Glossary of frequently used terms in franchise sector
Franchise Basics
Franchise: A license that describes the relationship between the franchisor and franchisee, including use of trademarks, fees, support, and control.
Franchising: A method of business expansion characterized by a trademark license, payment of fees, and significant assistance and/or control.
Franchisor: The company that grants the franchisee the right to do business under their trademark or trade name.
Franchisee: The person or company that gets the right from the franchisor to do business under the franchisor's trademark or trade name.
Business Format Franchise: A type of franchise that includes not only a product, service, and trademark, but also the complete method to conduct the business itself.
Product Franchise: A franchise system where the franchisee sells the franchisor's products exclusively.
Conversion Franchise: An existing independent business that converts to a franchise system.
Financial Terms
Franchise Fee: A one-time fee paid by the franchisee to the franchisor for the rights to operate a franchise unit.
Royalty Fee: The regular payment made by the franchisee to the franchisor, usually based on a percentage of the franchisee's gross sales.
Advertising Fee: A fee paid by the franchisee to the franchisor for national and regional advertising campaigns.
Initial Investment: The total amount of money required to open a franchise unit, including the franchise fee, equipment, inventory, and other startup costs.
Working Capital: The money needed to cover ongoing expenses and keep the business running during the initial months of operation.
Break-Even Point: The point at which total revenue equals total costs, indicating when a franchise unit becomes profitable.
Gross Sales: The total amount of sales generated by a franchise unit before deducting expenses.
Net Profit: The amount of money left after all expenses, including royalties and fees, have been deducted from gross sales.
Legal and Disclosure
Franchise Agreement: The legal, written contract between the franchisor and franchisee which tells each party what each is supposed to do.
Franchise Disclosure Document (FDD): A legal document provided by the franchisor to the prospective franchisee, containing detailed information about the franchise.
Item 19 (Financial Performance Representations): Statements made by the franchisor about the potential financial performance of franchise units, included in the FDD.
Non-Compete Clause: A provision in the franchise agreement that restricts the franchisee from operating a similar business for a specified period after the franchise agreement ends.
Confidentiality Agreement: A legal document that prohibits the franchisee from disclosing confidential information about the franchise system.
Termination: The ending of a franchise agreement before its natural expiration, usually due to a breach of contract.
Renewal: The extension of a franchise agreement for an additional term after the initial term expires.
Franchise Development and Operations
Area Developer: A franchisee who has the right to develop a specified number of franchise units within a certain area.
Multi-Unit Franchisee: Owns multiple franchise business units.
Master Franchisee: A franchising arrangement where a franchisee has the right to sell and support franchises within a specified territory.
Operations Manual: A comprehensive guide provided by the franchisor detailing the procedures and standards for operating a franchise unit.
Brand Standards: The guidelines set by the franchisor to ensure consistency across all franchise units.
Quality Control: Measures taken by the franchisor to ensure that all franchise units maintain consistent quality and adhere to brand standards.
Training Program: The initial and ongoing education provided by the franchisor to franchisees and their employees.
Grand Opening: The official launch event of a new franchise unit, often supported by the franchisor with marketing and promotional activities.
Territory and Location
Exclusive Territory: A geographic area granted to a franchisee in which no other franchisees or company-owned units can operate.
Non-Exclusive Territory: A territory where the franchisor reserves the right to open additional franchise units or company-owned locations.
Site Selection: The process of identifying and securing a suitable location for a new franchise unit, often with assistance from the franchisor.
Demographics: The statistical characteristics of a population used to identify suitable locations for franchise units.
Lease Negotiation: The process of securing a lease agreement for a franchise unit's location, often with guidance from the franchisor.
Franchise Seekers and Development
Candidate: The term used by franchisors for prospective franchisees who have contacted them about a franchise opportunity.
Discovery Day: An event organized by the franchisor to allow prospective franchisees to learn more about the franchise system, meet the leadership team, and visit existing locations.
Validation: Part of the due diligence process when buying a franchise, validating is speaking with existing franchise owners to confirm representations made by the franchisor.
Franchise Application: A formal document submitted by a prospective franchisee to express interest in purchasing a franchise.
Qualification Process: The steps taken by a franchisor to evaluate whether a prospective franchisee meets their criteria for becoming a franchisee.
Letter of Intent: A document indicating a serious interest in purchasing a franchise, often accompanied by a refundable deposit.
Stakeholders in Franchise Ecosystem
Franchise Broker: A person or company hired by a franchisor to identify and cultivate potential new franchisees.
Field Consultant: An employee or contract worker of the franchisor who supports franchisees at their locations.
Supplier/Vendor: A business that provides a service or product to the franchise.
Franchise Consultant: A professional who advises franchisors and franchisees on various aspects of franchising.
Franchise Solicitor: A legal professional specializing in franchise law and agreements.
Area Representative: An individual or company that represents the franchisor in a specific geographic area, often responsible for franchise sales and support.
Franchise Association: An organization that represents the interests of franchisees, often negotiating with the franchisor on behalf of its members.
Franchise Performance and Management
Cash Flow: The net amount of cash being transferred into and out of a business, especially as affecting liquidity.
Turnover: A franchise agreement that has been terminated, not renewed, transferred, or the franchise business goes out of business.
Encroachment: The act of a franchisor opening new franchise units or company-owned locations in close proximity to an existing franchisee's territory, potentially impacting their business.
Franchisee Advisory Council: A group of franchisees who provide feedback and advice to the franchisor on various aspects of the franchise system.
Key Performance Indicators (KPIs): Measurable values used to evaluate the success of a franchise unit or the overall franchise system.
Benchmarking: The process of comparing a franchise unit's performance against industry standards or other units within the system.
Customer Relationship Management (CRM): Software and strategies used to manage interactions with customers and potential customers.
Point of Sale (POS) System: The hardware and software used to process transactions and track sales in a franchise unit.