FRANCHISE LAW
Franchise Fees, Royalties & Item 19: Franchisor Guide
The financial terms of a franchise — the initial fee, the ongoing royalty, the advertising contribution, and any earnings figures you choose to publish — are governed by what you disclose in the FDD and what you can defend if challenged. Set them so a franchisee can build a viable business and still pay you, disclose them precisely, and you have a durable system. Set them on optimism and disclose them loosely, and you invite both disputes and regulatory attention.
This guide explains where each financial term lives in the FDD, how royalties and fees actually work, and the legal standard you must meet before you publish any earnings claim.
Where the money terms live in the FDD
A franchisee’s financial obligations are not buried in fine print — the FTC Franchise Rule assigns them specific items so buyers can compare systems side by side.
| FDD item | What it discloses |
|---|---|
| Item 5 — Initial fees | The franchise fee and any other payment due before opening |
| Item 6 — Other fees | Every recurring or situational fee: royalties, advertising fund, technology, transfer, renewal, audit, late fees |
| Item 7 — Estimated initial investment | The full low-to-high range to open and operate through the early months |
| Item 19 — Financial performance representations | Any claim about actual or potential franchisee earnings (optional) |
If a fee can be charged, it belongs in Item 6. Charging franchisees something you never disclosed is a recurring source of disputes, and in 2024 the FTC specifically flagged undisclosed fees imposed on franchisees as a practice it is scrutinizing.
Setting the initial fee and royalty
The initial franchise fee is your charge for the right to join the system and for initial training and onboarding. It should bear a sensible relationship to what a new franchisee actually receives. An inflated fee with thin support is the kind of mismatch that surfaces in franchisee complaints and registration-state review.
The royalty — usually a percentage of gross sales — is the engine of franchisor revenue and the reason franchising scales. Most systems set it as a fixed percentage of gross (not net) sales so it is simple to calculate and audit. When you set the rate, model it against a realistic franchisee profit-and-loss statement: after the royalty, the advertising contribution, rent, labor, and cost of goods, the franchisee needs to clear a return that makes the investment worthwhile. A royalty the unit economics can’t support eventually shows up as closures, not just complaints.
The advertising or brand fund contribution is typically a separate percentage. If you collect one, disclose how the fund is administered and spent — franchisees are entitled to understand where their marketing dollars go, and opaque funds are a frequent flashpoint.
Item 19: the rules before you publish earnings
Item 19 is where franchisors are most tempted and most exposed. Three principles govern it:
It is voluntary, but it controls every earnings claim. You are never required to make a financial performance representation. But if you make one anywhere — in the FDD, a brochure, a discovery-day pitch, or an offhand remark by a salesperson — it must appear in Item 19. Earnings claims made outside Item 19 are a classic violation.
It must have a reasonable basis. Any figure must rest on a reasonable basis at the time you make it, and you must have written substantiation available to show a prospect on request. “Reasonable basis” means real, supportable data — not projections dressed up as results.
Context and limits must be clear. State what the figures represent: which outlets, what time period, whether results are averages or medians, and whether they include company-owned units. A figure stripped of its context is the kind of representation that gets characterized as misleading.
A well-built Item 19 can be a powerful sales tool because it lets serious buyers underwrite the opportunity honestly. A sloppy one is a liability you carry for the life of the system.
Build the numbers to survive scrutiny
Financial terms get read closely by three audiences: prospective franchisees and their advisors, state examiners in registration states, and — if things go wrong — a franchisee’s litigation counsel. Numbers that are internally consistent across Items 5, 6, 7, and 19, supported by documentation, and matched to the actual franchise agreement will hold up before all three. Numbers chosen to look attractive will not.
For how these items fit the larger document, see how to draft an FDD and what’s in a franchise agreement. When fees or figures change, follow how to update your FDD and agreement, and see our franchise law page for the full scope.
Frequently asked questions
Are franchise royalties always a percentage of sales? Most are a percentage of gross sales, which is simple to audit, but some systems use flat fees or tiered structures. Whatever you choose must be disclosed in Item 6 and match the agreement.
Do I have to publish earnings figures? No. Item 19 is optional. But you may not make earnings claims anywhere unless they are in Item 19 with a reasonable basis and written substantiation.
Can I raise fees on existing franchisees? Generally only as the signed agreement allows. You cannot use operations-manual updates to impose material new fees that were never disclosed — a point the FTC has emphasized.
What is a “reasonable basis” for Item 19? Supportable, documented data behind the figures — actual outlet results or defensible projections, with written substantiation you can produce to a prospect on request.
Building or refining your franchise system? Reidel Law Firm drafts FDDs and franchise agreements for franchisors on a flat fee — structuring fees, royalties, and Item 19 disclosures with plain-English guidance from a franchise attorney. Get flat-fee startup franchising counsel →
