30 Franchising Terms You Should Know

Category: Franchising Resources

When It Comes To Being A Business Owner, It’s Important To Be As Informed As Possible!

Here Are 30 Common Terms You Should Know When Getting Involved In A Franchise.

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Franchise: A franchise is a type of license that grants a franchisee access to a franchisor’s proprietary business knowledge, processes and trademarks, thus allowing the franchisee to sell a product or service under the franchisor’s business name.
Franchisee: The name given to a person or corporate entity that owns a franchise business.
Franchisor: A franchisor is a person or company that grants a license to a third party for the conducting of a business under the franchisor’s marks.
Franchise Agreement: A franchise agreement is a legal, binding contract between a franchisor and franchisee.
Franchise Disclosure Document (FDD): a legal document that a franchisor must disclose to a prospective franchisee before a franchise may be sold.
Item 19: The section of the Franchise Disclosure Document that a franchisor may use to disclose earnings claims of existing franchise owners and corporate locations.

Validation: Part of “due diligence” when buying a franchise. Calling to speak with existing franchise owners in an attempt to validate the virtues of the franchise opportunity as explained by the franchisor. Typically, the prospective franchisee will contact several franchisees from the list provided in the company’s FDD.
Discovery Days: A term commonly used to refer to the time when a franchisor invites a prospective franchisee to the corporate office to meet the staff and learn more about the company. This is often one of the final steps before the prospective franchisee makes a final decision on investing in the franchise.
Assets: something you own that has monetary value, like a house, car, checking account or stock.
Liabilities: something a person or company owes, usually a sum of money such as loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses.
Net Worth: Calculation of one’s total value (total assets minus total liabilities). Many franchise brands require a minimum net worth in addition to a minimum liquid capital for prospective franchisees.
Liquid Capital: A sum of cash and other assets that can be easily converted to cash. Franchisors will require a specific minimum amount of available liquid capital from prospective franchisees.
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.
Return on Investment (ROI): A percentage of value of a business (or any investment) relative to the cost of establishing it. The formula for ROI is [current value – total cost] / [total cost] * 100.
Royalties/Royalty Fees: The sum of money, usually a percentage of gross sales, paid by the franchisee to the franchisor on a regular (usually monthly) basis as part of the franchise agreement.
Startup Costs (Initial Investment): The total initial (and not perpetual) costs that go into starting a franchise business. This can include the franchise fee, construction fees, equipment purchases, legal fees, and various other costs.
Franchise Fee: A component of the initial investment in a franchise business that allows the franchisee to use the franchise brand’s name and likeness. This is a one-time fee.

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.
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.
Operations: The processes, procedures, and strategies employed by the business to provide the product and/or services to its customers.
Supplier/Vendor: A business providing a service or product to another business. Franchisors often establish “preferred” supplier/vendor relationships wherein individual franchises receive negotiated discount pricing.
Renewal: Extension of the original franchise agreement whereby the franchisee retains ownership of the franchise business for a new term.
Transfer: Ownership of a franchise business is moved from one party to another.
Trademark: The marks, brand name and logo that identify a franchisor which is licensed to the franchisee.
Company-Owned Location: A location, owned and operated by the franchisor, usually identical in appearance and operations to those of the system’s franchises. While not required, most company-owned locations contribute to the system’s advertising fund(s).
Territory: A designated area that comprises a franchise “unit,” typically used for service-based or mobile franchise business models. Many franchisors provide exclusive territories to prevent conflict between franchisees.
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.).
Inquiry: Anyone requesting information about the franchise opportunity, whether via the web, by telephone, by fax, or by other methods.
Turnkey: A term used to describe a location which is provided to a franchisee fully equipped and ready to operate.
Term of Agreement: The term of agreement is the length of time the franchise agreement is good for. Typically this term lasts anywhere from five years to twenty years. Once the term is up, the franchisor can renew the agreement if things are going well and/or the contract can be readjusted.