FDD Item 6: The Ongoing Fees You Keep Paying

Item 5 was the money you pay to get in. Item 6 is the money you keep paying once you are open, and for many franchises this is the section that shapes your profit the most.

It lists the ongoing and occasional fees you owe the franchisor: royalties, the advertising fund, technology fees, training charges, and things like transfer or late fees. These are the costs that follow you for the entire length of your agreement.

What FDD Item 6 actually tells you

Item 6 is usually a big table of every recurring or situational fee: what it costs, when it is due, and how it is calculated. The two that matter most for almost every franchise are the royalty, your ongoing payment for using the system, and the advertising or marketing fund, a shared pot for brand marketing.

Here is the part to really sit with: most of these fees are a percentage of your gross sales, not your profit. Gross sales is all the money that comes in before you pay for anything. So the franchisor gets paid on every dollar that rings up, even in a month where you barely break even or lose money. The fee meter keeps running regardless of how you are doing.

How to read Item 6

Add up the recurring percentages first. A 6 percent royalty plus a 2 percent ad fund plus a 1 percent tech fee is 9 percent of everything you sell, off the top, before rent or payroll. On one million dollars of sales, that is ninety thousand dollars a year to the franchisor, whether or not you made a profit. Watch for minimums too, where you owe a set amount even when sales are low.

Just as important is what Item 6 leaves out. It only lists fees paid to the franchisor and related parties. It does not include payroll, rent, insurance, utilities, local marketing, loan payments, taxes, or your own salary, and those often dwarf the royalty. To know whether a location actually makes money, you have to build a full profit-and-loss estimate yourself. If a brand is reluctant to help you model that, it is fair to ask why.

Three questions to ask

Red flags

None of these is automatically a deal-breaker. They are just patterns worth slowing down for and asking about.

• High combined recurring fees that take a big bite out of every dollar of sales.
• Minimum royalty or marketing payments that apply even when sales are weak.
• Vague or open-ended fees the franchisor can raise or add at its discretion.
• An advertising fund with little transparency about where the money goes or whether your local market sees any of it.

Franchise vs. going independent

Item 6 is the clearest ongoing cost of the franchise model. You pay a slice of your sales, for years, in exchange for the brand and the system. An independent owner pays none of it and keeps every dollar of margin, but gets no brand, no national marketing, and no playbook in return. The capital, time, and effort to run the place are yours in both cases.

Where to go next

Item 6 is your ongoing cost. Item 5 covers the up-front fees, Item 7 shows the full cost to open, and Item 19 is where you look for any numbers on what locations actually earn.