Franchising Terminology

Advertising/Marketing Fee: An ongoing fee paid by franchisees, usually a percentage of gross revenues, enabling franchisors to develop and purchase national advertising. This fee is not a component of every franchise.

Area Developer: The right granted to a franchisee by a franchisor to open several franchise locations in a specific area. This opportunity may include a requirement to develop a certain number of locations within a specified timeframe, and/or may also include the right to sell franchises within the specified area.

Broker: An intermediary who facilitates the transaction between franchisor and franchisee. Brokers can represent either sellers or buyers.

Business Format Franchise: A model that includes not only the granting of the rights to the products, services, and trademark of the franchisor, but also the entire business concept, including marketing strategy, operating manual, standards, quality control, group purchasing power, research and development, and a continuous process of training and guidance.

Capital Required: The amount of liquid assets a franchisee is required to have to provide for the start-up and initial operation costs of the business.

Company-owned Unit: A business which is operated and owned directly by the corporation.

Conversion Franchise: A franchisor who allows existing businesses to convert to the franchisor’s brand for the purpose of being part of the franchised system.

Designated Supplier: Approved supplier of products and services that meet the requirements and specifications of a particular franchisor.

Exclusive Territory: A designated area or geographic boundary granted to the franchisee by the terms of a franchise agreement. The franchisor agrees not to open another franchised or company-owned business of a similar nature within the franchisee’s protected territory. Also known as Protected Territory.

Franchise: A right granted to offer specific products or services under explicit guidelines at a certain location for a declared period of time.

Franchisee: A person or entity who holds a contract to conduct one or more business using the name, trademark and operating system of a franchise company.

Franchising: A long-term cooperative relationship between two companies – a franchisor and one or more franchisees – based on a legal agreement in which the franchisor provides a licensed privilege to the franchisee to do business.

Franchisor: A company that grants to an individual or entity the right to use its name, trademark, and system of business operations for distribution of a product or service, in return for a fee and other considerations.

Franchise Agreement: The contract signed with the franchisor. This document governs the relationship between the franchisor and franchisee.

Franchise Disclosure Document: Also known formerly as an “Offering Circular” or “UFOC,” this background and contractual information is a requirement by the FTC and is provided to potential franchisees by franchisors. It contains information such as terms, royalty payments, existing franchisees in the system, any litigation and other pertinent data.

Gross Sales: Revenue generated before any expenses are deducted.

International Franchise Association (IFA): Founded in 1960 as a membership organization of franchisors, franchisees and suppliers with the purpose of providing help and guidance to the franchise industry.

Initial Investment: An estimate of the initial cash investment required to buy and open a franchise. This estimate includes the franchise fee and other initial start-up costs, but not necessarily the total cost of operating the business.

Liquid Capital: Assets held in cash or that can be readily converted into cash.

Master Franchisee: Also known as “sub-franchisor.” A franchisee that may own his/her own outlets with the intent to sub-franchise outlets to sub-franchisees in a specific region or country.

Multi-Unit Franchisee: The franchisee acquires the rights to develop more than one outlet. Also known as “Area Developer/Master Franchisee.”

Net Worth: Total assets minus total liabilities.

Non-Compete Clause: Restrictions on competing with the franchisor following termination of a franchise agreement by either the franchisee or franchisor.

Offering Circular: See “Disclosure Document.”

Operations Manual: Comprehensive document providing all the information necessary for the franchisee to operate the business.

Product Format Franchise: A type of franchise where the franchisor grants the franchisee the ability to sell a particular product where the product does not constitute all that the franchisee sells. Similar to distribution networks but the franchisor is able to control the way the dealer company operates by restricting the sale of competitive products or the type of marketing that it can do.

Pro Forma: A financial portrait of the franchisor. Includes a balance sheet, profit and loss or cash flow statement that estimates income and expense sources, assets, liabilities and net worth. Should be based on actual operating results of the franchisor’s units.

Protected Territory: See “Exclusive Territory.”

Registration: A requirement by some states that franchisors supply specific information for approval by state regulatory authorities before franchises may be offered in that state.

Royalty: An ongoing payment made by franchisee to franchisor, usually a percentage of gross sales, made throughout the term of the franchise agreement.

Single Unit: A franchisee owns and operates on outlet of a franchise.

Trademark: A symbol, name, or other distinctive characteristic which identifies a product that has been officially registered and is legally restricted to the use of the manufacturer or owner.

Turnkey: A franchise opportunity where most all aspects of a business prior to opening are provided to the franchisee by the franchisor. A turnkey business means the franchise buyer should not need to do much more than “turn the key” in the door to start the business.

UFOC: See “Franchise Disclosure Document.”