renewal clause and term conditions carefully to understand future cost escalation.
- Are there hidden fees not listed in Item 6? Technically, no. The FTC requires all material fees in Item 6. However, some franchisors charge for optional services (preferred suppliers, marketing materials, or premium support) outside Item 6. These are legitimate if optional, but they add to your total cost of operation. Ask your franchisor representative to clarify what is mandatory versus optional.
- What happens if I don't pay Item 6 fees on time? Non-payment is typically grounds for termination under your franchise agreement. The franchisor may also charge late fees, interest, or legal costs. Item 6 should specify the consequences of delinquency, so review those terms alongside your franchise agreement before signing.
How to Evaluate Item 6
- Calculate total annual fees as a percentage of projected revenue. If Item 6 fees represent more than 10% to 12% of gross revenue, your profit margins compress significantly.
- Compare Item 6 fees across competing franchise systems in your target industry. This benchmarking reveals whether a particular franchisor's fee structure is competitive or punitive.
- Request at least five to ten franchisee contact references and ask them specifically about the actual cash impact of Item 6 fees. Ask whether fees have increased beyond the Item 6 disclosures and whether the services funded by advertising contributions delivered value.
- Have a franchise attorney or accountant review Item 6 in context of your business plan. They can help you model worst-case scenarios if revenue drops and fees remain fixed.