Franchise Terms Glossary
Advertising Fee
Paid to a franchisor, it covers a franchisee’s share of the advertising and promotional activities for franchise systems.
Approved Site
Location that the franchisor deems appropriate for the franchisee’s unit.
Area Developer
A person or entity a franchisor contracts with to sell a specified number of franchise locations in a defined geographic area within a defined period of time.
Assets
Things or property owned by a person that can be used to meet a debt if payments are not made in a timely fashion.
Business Plan
Document prepared by a franchisee overviewing operational and financial goals and objectives for the franchise; contains detailed plans and budgets showing how these objectives are to be achieved.
Capital
Most often, capital refers to the wealth possessed by a franchisee, specifically the amount of cash the prospective franchisee has access to at a given moment. In addition, capital can be referred to in the human sense. Human capital refers to the skills, knowledge, and qualifications of a person that can be workforce considered as economic assets.
Collateral
Collateral is a form of security that the borrower may offer the lender to guarantee a loan or other credit. Collateral can be resources, belongings, or something of wealth and value to the borrower. If the borrower fails to pay back the credit, the asset acting as collateral may become subject to seizure. The lender can then sell this to comply with the original contract. This ensures payment or performance of the obligations stated in the lending agreement.
Copyright
Exclusive right of a person to use, and to license others to use, works of art, music or literature. It also gives the holder means of protecting these works from unauthorized use, including copying or exploiting works without expressed permission. The symbol for copyright is ©.
Discovery Day
A meet-and-greet, typically held at a franchisor’s headquarters, where a prospective franchisee can learn about the franchise system in detail. Usually there is an opportunity to meet company executives and other prospective or current franchisees.
Earnings Claims
Actual or forecasted franchise sales, profits or earnings stated by franchisors. Can be found in Item 19 of the FDD as the financial performance disclosure.
Equity
The value or worth of an asset beyond how much remains owed on it in the form of a loan, mortgage, lien, etc.
Feasibility Study
Determines if an area (or person) is capable of supporting a business.
Federal Trade Commission (FTC)
Independent agency of the United States government whose purpose is to promote anti-trust and consumer protection laws, and to eliminate and prevent anti-competitive business practices in the franchise industry.
Franchise
Relationship in which a company (franchisor) enters into a contract with an individual or entity (franchisee) granting the authorization to operate in the distribution of goods and services, under the franchisor’s trade name and guidance in exchange for a fee.
Franchise Agreement
Legal written document governing the relationship between the franchisor and franchisee. The franchise agreement specifies terms of the franchise contract such as rights and responsibilities of the parties, fees and payments, territory and duration of agreement.
Franchise Attorney
Legal specialist in franchise law.
Franchise Consultant
Business guide with expertise in the franchising industry who provides advice on topics such as franchising operations, companies and relationships.
Franchise Disclosure Document (FDD)
Document provided by the franchisor that outlines the history of the business, all the franchisees in a system, turnover rates, terminations, fees, rules, restrictions and numerous aspects of that particular franchise. The FDD was formerly called a Uniform Franchise Offering Circular (UFOC).
Franchise Fee
Essentially the cover charge for entry into a franchise system, it usually covers the initial right to use the franchisor’s system (including trademarks and proprietary operating system), and services the franchisor provides to franchisees such as help finding a location, training materials, etc.
Franchise System
The administrative location of a company that offers franchises (franchisor) and the franchised units it has granted. Also refers to the trademarks and operating methods granted by franchisors to franchisees.
Franchise Unit
Each individual outlet or location, whether company-owned or franchised.
Franchisee
Individual, partnership or corporation that purchases the right from the franchisor to conduct business under the franchisor’s trade name with the franchisor’s system.
Franchisor
Individual, partnership or corporation who grants an investor (the franchisee) the right to conduct business under their trade name, using its operational methods and organizational systems.
Initial Investment
Financial capital required to start a franchised business.
Licensing
Legal act of one entity granting rights to another to a legally protected property in exchange for a fee.
Marketing
Process or technique of planning, pricing, promoting, selling and distributing products and services to create exchanges that satisfy both the customer and the business.
Master Franchisee
Individual who negotiates the franchise rights for a defined territory (such as a city or state) and assumes the rights and obligations of the franchisor in that particular territory.
Multi-Unit Franchisee
Owner and operator of more than one franchise unit.
Operations Manual
Document that contains instructions advising a franchisee how to run the franchise.
Personal Guaranty (or Guarantee)
An unsecured (meaning not tied to an asset like a house or car) written promise from a business owner guaranteeing payment on a lease or loan in the event the business does not pay.
Pro Forma
Presentation of financial statements relying on historical data to make projections about future sales.
Royalty Fee
Continuous payments the franchisee gives the franchisor to remain a part of the franchise system.
Supplier
Authorized individual or company approved by the franchisor to supply products or services to its franchisees.
Territory
A specific area in which the franchisee has been given the right to conduct or solicit business within by the franchisor.
Trademark
Form of identification, such as a brand name or logo, legally associated with the franchise. Trademarks are protected by law and are distinguished by the symbol ™.
Working Capital
Working capital is the money needed for the running and operation of the franchise until it becomes profitable. This includes legal costs, salaries, insurance, advertising costs, leasing costs, and living expenses.
