Franchise Glossary
A
Advertising/Assignment fee
The franchisee pays an annual fee to the franchisor, as part of corporate marketing and advertising costs. This is separate from royalty fees.
Agent
An agent acts on behalf of a company, to which the company is legally liable.
Approved Products
A franchisor’s first concern is the quality of their franchises. The franchisee is required to buy approved products either from the franchisor, or from pre-approved suppliers.
Arbitration
Arbitraters are neutral third-party entities who help to work out disagreements, thus bypassing the legal process.
Area Development Rights
Area Development Rights gives the rights to a franchisee to expand the number of franchises in a particular location.
Assets
These are items that hold financial value to a company or entrepreneur.
B
Broker
A broker is the middleman between the buyer and seller, who represents either party or both.
Business Format Franchise
The franchisor allows the franchisee to use the company’s products, services and trademark(s). The franchisee is also taught the company’s business system which includes marketing, finance, and personnel.
Business Plan
A document that details a business’ targets, and how it will achieve them.
Buy Sell Agreement
A buy-sell agreement defines the legal provisions that allows the sale of a business.
C
Capital Required
This defines the amount of liquid cash or assets that you need to have in order to invest in a franchise.
Company Owned Outlet
Some franchisors establish businesses that look similar to franchised units.
Conversion Franchise
A conversion franchise allows an independent business to join; the franchisors help to convert it and allow the use of their name, trademark(s) and business system.
Copyright
A copyright is the exclusive right to use and sell any literary or artistic work. It is usually held for a number of years.
D
Default
Default is the failure to perform, as written in contract.
Designated Supplier
The designated suppliers are used by franchisors in oder to maintain standard of quality.
Disclosure Document
A Disclosure Document provides complete details about a franchisor and is a requirement prior to signing a franchise agreement. The information will include legal aspects such as litigation and bankruptcy.
Distributorship
A distributorship is the right granted by a manufacturer or copyright holder for the distribution and sale of products/items. Being a distributor is not equal to a franchisee, and franchisees are not always distributors. However, a franchisee can acquire distribution rights.
E
Earnings Claims
Franchise companies make verifiable statements, or Earning Claims, about their profitability.
Exclusive Territory
Exclusive Territory rights mean that a franchisor appoints only one franchisee for a particular territory. A franchise cannot be sold to a different franchisee within that area.
F
Federal Trade Commission (FTC)
The Federal Trade Commission is an American government body based in Washington, D.C. Its role is to standardize franchising and trade practices.
Fiscal Year
This does not refer to a calender year. A fiscal year refers to a company’s one-year financial period that can begin at any month, i.e. from September 1st to October 30th.
Franchise Renewal
A Franchise Agreement is usually contracted for a number of years. When the term ends, a new agreement is signed through Franchise Renewal.
Franchise
A franchise business is an agreement whereby a franchisor allows a franchisee to use their trademark and business systems. There are certain conditions attached such as royalty fees.
Franchise Agreement
The Franchise Agreement is a legally binding document that details the rights and obligations of both franchisor and franchisee. This document should be carefully reviewed with a franchise consultant, as it is usually one-sided.
It will contain information about business operations, training and support, fees requirement, and much more. There is no specific standard for the outline of this document, as each is tailored to its franchise and franchise industry.
Franchisee
A franchisee is the entity who is granted a license to run a franchise.
Franchise Feasibility Studies
A franchise feasibility study is used to find out if a company can become a successful franchisor.
Franchise Fee
A franchisee pays a franchisee as initial payment to the franchisor to obtain a franchise license.
Franchise Venture Capital
A Franchise Venture Capital is money invested in new business which have the potential for above average growth.
Franchising
Franchising is a method where a franchisor allows a franchisee to use their trademark, name and business system. This is done through a contract agreed upon by both parties.
Franchisor
A franchisor is the person or entity who owns the business, its trademark and system.
Furniture, Fixtures and Equipment
The furniture, fixtures and equipment is the property used in business operations.
G
Gross Sales
Gross sales is the amount of money the business made before expense deductions.
H
Housemark
The housemark, or trademark, is used to identify the company or organisation. It is used for product recognition and may be used in conjunction with other company trademarks.
I
Industry
A category of business that can have several different sectors or fields. For example, the food and beverage industry has the fast food sector, the coffee sector, the restaurant chain sector, and much more.
Initial Investment
The initial investment is the expenses a franchisee incurs at the starting of franchise. This would include start-up, franchise payments, advertising, and so on.
Initial Ongoing Training
This is the training and support a franchisor provides to the franchisee.
International Franchise Association (IFA)
The International Franchise Association (IFA) is based in Washington, D.C. It is a trade association for franchisors.
L
Liquid Capital
Liquid capital readily available money or assets.
M
Marketing Plan
A marketing plan is usually part of a business plan. It details the marketing techniques that will be used for selling franchises or products.
Master Franchisee
A master franchisee is the entity who is given rights by the franchisor to develop franchises within a country or territory. The master franchisee can develop as well as sell franchises.
Master Region
A master region is the territory controlled by a master franchisee.
Multi-level Marketing
This business system is one where the businessperson receives commission their sales and sales of those they sign up as distributors. This is illegal in some states and some resemble pyramid schemes. Although these can be legitimate business opportunities, it should be thoroughly researched.
N
National Alliance Of Franchisees (NAF)
The National Alliance of Franchisees (NAF) is an agency based in Washington, D.C. It was established in 1977 to protect the rights of franchisees.
Net Worth
The net worth of a person or coompany is their amount of their total assets minus the liabilities.
Non Compete Clause
This is a clause in the contract which stipulates that once a franchisee has terminated the franchising contract, they start a business in the same industry i.e. competing with their former franchisor.
O
Offer
An offer is the application to sell a franchise.
Operations Manual
The operations manual covers all areas that relate to the operation of the business.
P
Product Format Franchise
This franchise system is one where the franchisor’s product or service is only a small part of what the franchisee is offering.
Pro Forma
Pro forma statements are issued by the franchisor that measures profits and expenses projections. It is based on the results of actual business operations.
Protected Territory
A protected territory is one where the franchisor agrees not to sell franchises to other franchisees or develop company-owned units.
Q
Quality Control
Quality control is done to ensure that the franchisor’s product or service quality is consistent with the terms and conditions in the operations manual. The franchisor sends field agents to the respective franchise locations to assess quality.
R
Royalty fees
Royalty fees are the fees paid by the franchisee on a monthly basis, usually a percentage of the profits.
S
Sector
A sector is also known as the industry. There are different fields within a sector, such as the fast food within the food and beverage sector.
Sole Proprietorship
A person opens a business and is wholly its owner. This means that the owner is legally liable for the business (as opposed to a company-owned business where the entire company is liable).
Start-up Costs
Start-up costs refer to the initial investment that franchisees put in.
Sweat Equity
This is a system where in the early stages of the business, an owner does not take their share of the profits in order to spur business growth.
T
Total Investment
A total investment tally includes initial investment, working capital, inventory, equipment and other necessities of business.
Trade Secret
Trade secrets can range from food recipes, product ingredients, to customer databases. A franchisor usually includes a clause in the franchise agreement to protect them.
Turnkey
The turnkey business system is one where the franchisor sets up the entire business for the franchisee; all the franchisee needs to do is “turn the key” and they’re all set.
V
Variable Cost
These are costs that vary with a business’ production level.
Vertical And Horizontal Competition
Horizontal competition are companies who offer a product for the same price, while vertical competition are companies that offer the same product for a different price.
