Understanding the Franchise Terms

Advertising Fee:

It' s a contribution made to an advertising fund that the franchisor manages for the franchise system. The franchisor customarily uses the fund for national advertising and marketing, or to attract new franchise owners, but not to target your particular outlet. It's usually less then 3% of the franchisee's annual sales and usually paid in addition to the royalty fee. Not all franchisors charge advertising fees as in our case. At MDACI, our franchisors do not charge Advertisement Fee, but we carry out regular controls and provide advisory services on the advertisement quality and standards before being released nationally or locally.

 

Advertising Fund:

See advertising fee

 

Approved Suppliers:

Suppliers approved or chosen by a franchise company

 

Area Franchisee/Area Developer:

Buys the rights from the original franchisor to develop the system in a defined region. An area developer cannot sell franchises

 

Broker:

An independent professional salesperson or firm that takes a fee or commission for the sale of franchises on behalf of franchisors. Franchise brokers are disclosed within the offering circular. Some brokers like to call themselves franchise consultants, but this is a misnomer (see franchise consultant definition below).

 

Business Format Franchising:

Abbr.: BFF – It is a license to operate a business using a franchisor's product, service and trademark under certain guidelines for a specified time.

 

A franchise occurs when a business (the franchisor) licenses its trade name (the brand) and its operating methods (its system of doing business) to a person or group (the franchisee) that agrees to operate according to the terms of a contract (the franchise agreement). The franchisor provides the franchisee with support and, in some cases, exercises some control over the way the franchisee operates under the brand. In exchange, the franchisee usually pays the franchisor an initial fee (called a franchise fee) and a continuing fee (known as a royalty) for the use of the trade name and operating methods. BFF describes the system of delivery, not the specific product or service associated with the delivery as in Product or Trademark Franchising.

 

Business Plan:

Is a study plan that outlines the objectives of a business and the steps necessary to achieve those objectives. The business plan can include financial projections and the planned steps for expansion. If you are seeking funding from a bank or building society you will often be asked to provide your business plan to secure borrowing. In fact, many of the well-known banks can offer advice and assistance on formulating a comprehensive and achievable business plan for your franchise.

 

Capital Required:

Means the initial investment or required amount of investment necessary to conduct the business.

 

Certification:

Program by which franchisor or its franchisee may test and attest to the ability of an employee to perform certain job functions within the franchisee’s business to the franchisor’s standards. Certification can generally be revoked if the employee fails to maintain standards in performing the job function.

 

Churning:

It is a failing location acquired by the franchisor and resold to a franchisee even though the franchisor felt that the location had a high chance of failure regardless of ownership. While churning is not a common occurrence in franchising today, it does occur, and sometimes a single location may be churned several times. Churning is not the same as retrofranchising. See retrofranchising.

 

Company-Owned Outlet:

An outlet operating under a franchise company brand, but that is owned by the franchisor as opposed to a franchisee. Company-owned outlets are often used by franchisors to trial new ideas and systems before implementing them across the franchised outlets within the network.

 

Copyright:

The franchisor produces manuals and other documentation to ensure the franchise system is uniform. These are the franchisor's documents and he/she has copyright over them. Designated Supplier – see Approved Supplier.

 

Continuous Training:

Training provided by franchisors to its franchisees, unit management, and staff, subsequent to the initial training provided.

 

Conversion Franchising:

The conversion of an existing business within the franchisor’s industry into the franchise system. Sometimes includes experienced operators without operating locations.

 

Culture of Compliance:

Company culture whereby franchisees and staff do what is right for the system based on a feeling or knowledge that it is the right thing to do within the company philosophy, rather than because it is in the agreement or someone is watching.

 

Days:

Unless otherwise stated, days generally refer to calendar days.

 

Day-to-Day Management:

As an independent owner, the franchisee is obligated to manage the day-to-day affairs of their business to meet the franchisor’s brand standards.

 

Default:

The failure of either party to meet the terms of the agreement. In franchising certain defaults are enumerated and some can be cured in a defined period, while others may not be curable.

 

Design:

The trade dress used by the franchise system for the franchise locations, including logo, layout, color scheme, signage, etc.

 

Development Type:

The Development type is the method by which the franchisor wishes to build their franchise network. See Unit Franchise, Multi-unit Franchise, Area Developer, Regional Franchisee and Master Franchise.

 

Disclosure Document:

Also known as the Franchise Disclosure Document (FDD). 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.

 

Distributorships:

Manufacturers and wholesalers grant permission to businesses and individuals to sell their products. A distributorship is normally not a franchise. However, certain distributorship arrangements may qualify as a franchise, may be licensed or be adjudged a business opportunity requiring disclosure.

 

Earnings Claim:

It is any information the franchisor gives to a prospective franchisee, which allows you to attempt to predict a range or level of potential sales, costs, income, or profits.

 

Estimated Initial Investment:

A detailed listing of all fees and expenses you can expect to incur in starting a franchise. This listing represents the total amount that you would need to pay or get financing for, including fees paid to the franchisor; estimates for furniture; fixtures and equipment; opening inventory; real estate costs; insurance inventory, etc. This estimate should include a provision for working capital through the start-up phase.

 

Exclusive/Protected Territory:

As a franchisee you can, with the consent of the franchisor, be given an exclusive area around your operation. This area can be large or small and no other franchisee or company owned business would be allowed to operate there.

 

Feasibility Study:

An examination of the potential of a company to franchise, or of the potential success of a unit within a specific market or specific location.

 

Franchise

The rights you acquire to offer specific products or services within a certain location for a declared period of time.

 

Field Representative:

Typically an employee of the franchisor responsible for ensuring compliance by the franchisee with system standards. See also responsible for providing assistance to franchisees in the operation of their businesses. May be a commissioned Area Representative.

 

Financial Performance Representation:

Abbr.: FPR – Formerly known as an Earnings Claim, an FPR is the Item 19 representation of unit performance by a franchisor.

 

Footprint:

Layout of a location including placement of all furniture, fixtures, and equipment.

 

Franchise Agreement:

outlines the expectations and requirements of the franchisor and describes their commitment to the franchisee. The Franchise Agreement includes information that covers territorial rights of the franchisee, location requirements, training schedule, fees, general obligations of the franchisee, general obligations of the franchisor, etc.

 

Franchise Attorney:

Is 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 (see broker definition above).

 

Franchise Fee:

 

 

 

                                     

An up-front entry fee, usually payable upon the signing of the contract (franchise agreement) for the right to use the franchisor's name, logo, and business system. Often the franchise fee is also the consideration paid for initial training, site selection, operations manuals, and other help given by the franchisor before the opening of the business.

 

Franchisee:

Is the operator or owner of a franchise.

 

Franchisee in Good Standing:

Is the Franchisee operating their location and business in material compliance with franchisor’s operating standards and is current with all payments owed to franchisor and key suppliers.

Franchise Resale:

The process of buying a franchise that is already up and running. Franchisees sell on their franchise for a number of reasons; retirement, another business venture, moving overseas, have made their money etc. Whilst the investment may be higher than buying a new franchise, buying a franchise resale minimises the risk of failure and is operational from day one.

 

Franchise Type:

It is the franchise type identifies in general the type of work involved in running the franchise. There are five main categories, retail franchises, management franchises, single operator manual, single operator executive and investment.

 

Franchising:

It is a method of doing business within a given industry that involves at least two parties - the franchisor and the franchisee. The contract binding the two parties is the franchise.

 

Franchisor:

The parent company or person that grants, for a fee and other considerations, the right to use its name and system of business operations.

 

Home-based franchises:

These are franchises that can be run from home from a small office. The franchise investment is usually lower with a home-based franchise.

 

Initial Investment:

The funds needed to initially set up a franchise and begin trading. This amount must cover the franchise fee paid to the franchisor and also includes outlay needed to secure space, purchase products, and cover any other initial set-up costs.

 

Investment:

The franchisee invests a significant amount of money in the franchise such as a hotel. The franchisee in this case will be personally working at arm’s length from the franchise and will employ a management team to operate it.

 

Job Franchise:

See Single Operator Manual.

 

Management Franchise:

The franchisee will be using their experience to grow the business and control staff who carry out the tasks of the job. It will require premises, which are more likely to be office than a High Street outlet. The majority of the turnover from management franchises is generated from Business to Business activities rather than from retail.

 

Management Service Fee:

It is a term for Royalties, usually in the form of a fixed fee or percentage.

 

Marketing Plan:

It is a marketing plan should form part of your overall business plan. The purpose of the marketing plan is to define your market, i.e. identify your customers and competitors, to outline a strategy for attracting and keeping customers and to identify and anticipate change.

 

Master Franchisee/License:

This is a franchisee who is given the right by the franchisor to develop and sell franchises under the brand name within a certain territory. Unlike area development rights, where a franchisee can open outlets themselves within a given region, a master franchise owner must only sell franchises in a particular region.

 

When you are looking to expand your investment portfolio or when you are interested in becoming a master franchisee for an international brand, we will help you to understand how you can be involved in this exciting investment opportunity.

 

Multi-Level Marketing:

A form of distributorship in which you receive commission on your own sales and on the sales of others whom you sign up as distributors. Some MLMs are considered pyramid schemes and illegal in some countries. Some are legitimate business opportunities. Any business of this nature should be investigated closely.

 

Multi-Unit Franchise:

The franchisor awards the right to a franchisee to operate more than one unit within a defined area based on an agreed upon development schedule.

 

Offer:  

An oral or written proposal to sell a franchise to a prospective franchisee upon understood general terms and conditions.

 

Operating Manual:

Comprehensive guidelines advising a franchisee on how to operate the franchised business. It covers all aspects of the business, and may be separated into different manuals addressing such subjects as accounting, personnel, advertising, promotion and maintenance.

 

Product Format Franchise:

Once the rights to market a product or service have been acquired, you may offer other products along side your "product franchise." For example you may have a service station that sells a brand of gasoline, but you are not restricted on the other products or services that you can sell. Many times these are not true franchises, but can be considered distributorships

 

Regional Franchise:

Buys the rights from a master franchisee or the original franchisor to sell franchises in a defined region.

 

Renewal:

The rights given to a franchisee to renew their franchise business once the initial period set out in the franchise agreement has lapsed. The franchise agreement should also state the terms and conditions under which both parties agree that the business relationship can or cannot be renewed.

 

Retail Franchise:

The franchise will occupy retail premises, selling products or services during retail hours for ‘walk-in’ retail. The business is totally dependent on the premises and turnover is achieved from walk-in consumers.

 

Royalty Fees:

Are ongoing fees paid to the franchisor by franchisees in respect of ongoing training and support services provided, usually a % of turnover.

 

Single Operator Executive:

(Also referred to as a ‘white collar’ Job Franchise) – the franchisee will be working at the franchise, which usually takes the form of a trade supplying, selling and delivering products or service. It may be mobile, home-based or requiring small office premises. The type of work is executive.

 

Single Operator Manual (Also referred to as Job Franchise):

It is the franchisee will be working at the franchise, which usually takes the form of a trade supplying, selling and delivering products or service. It may be mobile, home-based or requiring small office premises.

 

Termination:

Refers to the legal provisions by which either party in the relationship may terminate the contract, e.g., for breach of contract.

 

Territory/Area:

Is that 'exclusive' portion of land, on a national, regional/area, county, metropolitan or postcode basis, which is allocated to franchisees as part of the franchise package.

 

Total Investment:

The amount of money estimated for complete set up of a franchisee's business, including the initial investment, the working capital, and subsequent additions to inventory and equipment deemed necessary for a fully operational and profitable enterprise.

 

Turnkey Package:

It is a package that includes all the systems, information and equipment a franchisee needs to be able to ‘turn the key’ and start trading.

 

Working Capital:

It is a major cause of business failure is not having enough cash in the bank, trade credit, borrowing capacity or cash flow to meet start-up expenses and see the business through any unusual dips and changes in its daily activity. Initially funds are needed to pay first and last months rent, utility deposits, licenses and any number of incidental costs. As it takes time to build up a new business the first months are usually loss months, which need to be financed.

 

‘White collar’ Job Franchise:

See Single Operator Executive

 

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