Before entering into franchise industry, it’s important to know the lingos related to it. Knowing and understanding the terminology related to the franchise industry helps in understanding related conversations, along with expressing thoughts.
Common Franchise Terms
Franchise: A license that describes the relationship between the franchisor and franchisee including use of trademarks, fees, support and control.
Franchisor: A parent company that allows individuals to start a business, using their trademarks, products, and processes, usually for a fee.
Franchisee: A person who purchases the right to operate a business under the franchisor’s name and system.
Franchise Agreement: Legally, written contract between the franchisor and franchisee, informing each party about their role.
Franchise Fee: The initial fee paid to a franchisor to become a franchisee, usually upon signing the franchise agreement.
Franchise Disclosure Document (FDD): Also known as the Disclosure Statement, it provides information about the franchisor and franchise system to the franchisee.
Start-up Cost: The total amount required to open the franchise, including the franchise fee and other expenses such as real estate, supplies, licenses, working capital, and equipments.
Royalty Fee: Many franchisors ask franchisees to pay fees on a regular basis (weekly, monthly or yearly). It’s a percentage of sales, as sometimes it’s a flat fee.
Term of Agreement: It is the length of time a franchise agreement is valid, usually from 5-20 years. At the end of the term, if a franchise is doing well, franchisors renew the agreement for a new and current percentage market.
In-house Financing: Finance offered by the franchisor to franchisees, helping with expenses, including the initial fee, start-up costs, inventory, and equipments.
Third-party Financing: A finance offered by another source than the franchisor to a franchisee. Many franchisors expedite the loan process for their franchisees from different source and relation.
Master Franchise: A sub-franchisor for a certain territory. Master franchisees can issue FDDs; sign up new franchisees, providing logistical support to the territory royalty.
Intellectual Property Rights: It serves as franchisor’s secrets of carrying business forward, with various trademarks, branding, manuals, etc which should be legally protected.