Beyond the Binder: Item 7-Your Initial Investment
When you’re evaluating a franchise opportunity, Item 7 of the Franchise Disclosure Document (FDD) is where reality starts to hit your wallet. This section details the estimated initial investment needed to open a franchised location, and it’s one of the most scrutinized parts of the FDD for good reason.
But as with many parts of the FDD, what’s disclosed in Item 7 may not tell the whole story.
What Is Item 7?
Item 7 is the franchisor’s breakdown of the estimated costs you’ll incur to open the business. It usually covers a range of expenses for the first three months, including:
Initial franchise fee
Leasehold improvements
Equipment
Inventory
Signs
Licenses and permits
Insurance
Grand opening advertising
Working capital
Each cost category is typically presented as a low-to-high range, followed by a total estimate. A footnote section may attempt to explain assumptions behind the estimates, but how helpful that is varies wildly by franchisor.
What Must Be Disclosed?
The FTC Franchise Rule requires franchisors to:
List each type of expenditure necessary to begin operations.
Provide a reasonable estimate of the low and high range for each cost.
State the basis for each estimate in the footnotes.
Indicate whether any payment is refundable and to whom it’s paid.
If a franchisor has opened company-owned or franchise locations, those real-world figures should inform these estimates. If they haven’t, they must disclose that the figures are based on assumptions or third-party information.
Why It Matters
Item 7 is often one of the first places a prospective franchisee looks to gauge affordability. But here’s the catch:
Low estimates can be misleading.
Critical expenses may be underreported, or omitted altogether.
Assumptions aren’t always grounded in real data.
If a franchisor lists $20,000 for build-out but their last 10 franchisees each spent $70,000, that’s a major problem. And if the working capital line is vague or too low, it could leave you undercapitalized and vulnerable from day one.
Real Due Diligence Tips for Item 7
Here’s how to go beyond the binder:
Ask for the assumptions behind every line item; especially for build-out, working capital, and equipment. If they won’t share, that’s a red flag.
Compare estimates to real-world results. Interview existing franchisees and ask:
What did you actually spend to open?
What surprised you about the costs?
How long did your working capital actually last?
Request vendor quotes yourself. Don’t rely on franchisor estimates. Call equipment vendors, real estate brokers, and marketing agencies to get actual pricing.
Watch out for “TBD” or “varies by market” disclaimers—especially if they appear next to major costs. Those can be used to dodge real accountability.
Look for hidden costs in other items. Some fees (like technology or software subscriptions) are buried in Item 6 or referenced only in the Franchise Agreement.
🔎 Backstory: When I opened my I Heart Mac & Cheese franchise, my build-out and equipment costs alone exceeded the entire high-end investment range disclosed in Item 7. Despite having real data from their flagship location and early builds, the franchisor continued to understate costs in every FDD from 2017 to 2023. I break down how that pattern misled me, and dozens of other franchisees, in the full Item 7 Reality Check Report.
Bottom Line
Item 7 may look like a tidy checklist, but don’t mistake estimates for guarantees. A conservative-looking investment range can lull prospective franchisees into underestimating how much capital they truly need and overestimating the franchisor’s credibility.
If the numbers don’t add up, or if franchisees consistently report higher costs than what’s shown, dig deeper. Your financial survival depends on it.
Stay Tuned: Item 8-Restrictions on Sources of Products and Services is coming soon.
