One of the things that can be the most overwhelming about the franchising process is learning all of the franchising terminology. Here are some of the most common franchising definitions. If you still have questions about franchising terminology, please don’t hesitate to contact us.
Advertising Fund (Ad Fund): The advertising 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
Advertising Portals: An area online where franchisors can pay to advertise their franchise to potential franchisees. The strength of advertising on franchise portals is getting franchisees to take a look at franchise concepts that they normally never would have considered.
Area Development Agreement (often confused with multi-unit): This is another variation of multi-level franchising where the franchisor grants exclusive development rights for a particular geographic area to an area development investment group or an area developer. In return for the rights to an exclusive territory, the area developer pays the franchisor a front-end development fee and commits to develop a certain number of units within a specified period of time.
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
Audit: For franchisors who are unable to achieve their grown plan, it is often recommended to undergo a strategic audit. The audit can cover specific elements of a franchise program or a complete assessment of the franchise organization. The end result is a written report with specific recommended action steps that the franchisor should undertake in each audited area.
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 Ad Fund.
Confidentiality Agreement: An agreement designed to protect trade secrets and expertise from being misused by those who have learned of them.
Employee Handbook: Used by franchisees when hiring and training staff with information covering the process of educating and selling the service.
Exclusive Territory: The franchisee’s territory is the geographic area or domain in which his/her business operates. The franchisor may grant an exclusivity to the territory, meaning no other franchised or company-owned outlet may open in that territory, or the rights of first refusal to the franchisee. Meaning that if the area can support other outlets, the franchisee is given first option to do so. The franchisor may give rights to the franchisee only where his location stands, no more.
Federal Trade Commission (FTC): The agency of the U.S. Government which regulates franchising under FTC Rule 436.
Financial Performance Representation (FPR): Forming known as an Earnings Claim, an FPR is the item 19 representation of unit performance by a franchisor.
Franchise: A license that describes the relationship between the franchisor and franchisee including use of trademarks, fees, support and control.
Franchise Agreement: The franchise agreement is a legally binding agreement that outlines the franchisor’s terms and conditions for the franchisee. The franchise agreement also clearly outlines the obligations of the franchisor and the obligations of the franchisee. The franchise agreement is signed when an individual has made the final decision to buy the franchise. It is strongly suggested that anyone who is considering buying a franchise should consult with a professional franchise attorney.
Franchise Attorney: A lawyer specializing in, or with significant knowledge of, the laws, regulations and customs governing franchising.
Franchise Consultant: A business specialist with significant knowledge of the design, development, and operation of franchising and the underlying franchise relationship. Not to be confused with a Broker, who is a sales agent for the franchisor.
Franchise Disclosure Document: Formerly known as the Uniform Franchise Offering Circular (UFOC). The format of the FDD is specified by the FTC and NASAA (Federal and State regulators) and provides information about the franchisor, the obligations of the franchisor and the franchisee, fees, start-up costs, and other required information about the franchise system. It includes a listing of current and former franchisees. In addition to the disclosure portion of the FDD, the document will contain the franchise and other agreements and exhibits. It does not typically include unit earnings information.
Franchise Disclosure Document (FDD) Renewal: A previously decided-upon date when the franchisor renews their FDD. Any material changes need to be included in the new FDD.
Franchise Fee: The franchise fee is an up‐front (one‐time) cost that a new franchisee pays to the franchisor. In most cases the franchise fee will cover the costs for training, support and site selection.
Franchisee: The person or company that gets the right from the franchisor to do business under the franchisor’s trademark or trade name.
Franchising: A method of business expansion characterized by a trademark license, payment of fees, and significant assistance and/or control.
Franchisor: The person or company that grants the franchisee the right to do business under their trademark or trade name.
Franchise Information Package: FIP (Franchise Information Packet) is a marketing piece presented to interested prospects detailing the important components of the franchise offering. The packet is created through mining the key aspects of the franchise system and competitors within the industry and ranges between 12 and 18 pages.
Grand Opening Manual: Used by franchisees to help launch their new franchise operation. A quality grand opening manual can be essential to franchisee satisfaction as it provides confidence and increased revenues during the early delicate stages of the franchise relationship. The manual will detail the steps, vendors, staffing, media and advertising needed for a successful grand opening.
International Franchise Association (IFA): The industry trade association representing franchising. The IFA is based in Washington D.C.
Jumpstart Manual: To be used by new franchisees from the signing of the franchise agreement until the start of training. The manual is divided among tasks to be completed prior to the start of the new franchise business; there may be up to 35+ tasks contained in the manual which may be up to 115+ pages. The manual is written so the franchisee begins to execute independently and learns to use the tools available.
Key Supplier or Vendor: Supplier with whom the franchisor has negotiated pricing or product availability and whose products or services are an integral part of the franchise system. Lead – An inquiry that is prequalified after the initial interview with a member of the franchisor’s development staff as meeting the minimum criteria to become a franchisee, and who is invited to submit a franchise application. Initial Investment – The total estimated cost for establishing the business, including the franchise fee, initial fixed assets and leasehold improvements, inventory, deposits, and other fees and costs, and the working capital required during the initial start-up period (three months). Lead Generation – Lead generation is a marketing term that refers to the creation or generation of prospective consumer interest or inquiry into a business’ products or services.
Master Franchise Agreement/License: A model of multi-level franchising wherein the master franchisor sells the development rights in a particular geographic market to a master franchisee, who, in turn, sells individual or single-unit franchises within the territory. In return for a front-end master franchise fee, the master franchisee has the sole responsibility of developing that area or market under a mutually agreed upon schedule. The master franchisee is rewarded by sharing in the franchise fee and ongoing royalties paid by the franchisees within the territory to the master or parent franchisor.
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.
Multi-Unit Franchise: Multi-unit franchising creates the opportunity for a franchisee to open more than one unit. In this type of operation, the franchisee partakes less in the day‐to‐day operations of the unit. Instead, the multi‐unit franchisee manages all the locations at a higher level. Usually the franchisee will hire managers and staff for each location to perform the daily operations. This type of franchising is not typically limited to a particular area. Therefore, the franchisee may have several units located in different parts of a town, or even in other countries. Although the initial total investment is higher than opening a single‐unit franchise, the risk is sometimes lower for the franchisee. Owning more units can increase the overall probability of success. Also, the multi‐unit franchisee is likely to have more input with the franchisor, creating a win‐win situation on both sides.
Operations manual: A written document which clearly explains the franchisor’s standards of operation, and identifies the operational tasks required to establish and operate the franchise business. The operations manual supports and promotes the use of consistent and uniform day-to-day business procedures at each franchise unit within the network in order to maintain the quality of service and products in every franchise outlet.
Product Distribution Franchise: A franchise where the franchisee simply sells the franchisor’s products without using the franchisor’s method of conducting business.
Registration States: The various states that require franchisors to submit their FDD for approval prior to offering franchises. The registrations states are members of the NASAA.
Retrofranchising or Refranchising: When existing locations that may or may not have ever been franchised, and which are currently operated by the franchisor, are offered for sale to prospects. Not the same as churning – the franchisor has an expectation that the retrofranchised business will be successful.
Royalty: The regular payment made by the franchisee to the franchisor, usually based on a percentage of the franchisee’s gross sales.
Spec manual: A manual which details specifications pertaining to bricks and mortar, build-out, construction, architecture, etc… Includes all of the material specifications.
Start-Up Costs (Initial Investment): The initial investment that the franchisee will make in becoming a franchisee. It is also known as an Item 7 disclosure. Generally this includes the franchise fee, the cost of fixed assets, leasehold improvements, inventory, deposits, other fees and costs, and working capital required during the start-up period.
Trademark: The franchisor’s identifying marks, brand name and logo that are licensed to the franchi