Advertising Fund (Ad Fund)

The advertising fund is 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

Franchise advertising portals are a website 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)

The Area Development Agreement 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

An area franchise is 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.

Company-owned Location

A company-owned franchise location is owned and operated by the franchisor. This type of location is 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 franchise advertising fund.

Confidentiality Agreement

A confidentiality agreement restricts parties involved from disclosing trade secrets and confidential franchise information. In franchising, this agreement is designed to protect trade secrets and expertise from being misused by those who have learned of them.

Employee Handbook

An employee handbook is one of the initial franchise manuals 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 exclusivity to the franchise territory, meaning no other franchised or company-owned outlet may open in the franchise territory.

Federal Trade Commission (FTC)

The Federal Trade Commission (FTC) is the agency of the U.S. Government which regulates franchising under FTC Rule 436.

Financial Performance Representation (FPR)

The Financial Performance Representation (FPR) is the item 19 representation of unit performance by a franchisor. Also known as an Earnings Claim.

Franchise

A franchise is a relationship, as defined by the FTC and various states, which typically includes three basic elements: (1) the granting of the right to use the systems mark, (2) substantial assistance or control provided by the franchisor to the franchisee, (3) the payment of a fee (in excess of $500) during a period of time six months before or six months following the commencement of the relationship.

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.

Franchise Application/Personal Profile

A franchise application, also referred to as personal profile, is required by most franchisors in order to collect and evaluate information about a prospective franchisee.

Franchise Attorney

A franchise attorney is a lawyer specializing in, or with significant knowledge of, the laws, regulations and customs governing franchising.

Franchise Broker

A Franchise Broker represents multiple franchisors in an effort to identify and introduce perspective franchisees to them. Brokers also work on behalf of individuals or groups helping them identify franchise opportunities prior to making the introduction. If and when a Franchise Agreement is signed the franchisor then pays a commission or finder’s fee to the Broker which is most often based on a percentage of the initial franchise fee.

Franchise Consultant

A franchise consultant is 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 Development

Is the process is of growing a franchise system through sales of franchise units in either groups of units or individual locations.

Franchise Disclosure Document

The Franchise Disclosure Document, formerly known as the Uniform Franchise Offering Circular (UFOC) 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

The FDD Renewal date is 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.

Franchise Information Package

An 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.

Franchise Operations

Franchise operations refer to the day to day operational aspects of a franchise system. They consist of, but are not limited to: vendor relations, day-to-day support, research and development, manuals and office forms, marketing and advertising, franchisee relations and training systems.

Franchisee

The franchisee is a person or company that gets the rights (license) from the franchisor to do business under the franchisor’s trademark or trade name.

Franchising

Franchising is a method of business expansion characterized by a trademark license, payment of fees, and significant assistance and/or control.

Franchisor

The franchisor is a person or company that grants the franchisee the right to do business under their trademark or trade name.

Grand Opening Manual

The Grand Opening Manual is prepared by the franchisor, and 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 franchise manual will detail the steps, vendors, staffing, media and advertising needed for a successful grand opening.

Initial Investment

The Initial Investment is 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).

International Franchise Association (IFA)

The International Franchising Association (IFA) is the world’s oldest and largest organization representing franchising. Founded in 1960, it is a Washington D.C. based trade group and non-profit association that represents a growing membership of more than 1,300 franchise systems, 10,000+ franchisees and more than 500 firms that supply goods and services to the industry.

Jumpstart Manual

The Jumpstart Manual is used by new franchisees in the time 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

A key supplier or vendor is a company with whom the franchisor has negotiated pricing or product availability and whose products or services are an integral part of the franchise system.

Lead

A franchise lead is 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.

Lead Generation

Franchise 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.

Liquid Capital

Liquid capital is a readily convertible asset, such as money, as opposed to a long term asset like real estate. Liquid capital may be held by individuals, companies or governments.

Master Franchise Agreement/License

A Master Franchise Agreement is 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 multi-unit developer is a franchisee who agrees to open two or more locations, generally in a defined market over an agreed upon period of time.

Multi-Unit Franchising

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.

Notice/Disclosure State

Selective states that do not require registration, however, do require notice or disclosure of that the franchise is operating and most often charge a small fee. Depending on the State, notices may be required one time or annually.

Operations manual

An Operations Manual is one of the many essential franchise resources. It is 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 franchise unit in order to maintain the quality of service and products in every franchise outlet.

Product Distribution Franchise

A product distribution franchise is a franchise where the franchisee simply sells the franchisor’s products without using the franchisor’s method of conducting business.

Regional Development/Director Agreement

A Regional Development or Regional Director Agreement is essentially structured the same as a Master Franchise Agreement or License. The terms are most often interchangeable and all are used frequently throughout the industry. "Master" is almost always associated with International agreements while Regional Development is often referred to for domestic agreements.

Registration States

Registration states are 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

Retrofranchising occurs when existing franchise 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

A royalty is a regular payment made by the franchisee to the franchisor, usually based on a percentage of the franchisee’s gross sales.

Search Engine Optimization (SEO)

Search engine optimization is the franchise internet marketing process of improving the visibility of a website or web page in search engines via the “natural” or unpaid search results. In general, the earlier (or higher on the page), and more frequently a site appears in the search results list, the more visitors it will receive from the search engine’s users.

Spec manual

A Spec manual details all specifications, including material, pertaining to brick and mortar, build-out and construction of a retail location.

Start-Up Costs (Initial Investment)

The initial investment is the amount of money the franchisee will spend in becoming a franchisee. It is also known as an Item 7 disclosure. Generally 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

A trademark is a distinctive sign or indicator used by an individual, business organization or legal entity to identify that the products or services to consumers with which the trademark appears originate from a unique source, and to distinguish its products and services from those of other entities.

Question about a franchising term not listed here? Contact us here.