Reference
Franchise Terminologies
To conduct an intelligent evaluation of any franchise, you need to "know the lingo." Every industry has its terminology, and franchising is certainly no different. Here are the most important terms you will need to know before you buy.
Acknowledgement of Receipt
Item 23 of the Franchise Disclosure Document (FDD) that is signed by the prospective franchisee and provided to the franchisor (in hard copy or electronically signed) as 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.
Agent
A party that has implied or express (oral or written) authority to act on the behalf of another.
Approved Advertising Materials
Materials provided by the franchisor for the franchisee's use in their local market, or materials created by the franchisee which the franchisor has approved for use.
Approved Products
Specified products which a franchisee must buy for use in their business. Franchisor may also specify an authorized supplier. Generally established to control the quality of the products used or sold by the franchisee in conducting their business.
Approved Site
A location that the franchisor determines will satisfactorily meet its criteria. Site approval by franchisor is generally not an indication of the sales potential or success of the location.
Arbitration
A method of resolving disputes.
Area Franchise
A franchise relationship that allows the franchisee to open multiple locations, usually in a defined territory within a pre-agreed upon timeline. Area franchisees usually pay an area fee for the rights granted by the franchisor.
Area Development Agreement
A term that refers to the specific agreement provided for multiple unit or territory purchases of a particular franchise. Generally, an ADA will allow a prospective Franchisee to purchase several units — but not have to open all of the units or territories at once.
Assignment
The sale of a franchise by one Franchisee (assignor) to another (assignee) is called an 'assignment.' In most UFOC's, the Franchisor designates an 'assignment fee' that must be paid by the original franchisee — which is then used by the Franchisor to train and induct the new Franchisee.
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 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.
Business Plan
A planning document that details the objectives for the business and establishes processes and measures for meeting those objectives.
B-2-B (Business to Business)
Used to describe a type of franchise whereby a Franchisee offers products or services of use to other businesses, not to consumers.
Business Opportunity
A term used to describe a non-regulated business offering. Buyers should be beware that these offerings are not protected by FDD compliance laws.
Capital Required
The amount of money a Franchisee will need to ramp up their franchise business during the start-up phase (average 3 to 15 months) to the point of producing a profit.
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 franchisee is not meeting standards.
Exclusive Territory
This is the region or area a Franchisee will have exclusive rights to operate within. It is generally defined and mapped in terms of targeted households or population.
Franchise
The legal rights (the surrounding trademarks, copyrights, franchise operating system, support, training, product or service) a Franchisee obtains from a Franchisor under a franchise agreement to operate within a designated contract period as their business.
Franchisee
The person, partnership or company who pays the Franchisor for the right to own and operate a business using the Franchisor's marks and system.
Franchisor
The person, partnership or company that controls the overall rights to the franchise.
Franchise Agreement
A non-negotiable contract, per FTC regulations, between a Franchisor and a Franchisee in which the Franchisor grants the Franchisee certain legal rights to use the Franchisor's marks and system in connection with a business to be independently owned and operated by the Franchisee.
FDD (Franchise Disclosure Document)
An acronym for 'Federal Disclosure Document' — an extensive legal document that provides you with 'all you need to know' about a particular franchise business, the franchisor and the franchise agreement. Regulated by the FTC, the FDD contents must be disclosed to potential buyers before purchase.
Liquidity
The total cash available to a franchise owner for business operation or living expenses.
Net Worth
Your assets (i.e., the cash value of all you own) minus your liabilities (i.e., what you owe).
Royalty Fee
Typically a percentage of gross sales paid by the franchisee to the franchisor on a regular basis. May also be a fixed or other fee basis.
If you have questions about any of these terms, make a note, and remember to ask me to explain it to you. — Phyllis