Item 7 - ESTIMATED INITIAL INVESTMENT
This Item covers the total initial investment required, combining the Initial Fees disclosed in Item 5 with estimates for a range of additional start-up expenses. Typically, this list includes construction/leasehold improvement costs, furniture, fixtures, equipment, signage, computer systems, rent deposits, insurance deposits, professional fees, grand opening expenses, and more.
- Determine whether you have enough capital to cover start-up expenses.
- Compare the values disclosed in this Item to other similar franchise disclosures.
- Item 7 doesn't include every expense required to open a franchise. Typically, interest and financing costs are omitted from this list, and in some cases expenses such as real estate or related occupancy are not included.
- Additional funds should cover at least three months of operation and should be between 15% and 37% of the total initial investment, depending on the time until the franchisee will see profit and the outlet stops running at a deficit.
- If a franchisee is underfunded, they are statistically more likely to fail within the first six to nine months.
- The disclosures in Item 7 are estimates. Ideally, you have capital reserves greater than the maximum ranges listed.
- Are the estimates realistic? You can get a more complete understanding of the initial and ongoing costs by contacting current and former franchisees.