Absentee ownership: An option offered by some franchisors that allows a person to own a franchise without being actively involved in its day-to-day operations.
Acknowledgement of Receipt: Item 23 of the Franchise Disclosure Document (FDD), proof of the date the FDD was received by the prospect.
Advertising Fee: An amount paid by the franchisee to the franchisor as a contribution to the franchise system’s advertising fund(s). The fund is typically established to pay for the creation and placement of advertising, and is used to offset the franchisor’s administrative costs relating to “retail/brand” advertising. Payments are typically calculated as a percentage of gross sales.
Area developer: An area developer agrees to open a certain number of franchise units in a large territory within a specified time period. They may open and operate the units themselves or recruit other franchisees to open them.
Authorized/Designated Supplier: A supplier of products and/or services used in the operation of the franchise that has been approved by the franchisor to sell to franchisees. May be the franchisor or an affiliate company.
Broker: An outside salesperson or firm that undertakes, for a fee or commission, the sale of franchises for a franchisor. Franchise brokers are disclosed within the offering circular. Some brokers like to call themselves franchise consultants, but this is a misnomer. Business Brokers and Franchise Brokers are active sales agents and paid by the client (buyer or seller) of the transaction.
Business Format Franchising (BFF): A franchise occurs when a business (the franchisor) licenses its trade name (the brand) and its operating methods (its system of doing business) to a person or group (the franchisee) that agrees to operate according to the terms of a contract (the franchise agreement). The franchisor provides the franchisee with support and, in some cases, exercises some control over the way the franchisee operates under the brand. In exchange, the franchisee usually pays the franchisor an initial fee (called a franchise fee) and a continuing fee (known as a royalty) for the use of the trade name and operating methods. BFF describes the system of delivery, not the specific product or service associated with the delivery as in Product or Trademark Franchising.
Capital Required: The initial investment or required amount of investment necessary to conduct the business.
Certification: Program by which franchisor or its franchisee may test and attest to the ability of an employee to perform certain job functions within the franchisee’s business to the franchisor’s standards. Certification can generally be revoked if the employee fails to maintain standards in performing the job function.
Company-owned units: These are locations that are owned and run by the parent company (the franchisor), rather than by franchisees.
Copyright: The right to use and license others to use intellectual property, such as system manuals or other published materials.
Continuous Training: Training provided by franchisors to its franchisees, unit management, and staff, subsequent to the initial training provided.
Conversion: Some franchisors offer entrepreneurs the opportunity to convert their existing independent business into a franchise.
Culture of Compliance: Company culture whereby franchisees and staff do what is right for the system based on a feeling or knowledge that it is the right thing to do within the company philosophy, rather than because it is in the agreement or someone is watching.
Day-to-Day Management: As an independent owner, the franchisee is obligated to manage the day-to-day affairs of their business to meet the franchisor’s brand standards.
Default: The failure of either party to meet the terms of the agreement. In franchising certain defaults are enumerated and some can be cured in a defined period, while others may not be curable.
Design: The trade dress used by the franchise system for the franchise locations, including logo, layout, color scheme, signage, etc.
Distributorship: The right granted by a manufacturer or wholesaler to sell their products.
Exclusive (protected) Territory: A geographic area which provides the franchisee with certain rights, which may include exclusive operation. Franchisors may include carve-out provisions within an exclusive territory which define an excluded type of location (malls, airports, stadiums, arenas, supermarkets, hospitals, etc.).
Feasibility Study: An examination of the potential of a company to franchise, or of the potential success of a unit within a specific market or specific location.
Federal Trade Commission (FTC): The agency of the U.S. Government which regulates franchising under FTC Rule 436.
Field Representative: Typically an employee of the franchisor responsible for ensuring compliance by the franchisee with system standards. This person may also be responsible for providing assistance to franchisees in the operation of their businesses. They may also be a commissioned Area Representative.
Financial Performance Representation (FPR): Formerly known as an Earnings Claim, an FPR is the Item 19 representation of unit performance by a franchisor.
Franchisee: An individual who purchases the right to operate a business under the franchisor’s name and system.
Franchisor: The parent company that allows individuals to start and run a business using its trademarks, products and processes, usually for a fee.
Franchise agreement: The written contract, included in the FDD, which outlines the responsibilities of both the franchisor and the franchisee.
Franchise fee: The initial fee paid to a franchisor to become a franchisee, outlined in Item 5 of the Franchise Disclosure Document (FDD). For some franchises, this is a flat, one-size-fits-all fee; for others, it varies based on territory size, experience or other factors. Many franchisors offer franchise fee discounts for veterans, minorities or existing franchisees.
Franchise Disclosure Document: All franchisors are required by the U.S. Federal Trade Commission to provide this legal document to prospective franchisees. FDDs are updated annually and consist of 23 sections, called items, which explain the company history, the fees and costs, contractual obligations, unit data and more. Don’t make a move without reviewing it.
Franchise: A relationship, as defined by the FTC and various states, which typically includes three basic elements: (1) the granting of the right to use the systems mark, (2) substantial assistance or control provided by the franchisor to the franchisee, (3) the payment of a fee (in excess of $500) during a period of time six months before or six months following the commencement of the relationship.
Franchise Attorney: A lawyer specializing in, or with significant knowledge of, the laws, regulations and customs governing franchising.
Franchise Consultant: A business specialist with significant knowledge of the design, development, and operation of franchising and the underlying franchise relationship; Not to be confused with a Broker, who is a sales agent for the franchisor.
Franchisee in Good Standing: Franchisee operating their location and business in material compliance with franchisor’s operating standards and is current with all payments owed to franchisor and key suppliers.
Gross Sales: When used in franchising, generally the total sales of the business before the collection of any sales taxes and after specified deductions. Generally used as the basis for percentage royalty calculations.
In-house financing: Financing offered by the franchisor to franchisees to help with expenses, which can include the initial franchise fee, startup costs, equipment and inventory as well as day-to-day expenses such as payroll.
Initial Investment: The total estimated cost for establishing the business, including the franchise fee, initial fixed assets and leasehold improvements, inventory, deposits, other fees and costs, and the working capital required during the initial start-up period (three months).
International Franchise Association (IFA: The industry trade association representing franchising. The IFA is based in Washington, D.C. www.franchise.org.
Key Supplier or Vendor: Supplier with whom franchisor has negotiated pricing or product availability and whose products or services are an integral part of the franchise system.
Manuals: The reference literature published by the franchisor which specifies the method of operating the business under the mark. The operations manual(s) enables the franchisor to alter and evolve the business.
Master franchise: A master franchisee serves as a sub-franchisor for a certain territory. Master franchisees can issue FDDs, sign up new franchisees, provide logistical support and shares in the franchise fees of sold franchise territories as well as the on-going royalties with the franchisor.
Multi-Unit Developer: A franchisee who agrees to open two or more locations, generally in a defined market over an agreed upon period of time.
Operating Principal: A single individual authorized by a franchise owner to make decisions on behalf of the franchisee. This person is the operating principal and is usually the person with whom the franchisor consults in regarding the operation and conduct of the franchise.
Product and Tradename Franchising: The licensing of a franchisee/dealer to sell or distribute a specific product using the franchisor’s trademark, trade name, and logo (automobile or truck dealerships, farm equipment, mobile homes, gasoline service stations, automobile accessories, soda, beer, bottling). Describes the specific product or service associated with the delivery, not the system of delivery as with Business Format Franchising.
Protected or Exclusive Territory: Protection or exclusivity granted to a franchisee by the franchisor against the opening of company, franchisee, or other locations within the territory assigned to the franchisee.
Quality Standards: The standards specified by the franchisor for the operation of the business. Quality standards are specified in the operations manuals, and quality franchise systems tightly control their standards for the benefit of the franchise system and its franchisees.
Registration: A requirement to submit the franchisor’s disclosure document prior to the approval to offer franchises within some states. There is no requirement to register a franchise at the Federal level. Registration is not an indication of state sanction of the value of the franchise offering.
Registration states: Fifteen states require franchisors to register their FDDs with a state agency before they are legally allowed to sell franchises within that state. Find a list at FTC.gov.
Retrofranchising or Refranchising: When existing locations that may or may not have ever been franchised, and which are currently operated by the franchisor, are offered for sale to prospects.
Royalty fee: Most franchisors require franchisees to pay a fee on a regular basis (weekly, monthly or yearly). Usually, it’s a percentage of sales; sometimes it’s a flat fee. Some franchisors also require a separate royalty fee to cover advertising costs.
Service Mark: A mark used to identify the services of one company as distinguished from the services of another. Service Marks are afforded similar protection to registered marks under the law.
Single-Unit Franchisee: Franchisee who owns and operates a single location.
Startup cost/initial investment: The total amount required to open the franchise, outlined in Item 7 of the FDD. This includes the franchise fee, along with other startup expenses such as real estate, equipment, supplies, business licenses and working capital. Item 7 will include 3 months of working capital, don’t assume the business model will break even in 3 months, you may need more working capital for your business.
Success: When used in franchising, the absence of failure or closing of a location. It does not relate to unit sales or profitability. The franchisor can take over a location and then re-sell it (see Refranchising) to keep the appearance of the “success rate” high.
Successor Agreement: Franchisee’s ability to continue in the business for additional terms following a successful completion of their initial term.
System Brand Fund: A fund established and managed by franchisor to which all franchised and usually all company-owned units contribute monies to be spent on promoting and protecting the franchisor’s brand. Frequently called an advertising fund.
Term of agreement: This spells out the length of time that your franchise agreement is valid–usually anywhere from five to 20 years. At the end of your term, if you are a franchisee in good standing, most franchisors will allow you to renew your agreement for a percentage of the then-current franchise fee.
Third-party financing: Financing provided by a source other than the franchisor. Many franchisors have relationships with banks or are registered with the SBA in order to expedite the loan process for their franchisees.
Trademark: The mark, name, and logo which identifies the franchisor and which is licensed by the franchisor for use by the franchisee.
Turnkey: A term used to describe a location which is provided to a franchisee fully equipped and ready to operate.