FDD Item 5 Explained: Initial Fees Definition + Real Examples

FDD Item 5 discloses the initial fees a franchisee pays the franchisor or its affiliates before opening, and the conditions for any refund (16 CFR 436.5(e)). The number most buyers carry away from a brand’s website is the franchise fee. When you read the actual Item 5 in a Franchise Disclosure Document, the fee is often a small part of what the section adds up to.

This guide starts with what the FTC Franchise Rule requires Item 5 to contain, then works through real Item 5 text from FDDs issued in spring 2026 (three coffee brands and one shaved-ice brand), and ends with a check you can run on any FDD in ten minutes. It sits inside the larger walkthrough of how to read an FDD, and it pairs with Item 6 for recurring fees and Item 7 for the full cost to open. Before paying the initial fees, review the franchisor’s financial statements in Item 21 with your accountant. For the potential Section 197 15-year tax treatment of a franchise fee, see CapEx vs. OpEx for a food franchise and discuss your situation with a tax professional.

What the Rule says Item 5 must contain

(e) Item 5: Initial Fees. Disclose the initial fees and any conditions under which these fees are refundable. If the initial fees are not uniform, disclose the range or formula used to calculate the initial fees paid in the fiscal year before the issuance date and the factors that determined the amount.

For this section, “initial fees” means all fees and payments, or commitments to pay, for services or goods received from the franchisor or any affiliate before the franchisee’s business opens, whether payable in lump sum or installments. Disclose installment payment terms in this section or in § 436.5(j) of this part.

The text is short. Under 16 CFR 436.5(e), Item 5 must disclose the initial fees and any conditions under which they are refundable. If the fees are not uniform, the franchisor discloses “the range or formula used to calculate the initial fees paid in the fiscal year before the issuance date and the factors that determined the amount.” The Rule then defines its term: “initial fees” means “all fees and payments, or commitments to pay, for services or goods received from the franchisor or any affiliate before the franchisee’s business opens, whether payable in lump sum or installments.” Installment terms go in Item 5 or in Item 10, the financing item.

Three details in the FTC’s Franchise Rule Compliance Guide change how you should read it.

• Refunds. The guide states that franchisors are not required to refund initial fees. If a fee is refundable in whole or in part, the franchisor must state the terms and conditions.
• Ranges. A range is acceptable where fees varied over the last year, for example because of cost increases, and a franchisor may instead disclose a formula, such as a dollar amount per potential customer in your territory. Fees from occasional sales of company-owned outlets do not have to be folded into the range.
• The cover page. The Rule prescribes one sentence for the front of every FDD: “The total investment necessary to begin operation of a [franchise system name] franchise is [the total amount of Item 7]. This includes [the total amount in Item 5] that must be paid to the franchisor or affiliate.” The guide says the format makes clear that Item 5 is a subset of the Item 7 total.

That subset relationship is the key to reading Item 5. Item 7 is the whole bill. Item 5 is the part of the bill that goes to the franchisor’s side of the table.

What four real Item 5s look like

The table below uses each brand’s FDD (issuance dates shown), as read on September 29, 2026. Each brand’s own site is linked so you can compare its public information with the document. All figures are the franchisor’s, from its FDD, and any of them can change with the next filing.

FDD (issuance date)	Headline franchise fee	Other Item 5 payments	Cover: paid to franchisor or affiliate	Cover: total investment
BIGGBY COFFEE (Apr. 30, 2026)	$20,000 ($10,000 for military service members and existing franchisees adding stores)	Supplies and merchandise $4,000 to $4,500 (optional); POS system and technology $7,500 to $15,000	$27,500 to $39,500	$242,200 to $610,000 (whitebox), $457,750 to $826,000 (modular), $484,200 to $973,000 (site-built)
Scooter’s Coffee (Apr. 3, 2026)	$40,000	Initial Opening Support Fee $20,000; opening inventory and equipment from an affiliate $160,000 to $226,000 (kiosk) or $214,300 to $225,550 (end cap)	$220,000 to $286,000	$658,898 to $1,345,750
7 BREW (May 11, 2026)	$35,000 first store; $25,000 each later store	Modular building from an affiliate $310,000 to $600,000 plus shipping and installation; coffee equipment package about $60,000; ground-lease first month’s rent $5,000 to $20,000 where an affiliate owns the land	$185,000 to $785,000	$940,500 to $2,283,500, assuming a 10-store commitment
Kona Ice (Apr. 20, 2026)	$15,000	Truck (used $87,365 to $125,781; new $151,491 to $157,491) from the franchisor; initial inventory $6,475	$108,840 to $188,291	$114,730 to $228,601

As of October 13, 2026, 7 Brew states on its own support page that it is not accepting new franchise applications or expressions of interest; its row is shown for its Item 5 structure.

Sources for the table: the cover page and Item 5 of each company’s FDD (linked in Sources below). The Scooter’s figures also match its franchising site, checked September 29, 2026. Kona Ice’s site, checked the same day, states an estimated initial investment of $102,365 to $226,841, which differs from the $114,730 to $228,601 on the cover of its April 20, 2026 FDD. Where a site and an FDD disagree, the FDD is the document you are legally handed and the one to reconcile against.

Read across the rows and a pattern appears that the headline fee hides. In the brands where the franchisor or an affiliate also supplies the physical assets (Scooter’s equipment and opening inventory, 7 BREW’s modular building, Kona Ice’s truck), Item 5 balloons past the fee. In a brand that sends you to third-party contractors for almost everything (Biggby), Item 5 stays small.

The cover-page check, with the arithmetic

The cover sentence gives you a target, and Item 5 should add up to it. Here is the check on two of the rows above, using only numbers printed in the FDDs.

Biggby. The cover says $27,500 to $39,500 goes to the franchisor or affiliates. Item 5 lists the $20,000 franchise fee, optional supplies of $4,000 to $4,500, and a POS system of $7,500 to $15,000. Low end: $20,000 + $7,500 = $27,500. High end: $20,000 + $4,500 + $15,000 = $39,500. The cover figure ties to Item 5 exactly, and it tells you the low end assumes you skip the optional supplies. Against the $242,200 to $610,000 total, that is a franchisor-side share of 11.4% at the bottom of the range ($27,500 ÷ $242,200) and 6.5% at the top ($39,500 ÷ $610,000).

Scooter’s kiosk. The cover says $220,000 to $286,000. Item 5 lists a $40,000 franchise fee, a $20,000 Initial Opening Support Fee, and $160,000 to $226,000 of opening inventory and equipment bought from its affiliate. Low end: $40,000 + $20,000 + $160,000 = $220,000. High end: $40,000 + $20,000 + $226,000 = $286,000. Set against the kiosk investment of $1,163,650 to $1,345,750 in Item 7, that is 18.9% ($220,000 ÷ $1,163,650) to 21.3% ($286,000 ÷ $1,345,750). The $40,000 fee alone is only 3.0% to 3.4% of the same range, which is how a brand can advertise a modest fee and still send about a fifth of your investment to itself and its supplier affiliate.

The same test applies to the other rows. Kona Ice’s $15,000 fee is 6.6% to 13.1% of its total, but its franchisor-side payments are 82.4% to 94.9%, because the truck is bought from the company. 7 BREW’s franchisor-side share is 19.7% ($185,000 ÷ $940,500) to 34.4% ($785,000 ÷ $2,283,500).

Line brands up on the same columns in the franchise comparison spreadsheet template.

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Refundable? Read the exact words

An FTC Business Blog post by Lesley Fair (May 2023) on the FDD describes Items 5 through 7 as covering “deposits or franchise fees (some of which may be non-refundable).” Each of the FDDs above answers the refund question in its own words, and none of the answers is generous. Biggby’s Item 5 says the franchise fee is earned when paid and is not refundable under any circumstances. Scooter’s says its $40,000 fee and its $20,000 opening support fee are not refundable. 7 BREW says its initial franchise fee is not refundable under any circumstances, and that if you pay its development fee and then cannot find sites or decide not to proceed, it keeps the entire fee. Kona Ice states that its franchise fee is not refundable and that truck payments are nonrefundable even if you never open.

Two patterns to watch for in your own document:

• Rebates are not refunds. Biggby’s Item 5 describes a limited-time 2025 offer to existing franchisees: a $10,000 fee, with a 30% rebate after opening if the franchisee signed a lease within 12 months of the franchise agreement and opened within 12 months of the lease. That is a discount you earn by performing, not money back if a deal falls through.
• Development fees. If you sign a multi-unit agreement, there may be a separate development fee that does not credit toward store fees. 7 BREW’s minimum development fee for a new franchisee is $125,000: the $35,000 first-store fee plus $10,000 for each of stores two through ten, and the $10,000 payments are not credited toward later initial franchise fees.

The 14-day clock and the deposit

The FTC’s compliance guide says the disclosure document must reach you at least 14 calendar days before you sign a binding agreement or make any payment to the franchisor or an affiliate, and that the days begin the day after delivery. The signing or the payment can happen on the fifteenth day. The cover page of each FDD reviewed here repeats the rule in plain English.

The practical consequence is about sequencing. Item 5 payments are usually due at signing, and they are non-refundable, so the fifteenth day is when real money first moves. Use the fourteen days to do the reconciliation above, to call franchisees listed in Item 20, and to have an attorney read the agreement. A request for a “deposit to hold your territory” before you have had the document for two weeks is a question to put to the franchisor in writing.

Before paying the initial fees, use Item 9’s franchisee-obligations table to locate and review the agreement sections governing the duties you would accept.

Fee before site: the risk inside “due at signing”

Because Item 5 fees are due at signing and non-refundable, the order of events matters. Scooter’s Item 12 says that if you do not have an approved location on the date you sign, the franchisor designates a non-exclusive search area within which you are to find one, and that the search area grants no territorial rights. Item 5 puts both the $40,000 franchise fee and the $20,000 Initial Opening Support Fee at the signing of the franchise agreement. So $60,000 of non-refundable money can move before a site exists. Item 7 then explains that a site typically needs a concept plan and preliminary due diligence (zoning, flood zone, environmental and geotechnical work, permitting) before you enter a lease or purchase.

Biggby’s FDD shows the other side of the same sequence. Its Item 6 lists $27,000 in damages payable if the franchisor terminates the agreement because you fail to secure an approved location or to open within the required timeframes, and the franchise agreement gives you 12 months from signing to acquire an approved location, with one six-month extension available for a non-refundable $5,000 fee. So the money at risk in a failed site search can be the fee you paid plus the damages the agreement provides for, and both are disclosed in the document, though the damages sit in Item 6 and not in Item 5.

Neither is a criticism of these brands; it is how many systems work, and each FDD discloses it. It is a reason to ask, before signing, what happens to the fee if the site you need cannot be approved or permitted, and to have the answer in the agreement instead of in a sales conversation.

Timing differs by brand

Item 5 also tells you when each payment is due, and the FDDs vary. Biggby’s fee is payable in full at signing. Scooter’s fees are due at signing by ACH. 7 BREW’s first-store fee is due at signing, but the $25,000 fee for each later store is due within five days after that store opens. Dippin’ Dots’ Item 5 sets its fee, $35,000 for the territory model, $15,000 for store-only and $25,000 for distribution, and says it is payable in full upon opening of the franchised business. A fee payable at opening is a very different exposure from a fee payable before you have a lease.

State addenda: escrow, deferral and surety bonds

Some states let their regulator condition a franchise registration on financial assurance. Virginia’s rule, 21VAC5-110-65, is a clear example. The commission may require a franchisor to escrow franchise fees and other payments until its pre-opening obligations are satisfied, may accept a deferral of franchise fees and other initial payments until those obligations are complete, or may accept a surety bond instead. Where escrow or deferral applies, the rule requires it to be reflected in Item 5 or in a Virginia addendum to the FDD.

You can see the mechanism in live documents. The Illinois addendum in Exhibit L of Biggby’s April 30, 2026 FDD states that a franchisee’s payment of initial franchise fees will be escrowed until the franchisor’s initial obligations to help establish and open the business are fulfilled, and that the Office of the Illinois Attorney General imposed this financial assurance requirement due to the franchisor’s financial condition. That is a state-specific change to what happens to your Item 5 money, and it lives in the addendum, not in Biggby’s Item 5 text. The April 2026 Dippin’ Dots FDD includes a Maryland addendum that amends Item 5 to say the Maryland Securities Commissioner required financial assurance and that the company posted a surety bond of $135,150 for franchise sales in Maryland. Kona Ice’s Item 7 includes a related note: in a state with a fee deferral requirement, the company reimburses one attendee’s training hotel and airfare after the business opens. The lesson for a buyer is to read the addenda at the back of the FDD for the state where you will operate, since they can change what Item 5 says for you.

Undisclosed fees and the 2024 FTC staff guidance

In July 2024 the FTC issued staff guidance and announced it in a press release. The guidance says a franchisor that fails to disclose required fees in the FDD violates the Franchise Rule and Section 5 of the FTC Act, and that imposing or collecting a new fee through the operating manual or otherwise, when the fee was not disclosed in the FDD and included in the franchise agreement, may be an unfair act or practice. The document itself states that it represents the views of FTC staff and is not binding on the Commission, and that any determination is fact specific. The PDF was still posted on ftc.gov when checked on September 29, 2026.

For an Item 5 reader the useful question is narrow: does every payment you will owe the franchisor or an affiliate before opening appear in Item 5 and in the agreement, or does one live only in a manual? Scooter’s Item 5, for instance, lists its opening support fee and the affiliate purchase as separate headings, which is what you want to see.

Questions to take to your franchise attorney

Item 5 is a place to build a question list for a professional, not to decide alone whether a fee is fair.

• Does the cover-page franchisor-and-affiliate figure tie to the sum of Item 5 and to the “to whom paid” column in Item 7? Which line explains any gap?
• Which Item 5 payments are due at signing, and is a site approved by then? What happens to each payment if you cannot secure an approved, permitted site?
• Is any portion refundable, and what exact conditions, deadlines and documentation trigger a refund? Is a rebate conditional on performance?
• Does a development or reservation fee credit toward store fees, and is it kept if you do not open?
• Does the state addendum for your state add escrow, deferral or a bond that changes when Item 5 fees are due?
• Are any affiliate-supplied items in Item 5 also required purchases under Item 8, and what does the FDD disclose about the franchisor’s revenue from them?

Talking to people who have already been through it helps too. The questions to ask current and former franchisees include asking whether any pre-opening cost surprised them relative to what Item 5 disclosed. To see how small or large the fee is against your own investment range, use the franchise fee vs total investment calculator, and line brands up on the same columns in the franchise comparison spreadsheet template.