Franchise Your Business: Understanding the initital investment section of a FDD.
As part of the legal requirements to offer a franchise in the United States, it is required that a franchisor develop and present a Uniform Franchise Disclosure Document to potential franchise buyers. This document has 23 points of disclosure that cover a wide variety of items. One of the most critically important items covered in the FDD is the initial investment for the franchise opportunity.
The initial investment section clearly delineates the cost of opening a location of the franchise operation. Included below is the KFC franchise initial investment section for review.
1. It is important to note that there is a net worth requirement in addition to a liquid asset requirement (cash needed).
2. There are ranges disclosed in the investment section that describe the potential high and low end of the investment for each category.
3. In the FDD itself, the document will describe who the money is paid to. In most cases, it will not be to the franchisor, but to approved vendors who provide the described services.
4. The initial franchise fee is paid to the franchisor for the rights to the franchise system, tradename and operating model. This fee is typically deemed as fully earned upon payment by the franchisor. There may be a refund clause that allows the franchisee to receive 50% of this fee back if certain things happen following the signing of the agreement.
5. The Training Segment of the franchise investment does not necessarily mean that the franchise buyer is paying an additional fee for training. This range infers the cost to attend training in food, travel and lodging for the new franchisee.
6. Additional Funds refers to working capital needed to get the business running and to the point where it will cash flow. These funds are required to be on hand and ready to use when the business is opened. Things like hiring employees, advertising the business and other operating expenses would come from this portion of the investment range.
The minimum financial requirement to open a KFC or KFC/Taco Bell in the United States is:
$1.5 million net worth
Item 7 of the Franchise Disclosure Document (FDD) outlines the investment costs necessary to enter the KFC system. Highlights are as follows:
|Building Construction Costs||$425,000 to $565,000||$440,000 to $590,000|
|Equipment, Signage, and Décor||$216,000 to $366,000||$377,000 to $427,000|
|Site Work||$100,000 to $250,000||$100,000 to $250,000|
|Miscellaneous Permits, Utility Deposits,
Licenses, and Architectural Costs
|$50,000 to $100,000||$50,000 to $100,000|
|Subtotal Construction||$791,000 to $1,281,000||$967,000 to $1,367,000|
|Initial Franchise Fee||$45,000||$75,000|
|Development Services Fee||$0 to $35,000||$0 to $35,000|
|Real Estate||$400,000 to $1,000,000||$400,000 to $1,000,000|
|Grand Opening Expense||$5,000||$5,000|
|Training Expenses||$3,900 to $10,000||$3,900 to $10,000|
|Miscellaneous Opening Costs||$5,000 to $10,000||$5,000 to $10,000|
|Additional Funds||$50,000 to $75,000||$50,000 to $75,000|
|Total||$1,309,900 to $2,471,000||$1,515,900 to $2,587,000|