Podcast: Download (Duration: 3:09 — 4.5MB)
When diving into franchise ownership, due diligence is everything—and one of the most overlooked sections in the Franchise Disclosure Document (FDD) is Item 7.
In this vlog breakdown, I’m sharing the biggest mistakes I see entrepreneurs make when reviewing FDD Item 7 and how you can avoid falling into the same traps—especially if you're planning to use an SBA loan to fund your franchise startup.
What Is FDD Item 7?
Item 7 of the Franchise Disclosure Document lists your estimated initial investment—everything from franchise fees and equipment to working capital and marketing spend.
Sounds straightforward, right?
Not so fast.
This section is often incomplete or misunderstood, and failing to properly analyze it can lead to cash flow issues, delayed profitability, or worse—underfunding your entire business.
Pitfall #1: Underestimating Working Capital
One of the biggest errors I see? Believing that 3 months of working capital is enough.
📉 Here’s the truth:
Many franchises take 12 to 18 months to become profitable.
So, if you’re leaving your job and going full-time into the business, but only budget 3 months of living expenses and operating capital? You're going to hit a wall—fast.
✅ Solution: Be conservative.
Plan for at least 12+ months of working capital if possible—especially for slower-ramping franchises. If your monthly personal expenses are $10K–$15K, that alone could mean needing $150K+ in reserves or additional capital flexibility.
Pitfall #2: Not Customizing Item 7 to Your Needs
Another common issue? People take Item 7 at face value without tailoring it to their specific situation.
Let’s say the FDD includes a $2,000 line item for a computer. If you already own one, that cost isn’t relevant—but there may be other costs missing, like:
- Down payments for a second location
- Deposits for vehicle leases
- Build-out overruns
- Technology or software needs
✅ Solution: Go line-by-line through Item 7 and customize it to your situation. Think of it like building your personal “Sources and Uses” statement—because guess what? Your SBA lender will ask for it.
Pitfall #3: Skipping Conversations with Existing Franchisees
Don’t make the mistake of staying in the spreadsheet.
📞 Talk to other franchise owners—ask them:
- What their real startup costs were
- If any unexpected expenses came up
- How long it took them to reach breakeven
You’ll get real-world clarity on how Item 7 compares to actual startup costs. Many new franchisees overlook this step, but it's gold.
✅ Solution: Create a list of current franchisees and schedule calls. Ask specific questions related to cost overruns, ramp-up time, and SBA loan structuring.
Final Thoughts: Do the Work Upfront
Your SBA lender will scrutinize every dollar in your funding request. They’ll want to see a complete breakdown of your startup budget, reserves, and living expenses.
The more accurate and tailored your numbers, the smoother your loan process—and the better your odds of long-term success.
Next Steps
📅 Need help reviewing your FDD or building your funding plan?
Book a free consult with me at bookwithbeau.com — we’ll walk through your numbers together.
🗺️ Want to check if your ideal franchise is available in your area?
Go to myterritorycheck.com, enter your zip code, and we’ll let you know what’s open—and recommend other strong options if it's taken.