Franchise Fees Explained: Initial Fee, Royalties, Ad Fund & Transfer Fees
Franchise fees are more than the initial franchise fee. Item 5 and Item 6 show the cost structure you need to model.
Last reviewed: May 26, 2026 by the BizLeaseCheck Editorial Team
General information, not legal advice.
Overview
The initial franchise fee is only the entry price. A franchise can also include royalty fees, advertising or brand-fund contributions, technology fees, training fees, renewal fees, transfer fees, audit costs, purchasing-program charges, and other recurring or event-based fees.
The FTC disclosure format separates initial fees in Item 5 from other fees in Item 6. Read both against the franchise agreement and your unit economics before signing.
Topics to check
Section 436.5 describes Item 5 as the disclosure for initial fees and conditions under which those fees are refundable. If fees are not uniform, the franchisor must disclose the range or formula used and the factors that determined the amount.
Do not model the initial fee as your only upfront franchisor payment. Item 5 can include payments or commitments for services or goods received from the franchisor or an affiliate before opening.
16 CFR 436.5 — Item 5Item 6 is the fee table for other fees the franchisee must pay to the franchisor, affiliates, or fees imposed or collected for a third party. The rule calls for fee type, amount, due date, and remarks.
Review whether royalties and brand-fund contributions are calculated from gross sales or another revenue base. A fee measured against gross sales can be owed even when the unit is not profitable.
16 CFR 436.5 — Item 6Transfer, renewal, training, audit, late-payment, technology, and additional-assistance fees may matter most when the business is stressed or when you want to sell.
Ask whether a buyer, seller, or both pay transfer fees; whether the franchisor can require remodels or training at transfer; and whether renewal comes with then-current agreement terms.
16 CFR 436.5 — disclosure itemsA franchise can show attractive sales but weak owner economics after royalties, ad fund, rent, debt service, payroll, supplier restrictions, and working capital.
Build a month-by-month model that includes all recurring and contingent fees. If a fee is unclear, ask the franchisor to identify the FDD item, agreement section, due date, and calculation base.
FTC Consumer Guide to Buying a FranchiseKey takeaways
- Item 5 is the initial-fee disclosure; Item 6 is the other-fee table.
- Royalty and ad-fund fees may be based on gross sales, not profit.
- Transfer, renewal, audit, technology, and training fees can affect exit and stress cases.
- Fee modeling should connect Item 5, Item 6, Item 7, and Item 19.
- Ask for the agreement section and calculation base for every unclear fee.
Official resources
Legal-review notes
Guide confidence marker: High confidence.
- Confirm the exact fee calculation, refundability, audit rights, and gross-sales definition in the franchise agreement before relying on any model.
- Do not treat common franchise fee examples as universal; the signed agreement controls the buyer-specific obligation.
Frequently asked questions
What is the difference between Item 5 and Item 6?
Item 5 covers initial fees. Item 6 covers other fees, including recurring, conditional, event-based, or third-party fees that the franchisor imposes or collects.
Are franchise royalties usually based on profit?
Many royalty structures are based on sales or another revenue measure rather than profit. Confirm the exact calculation in Item 6 and the franchise agreement.
Which fees are easiest to miss?
Transfer, renewal, audit, required training, technology, additional assistance, purchasing-program, and late-payment fees are common diligence items.