What is the relationship between the Baya Bar initial fee (Item 5) and the franchisee's obligations regarding the initial investment (Item 7)?
Baya_Bar Franchise · 2024 FDDAnswer from 2024 FDD Document
[Item 5: INITIAL FEES]
ITEM 5 INITIAL FEES
Franchise Agreement: You must pay us an initial franchise fee of $35,000 for the right to establish a single Baya Bar Shop under a Franchise Agreement. This fee is used in part for working capital and in part for profit. If you are purchasing your second Shop, the initial franchise fee will be reduced to $30,000, and if you are purchasing your third or later Shop, the initial franchise fee will be reduced to $25,000. The initial franchise fee is imposed uniformly on all franchisees.
If (a) you fail to complete the pre-opening training program to our satisfaction, after having given you the opportunity to re-take our pre-opening training program at your expense or (b) we conclude, no more than ten days after you complete the pre-opening training program, that you do not have the ability to satisfactorily operate your Franchised Business, then we have the right to terminate your Franchise Agreement. If we terminate your Franchise Agreement, we will refund your initial franchise fee less any out-of-pocket costs we have incurred. You must sign any documents we require, including a confidentiality agreement and general release, before any money will be refunded to you. The initial franchise fee is not refundable under any other circumstances.
Multi-Unit Development Agreement: If you and we agree that you will develop and operate multiple Baya Bar Franchised Businesses, then you will pay to us a development fee equal to 100% of the initial franchise fee for the first Shop to be developed, plus 50% of the reduced initial franchise fee for each additional Shop you commit to develop under the MUDA. For example, if you commit to develop three Shops, the development fee is calculated as $35,000 + (50% of $30,000=$15,000) + (50% of $25,000=$12,500) = $62,500. The development fee is imposed uniformly on all multi-unit developers and is fully earned by us when received. These franchise fees are refundable only as described above under the Franchise Agreement.
[Item 7: ESTIMATED INITIAL INVESTMENT]
If you choose to purchase real property on which to build your Franchised Business, your initial investment will probably be higher than what we estimate above. If you purchase real property, we cannot estimate how this purchase will affect your total initial investment.
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- Additional Funds.
You will need capital to support ongoing expenses, such as payroll, utilities, rent, royalty fees, and marketing fund fees, if these costs are not covered by sales revenue for your first three months of operation.
Our estimate does not include any sales revenue you may generate.
New businesses often generate a negative cash flow.
We estimate that the amount given will be sufficient to cover ongoing expenses for the start-up phase of the business, which we calculate to be three months.
This is only an estimate and there is no guarantee that additional working capital will not be necessary during this start-up phase or after.
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- Total.
We relied upon our affiliates' experience in operating similar Baya Bar businesses in the metropolitan New York area since 2016 when preparing these figures.
Your actual costs may vary greatly and will depend on factors such as the size and condition of the space and cost to convert to a Baya Bar Shop, your management skill, experience and business acumen; local economic conditions; the local market for the Baya Bar products; the prevailing wage rate; competition; and the sales level reached during the start-up phase.
These amounts do not include any estimates for debt service.
These are only estimates, and your costs may vary based on actual rental prices in your area, and other site-specific requirements or regulations.
What This Means (2024 FDD)
According to Baya Bar's 2024 Franchise Disclosure Document, the initial franchise fee paid under Item 5 is a component of the franchisee's overall initial investment detailed in Item 7. The initial franchise fee for a single Baya Bar shop is $35,000, but this fee is reduced to $30,000 for a second shop and $25,000 for a third or subsequent shop. This fee grants the franchisee the right to establish a Baya Bar shop. Item 7 outlines the broader estimated initial investment required, which includes expenses beyond just the franchise fee, such as leasehold improvements, equipment, signage, and initial marketing expenses.
The initial franchise fee contributes to Baya Bar's working capital and profit. If a franchisee fails to complete the pre-opening training program satisfactorily or if Baya Bar determines the franchisee cannot satisfactorily operate the business, Baya Bar may terminate the agreement and refund the initial franchise fee, less any out-of-pocket costs. However, this refund is contingent on the franchisee signing required documents, including confidentiality and general release agreements. The initial franchise fee is generally non-refundable under other circumstances.
For multi-unit development agreements, the development fee is calculated differently. For example, committing to develop three shops requires a fee of $62,500, calculated as $35,000 for the first shop, plus 50% of the reduced fees for the second and third shops. This development fee is fully earned by Baya Bar upon receipt and is refundable only under the same conditions as the single-unit franchise fee. The initial investment in Item 7 will vary depending on factors like the size and condition of the premises, local economic conditions, and the franchisee's management skills. Item 7 also specifies that additional funds are needed to cover ongoing expenses like payroll, utilities, and rent during the first three months of operation, which are separate from the initial franchise fee.