The four cost lines that matter
Franchise fee. A one-time, non-refundable payment — typically $20,000–$50,000 — for the right to operate in your territory, plus initial training and onboarding. It's due at signing, before you've made a dollar.
Royalty. An ongoing cut of your gross revenue — not profit — typically 4–8%, though many home-service and business-service brands run higher, up to 10–12%. This is the number owners underestimate: a $5,000 job at an 8% royalty costs you $400 whether your margin on that job was 40% or 4%.
Advertising/brand fund. A separate ongoing contribution, commonly 1–4% of gross revenue (roughly 2% is a frequently cited typical figure), that funds national or regional marketing you don't control the creative or spend allocation for.
Everything else. Buildout or vehicle wraps, initial inventory or equipment, a working-capital cushion, and often mandatory technology or software fees paid to (or through) the franchisor. This is where total initial investment climbs from the advertised franchise fee into six figures.
Where FDD Item 7 comes in
The FDD's Item 7 is legally required to lay out the estimated initial investment as a range — low end to high end — across every cost category: franchise fee, real estate/buildout, equipment, initial inventory, training expenses, and working capital for the first few months. Read Item 7 as a worksheet, not a headline number — add up the high end of every line, not the low end, and compare it to your actual cash and financing capacity before you sign.
The royalty math that surprises people
Royalties are calculated on gross sales, collected on a fixed schedule regardless of your profitability that period. On $100,000 in monthly revenue at a 6% royalty plus 2% ad fund, that's $8,000/month leaving the business before you've paid a single other expense. Model this against your expected margins before you sign — not after your first slow month.