Glossary of Franchise Terms

FranchiseThe terms used in franchising agreements can be as changing as the franchising industry itself. Actual words and phrases can vary in meaning and use between one company and another, but generally, the following franchise terms will be used:

- Acknowledgement of Receipt

This document is signed as a dated record of acceptance of a Disclosure Agreement.

- Advertising Fee

This is the amount paid as a contribution to advertising funds, usually as a pecentage of gross sales.

- Agreement

The contract spelling out details and obligations.

- Arbitration

Resolution of disagreements by a third-party, outside of the civil courts.

- Area Franchise

Some agreements allow rights to a designated territory, usually on payment of an area fee. These rights may or may not be exclusive, and may involve provisions such as specific location types (malls, stadiums, etc.).

-Assignment (see Advertising Fee)

- Broker

This is a third party managing the sale of franchising on behalf of the franchisor, and must be named in the FDD.

- Business Format Franchising

The specific business methods for using of a trademark or other licensed service mark as dictated by the parent company.

- Business Plan

A planning document that details the objectives for the business and establishes processes and measures for meeting those objectives.

- Capital Required

The amount of the deposit or cash payment required to purchase franchising .

- Churn

Though less common today, this is the sale of a failing location to a franchisee.

- Default

Failure of either party to live up to terms of the agreement; different defaults can involve different conditions or consequences.

- Designated Supplier

These are suppliers of equipment or materials approved by the franchisor

- Distributorship

The rights granted by a supplier to sell its product.

- Due Diligence

This refers to discovering facts critical to understanding a legal arrangement. Franchisees should do due diligence before signing any contract.

- Earnings Claims

This involves specific sales or profitability levels affecting franchisee income.

- FDD (Franchise Disclosure Document)

The format of the disclosure agreement is established by the FTC (Federal Trade Commission) and NASAA (North American Securities Administrators Association). It requires providing full information on the franchisor company, and explains all fees and costs to the franchisee.

- Feasibility Study

This is done to determine the potential benefits of franchising to the parent company, or the potential of a certain location or market.

- Field Representative

An agent of the franchisor that supervises franchisees in order to provide assistance or ensure compliance with company guidelines.

- Financial Performance Representation

The FPR is a required document representing the unit performance of a company’s franchising.

- Franchisor/Franchisee Agreement

A document specifying the obligations of each party during and after the relationship.

- Franchising Fee

This is a flat fee paid by the franchisee in order to offset the franchisor’s monetary risk.

- Gross Sales

This amount is the total sales before deduction of fees and taxes.

- Initial Investment

This is the total amount required from the franchisee, including fees, leases, deposits, materials, equipment, working capital, and other related costs.

- International Franchise Association

The (IFA) is a franchising industry trade association based out of Washington, D.C.

- Master Franchisee / Master Region

This is a franchisee granted the rights to sell franchising to others within a given territory, or Master Region.

- Multi-Unit Developer

This is the term for a franchisee who agrees to open multiple franchising locations within a specified territory and within a specific timeframe.

- Net Worth

Total assets remaining after subtraction of liabilities such as fees and operating costs.

- Non-Compete Clause

This agreement clause forbids the franchisee from competing with the parent company when the business relationship is ended.

- Offering Circular (see FDD)

- Operations Manual

This contains the information needed for successful and compliant operations.

- Protected or Exclusive Territory

A territory assigned a franchisee such that he/she is protected against any of the company’s other franchisees operating in the same territory.

- Registration

Some states may require submission of disclosure documents before approval is given. Registration is not required by the FTC.

- Registration States

The states where registration is required are members of the NASAA.

- Royalty Fee

Usually a percentage of gross sales paid to franchisor by the franchisee.

- Start-Up Costs (see Initial Investment

- Turnkey

A location that is equipped and ready for immediate operation.

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