Understanding Common Terms Used in Franchising
Updated: Aug 13, 2019
Love the idea of being your own boss but overwhelmed by the lingo? We can help, take time to understand the common terms and definitions of franchising.
🔹FDD: Franchise Disclosure Document: the disclosure document provides information about the franchisor and franchise system
Business format franchise: this type of franchise includes not only a product, service and trademark, but also the complete method to conduct the business itself, such as the marketing plan and operations manual.
🔹Franchisee: the person or company that gets the rights from the franchisor to do business under the franchisor’s trademark or trade name Franchise Agreement: the legal, written contract between the franchisor and franchisee which tells each party what each is supposed to do
🔹Franchising: a method of business expansion characterized by a trademark license, payment of fees, and significant assistance and/or control
🔹Franchisor: the person or company that grants the franchisee the right to do business under their trademark or trade name
🔹Franchise agreement: The contract a franchisor and franchisee sign to confirm the agreement to open one or more franchise business(es). Among other details, the franchise agreement will include a term, typically ranging from 5 to 20 years, that the franchisee is agreeing to continuously own the unit(s) being purchased.
🔹In-house financing: Financing offered by the franchisor to franchisees to help with expenses, which can include the initial franchise fee, startup costs, equipment and inventory as well as day-to-day expenses such as payroll.
🔹Liquid Capital: A sum of cash and other assets that can be easily converted to cash. Franchisors will require a specific minimum amount of available liquid capital from prospective franchisees.
🔹Net Worth: Calculation of one’s total value (total assets minus total liabilities). Many franchise brands require a minimum net worth in addition to a minimum liquid capital for prospective franchisees.
🔹Product Distribution Franchisee: a franchise where the franchisee simply sells the franchisor’s products without using the franchisor’s method of conducting business
🔹Return on Investment (ROI): A percentage of value of a business (or any investment) relative to the cost of establishing it. A $100,000 business investment that is now worth $200,000 would have a 100% ROI. The formula for ROI is [current value - total cost] / [total cost] * 100.
🔹Royalty: the regular payment made by the franchisee to the franchisor, usually based on a percentage of the franchisee’s gross sales
🔹Startup cost/initial investment: The total amount required to open the franchise, outlined in Item 7 of the FDD. This includes the franchise fee, along with other startup expenses such as real estate, equipment, supplies, business licenses and working capital.
🔹Term of agreement: This spells out the length of time that your franchise agreement is valid--usually anywhere from five to 20 years. At the end of your term, if you are a franchisee in good standing, most franchisors will allow you to renew your agreement for a percentage of the then-current franchise fee.
🔹Territory: A designated area that comprises a franchise “unit,” typically used for service-based or mobile franchise business models. Many franchisors provide exclusive territories to prevent conflict between franchisees.
🔹Third-party financing: Financing provided by a source other than the franchisor. Many franchisors have relationships with banks or are registered with the SBA in order to expedite the loan process for their franchisees.
🔹Trademark: the marks, brand name and logo that identify a franchisor which is licensed to the franchise
🔹Validation: Part of “due diligence” when buying a franchise. Calling to speak with existing franchise owners in an attempt to validate the virtues of the franchise opportunity as explained by the franchisor. Typically, the prospective franchisee will contact several franchisees from the list provided in the company’s FDD.
SSB Franchise Consulting offers one-stop shopping when you are searching for a business to call your own. We help you save time by working with you to learn your likes and dislikes and style of doing business then matching you with prospective Franchisors at no cost to you. To read more on if we're a good fit go to https://www.ssbconsulting.us/faq
Ready to get started? Schedule your free consultation today!