Let's Talk Terminology

The advertising fund is typically established to pay for the creation and placement of advertising and is used to offset the franchisor’s administrative costs relating to “retail/brand” advertising. Payments are typically calculated as a percentage of gross sales.   

An online site where franchisors can pay to advertise their franchise to potential franchisees.  

 Often confused with multi-unit, An Area Development Agreement is where franchisor grants exclusive development rights for a particular geographic area to an area development investment group or an area developer. In return for the rights to an exclusive territory, the area developer pays the franchisor a front-end development fee and commits to develop a certain number of units within a specified period.  

A franchise relationship that allows the franchisee to open multiple locations, usually in a defined territory within a pre-agreed-upon timeline. Area franchisees usually pay an area fee for the rights granted by the franchisor.

A sales agent for the franchisor and typically represents or interfaces with multiple franchisors. 

A location, owned and operated by the franchisor, usually identical in appearance and operations to those of the system’s franchises.

An agreement designed to protect trade secrets and expertise from being misused by those who have used or come into contact with them. 

The franchisee’s territory is the geographic area or domain in which his/her business operates. The franchisor may grant exclusivity to the territory, meaning no other franchised or company-owned outlet may open in that territory, or the rights of first refusal to the franchisee. Meaning that if the area can support other outlets, the franchisee is given the first option to do so. The franchisor may give rights to the franchisee only where his location stands, no more. 

The agency of the U.S. Government which regulates franchising under FTC Rule 436.

Forming known as an Earnings Claim, an FPR is the item 19 representation of unit performance by a franchisor. 

A license that describes the relationship between the franchisor and franchisee including use of trademarks, fees, support, and control. 

The franchise agreement is a legally binding agreement that outlines the franchisor’s terms and conditions for the franchisee. The franchise agreement also clearly outlines the obligations of the franchisor and the obligations of the franchisee. The franchise agreement is signed when an individual has made the final decision to buy the franchise. It is strongly suggested that anyone who is considering buying a franchise should consult with a professional franchise attorney. 

A lawyer specializing in, or with significant knowledge of, the laws, regulations and customs governing franchising.

A business specialist with significant knowledge of the design, development, and operation of franchising and the underlying franchise relationship.  

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.

The franchise fee is an up‐front (one‐time) cost that a new franchisee pays to the franchisor. In most cases the franchise fee will cover the costs for training, support, and site selection. 

The person or entity that gets the right from the franchisor to do business under the franchisor’s trademark or trade name.

A method of business expansion characterized by a trademark license, payment of fees, and significant assistance and/or control. 

The person or entity that grants the franchisee the right to do business under their trademark or trade name. 

The industry trade association representing franchising. The IFA is based in Washington D.C. 

The total estimated cost for establishing the business, including the franchise fee, initial fixed assets and leasehold improvements, inventory, deposits, and other fees and costs, and the working capital required during the initial start-up period (three months). 

An inquiry that is prequalified after the initial interview with a member of the franchisor’s development staff as meeting the minimum criteria to become a franchisee, and who is invited to submit a franchise application. 

Lead generation is a marketing term that refers to the creation or generation of prospective consumer interest or inquiry into a business’ products or services. 

A model of multi-level franchising wherein the master franchisor sells the development rights in a particular geographic market to a master franchisee, who, in turn, sells individual or single-unit franchises within the territory. In return for a front-end master franchise fee, the master franchisee has the sole responsibility of developing that area or market under a mutually agreed-upon schedule. The master franchisee is rewarded by sharing in the franchise fee and ongoing royalties paid by the franchisees within the territory to the master or parent franchisor. 

 A franchisee who agrees to open two or more locations, generally in a defined market over an agreed upon period of time.  

Multi-unit franchising creates the opportunity for a franchisee to open more than one unit. In this type of operation, the franchisee partakes less in the day‐to‐day operations of the unit. Instead, the multi‐unit franchisee manages all the locations at a higher level. Typically, the franchisee will hire managers and staff for each location to perform the daily operations. This type of franchising is not typically limited to a particular area. Therefore, the franchisee may have several units located in different parts of a town, or even in other countries. Although the initial total investment is higher than opening a single‐unit franchise, the risk is sometimes lower for the franchisee. Owning more units can increase the overall probability of success. Also, the multi‐unit franchisee is likely to have more input with the franchisor, creating a win‐win situation on both sides. 

A written document that clearly explains the franchisor’s standards of operation, and identifies the operational tasks required to establish and operate the franchise business. The operations manual supports and promotes the use of consistent and uniform day-to-day business procedures at each franchise unit within the network to maintain the quality of service and products in every franchise outlet. 

The various states that require franchisors to submit their FDD for approval prior to offering franchises. The registration states are members of NASAA (North American Securities Administrators Association).  The franchise fee is an up‐front (one‐time) cost that a new franchisee pays to the franchisor. In most cases the franchise fee will cover the costs for training, support, and site selection. 

The regular payment made by the franchisee to the franchisor, usually based on a percentage of the franchisee’s gross sales. 

The initial investment that the franchisee will make in becoming a franchisee. It is also known as an Item 7 disclosure. Generally, this includes the franchise fee, the cost of fixed assets, leasehold improvements, inventory, deposits, other fees, and costs, as well as working capital required during the start-up period. 

The franchisor’s identifying marks, brand name, and logo that are licensed to the franchisee. The person or entity that grants the franchisee the right to do business under their trademark or trade name.