Franchising Glossary
Acknowledgement
of Receipt: The last page of the FDD (Franchise Disclosure Document), which
is signed by recipient to show receipt by a certain date.
Advertising/Marketing
Fee: An ongoing fee paid by franchisees, usually a percentage of
gross revenues, enabling franchisors to develop and purchase national
advertising. This fee is not a component of every franchise; if it
is required it is typically paid in addition to the royalty fee.
Agreement:
The contract signed with the franchisor, this document governs the
relationship between the franchisor and franchisee. Also
called the Franchise Agreement.
Arbitration:
A very common mediating process used to resolve disputes between
franchisors and franchisees. When using arbitration, a neutral third
party hears both sides to the dispute and makes a binding decision.
Area
Developer/Master Franchisee: The right granted to a franchisee by
franchisor to open several franchise locations in a specific area.
This opportunity may include a requirement to develop a certain
number of locations within a specified timeframe, and/or may also
include the right to sell franchises within the specified area.
Broker:
An intermediary
who works with franchisee candidates and franchisors to facilitate a
franchise purchase. Brokers can represent either sellers or buyers.
Business
Format Franchise: A type of franchise where the franchisor grants
the franchisee the use of the franchisor’s trademark and
product or service and provides all business procedures, which can
include marketing, sales, inventory and accounting.
Business
Plan: A plan
developed by the franchisee that provides the objectives of a
business and the steps necessary to achieve those objectives.
Capital
Required: The amount of liquid assets a potential franchisee is
required to have to provide for the start up and initial operation
costs of the business.
Company-owned
Outlet: A business which is operationally similar to a
franchise entity, but owned directly by the corporation.
Conversion
Franchise: A franchisor who allows existing businesses to
convert to the franchisors brand for the purpose of being part of the
franchised system.
Designated
Supplier: Approved
supplier of products and services that meet the requirements of a
particular franchisor.
Default:
A
failure to perform the requirements of the franchise contract.
Distributorship:
A right granted to a person or business to sell the products or
services of another business or wholesaler. Although most
distributorships are not considered to be franchises, some
arrangements may qualify and will require pre-purchase disclosure.
Earnings
Claims: Claims
made by the franchisor regarding the past performance of franchisees
or to the potential financial performance of a franchisee. If given,
claims must be disclosed in item 19 of the FDD.
Entrepreneur:
A person with the desire to create his own career opportunity and who
is willing to assume the responsibility, risk and rewards of starting
and operating a business.
Exclusive
Territory: A designated area or geographic boundary granted to
the franchisee by the terms of a franchise agreement. The franchisor
agrees to not to open another franchised or company-owned business of
a similar nature within the franchisee's protected territory. Also
known as Protected Territory.
Federal
Trade Commission (FTC): The agency of the U.S. government that
regulates franchising in the United States.
Franchise:
A
privilege or right officially granted to offer specific products or
services
under explicit guidelines at a certain location for a declared period
of time.
Franchise
Agreement: A written contract that sets forth the mutual
obligations of both the franchisor and franchisee.
Franchise Disclosure Document: Also known as the FDD, this background and contractual information is a requirement by the FTC and given to potential franchisees by franchisors. It contains information such as terms, royalty payments, existing franchisees in the system, any litigation and other pertinent data. Prior to a change in 2008, this was called the Uniform Franchise Offering Circular.
Franchisee:
A person or entity who holds a contract to conduct one or more
businesses using the name, trademark and operating system of a
franchise company.
Franchise
Fee: The initial fee paid to a franchisor, usually due at the
signing of the contract, for the right to use the franchisor's name,
trademark and business system.
Franchising:
A long-term cooperative relationship between two individual
companies -
a franchisor and one or more franchisees -
based on a legal agreement in which the franchisor provides
a licensed privilege to the franchisee to do business.
Franchisor:
A company that grants to an individual or entity the right to use its
name, trademark, and system of business operations for distribution
of a product or service, in return for a fee and other
considerations.
FTC
Rule 436: The law passed in 1979 that regulates the franchise
industry. It set forth disclosure requirements and prohibited
franchisors from making earnings claims.
Gross
Sales: Revenue
generated before any expenses are deducted.
International
Franchise Association (IFA): Founded
in 1960 as a membership organization of franchisors, franchisees and
suppliers with the purpose of providing help and guidance to the
entire industry.
Initial
Investment: An estimate of the initial cash investment required
to buy and open a franchise business. This estimate includes the
franchise fee and other initial start-up costs, but not necessarily
the total cost of operating the business.
Liquid
Capital: Assets held in cash or in something that can be readily
turned into cash.
Master
Region/Master Franchisee: A large territory acquired by a
franchisee with the intent to subdivide and resell individual
franchise locations.
Multi
Unit Franchise: The franchisee acquires the rights to develop
more than one unit. Also known as Area Developer/Master
Franchisee.
Net
Worth: Total assets minus total liabilities.
Non-Compete
Clause: Restrictions on competing with the franchised company
upon termination of a franchise agreement by either the franchisee or
franchisor.
Offering
Circular: see Disclosure Document
Operations
Manual: Comprehensive document(s) containing all of the
information necessary for the franchisee to be able to operate the
business.
Personal
Guaranty: A non-standard
requirement to secure a business loan where
the lender asks a corporation’s owner(s) to personally
guarantee the debt should the corporation default.
Product Format Franchise: A
type of franchise where the franchisor grants the franchisee the
ability to sell a particular product where that product does not
constitute all that the franchisee sells. Similar to distribution
networks yet the franchisor is able to control the way the dealer
company operates by restricting the sale of competitive products or
the type of marketing that it can do.
Pro
Forma: A financial
picture of the franchisor including a balance sheet, profit and loss
or cash flow statement that estimates income and expense sources,
assets, liabilities, and net worth. Pro forma statements
issued by the franchisor to the franchisee should be based on actual
operating results of the franchisor's units or franchise
establishments.
Protected
Territory: A designated area or geographic boundary granted to
the franchisee by the terms of a franchise agreement. The franchisor
agrees to not to open another franchised or company-owned business of
a similar nature within the franchisee's protected territory. Also
known as Exclusive Territory.
Qualification
Questionnaire: A form to be completed by the prospective
franchisee which allows the franchisor to assess whether or not the
prospect has the motivation, skills and financial resources necessary
to become a successful franchisee.
Registration:
A
requirement in several states that franchisors supply specific
information for approval by state regulatory authorities before
franchises may be offered in that state.
Renewal:
The signing of a new franchise agreement upon the
expiration of the old one. Many franchisors issue 5 or 10 year
agreements which have renewal rights if all conditions are met. A
fee is normally associated with renewing a franchise agreement.
Royalty:
An ongoing payment made by franchisee to franchisor, usually a
percentage of gross sales, made throughout the term of the franchise
agreement.
Single
Unit: A franchisee owns and operates one unit of a franchise.
Start
Up Costs: The amount of money the franchisor will require the
franchisee to have available to invest in the franchise in order to
get it up and running. Often referred to as Initial
Investment.
Total
Investment: An estimate of the amount of money needed by a
franchisee to start a business, including the initial fee, the
working capital, and the cost to set up the business which may
include site build-out, equipment, inventory, marketing and
advertising, and
most (but not necessarily all) items considered necessary to create a
fully operational business.
Trademark:
A symbol, name, or other distinctive characteristic which
identifies a product that has been officially registered and is
legally restricted to the use of the manufacturer or owner.
Turnkey:
A franchise opportunity where most all aspects of a business prior to
opening are provided to the franchisee by the franchisor. Also
referred to as “Business in a Box,” a turnkey business
means the franchise buyer shouldn’t need to do much more than
“turn the key” in the door to start the business.
UFOC:
Uniform Franchise Offering Circular, see Franchise Disclosure Document
10-day and 5-day Rules:
A FTC requirement that the franchisor give potential franchisees a
complete copy of their FDD at least 10 business days before any
contract is signed or any money changes hands (the 10-day Rule).
Also, potential franchisees must be given a separate contract, with
all blanks or negotiated parts completed (except signatures) at least
five business days before any contract is signed or any money changes
hands (the 5-day Rule).
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