Franchises | Franchise Opportunities | Franchise Fix

Below are definitions of some major terms and concepts vital to your understanding of franchises, franchising and franchisers.

Acknowledgment of Receipt:

The last page of an Offering Circular that indicates the receipt of the documents on a certain date. This, when signed and returned, acts as a proof of the date one received the documents.

Advertising Fee:

The annual fee that is paid by the franchisee to the franchiser as his share of the corporate advertising expenditures. This advertising fee is charged by few franchisers only.

Agent:

An individual appointed who can act on behalf of the person or entity. The corporation is legally bound by the actions of the agent.

Agreement:

The contract that signifies a franchise.

Approved Products:

Products that a franchisee must buy from the franchiser. It also includes products which must be bought from approved suppliers. This is done by the franchiser in order to maintain quality across all franchisees.

Arbitration:

A way of resolving disputes by referring them to a third party which is selected by the parties.

Area Development Rights:

The rights allotted to a franchisee to operate a number of franchises within a specified geographical area.

Area Franchise:

A franchise licensed to develop a particular area. These sometimes include performance targets and schedules, and can also include franchise sales rights.

Assignment Fees:

The monthly fees paid by the franchisee to the franchise company for expenses incurred by the company, such as corporate marketing and advertising.

Broker:

An intermediary between the buyer and the seller. He or she can represent either the buyer or the seller, and in some cases even both.

Business Format Franchise:

In Business Format Franchise, the franchiser gives permission to the franchisee for use of products, services and trademarks. The entire business format is also taught to the franchisee including marketing, selling, inventory, accounting and more.

Buy Sell Agreement:

A buy sell agreement states the legal provisions under which a business can be sold.

Capital Required:

The amount of cash one is required to have available.

Company Owned Outlet:

Company-owned stores or offices that, in appearance, are identical to the franchised outlets are also established by certain franchisers.

Conversion Franchise:

A franchise system that permits existing businesses to join a national franchise system and access to its name, trademark and operating system.

Copyright:

The exclusive right of reproduction and sale of any literary or artistic work. Copyrights are granted by law for a specific number of years.

Default:

The failure to perform as was agreed upon by the parties.

Designated Supplier:

The supplier or suppliers approved by the franchiser in order to maintain a standard.

Disclosure:

Revealing facts to others. In a franchise these facts may be complimentary to the franchisor, such as disclosing a prior bankruptcy or litigation.

Disclosure Document:

A legal document that franchisers must furnish to franchisees, as regulated by the Federal Trade Commission. This document must be presented at least 10 days prior to the signing of the Franchise Agreement. The document contains material information about a franchise operation and is designed to help franchisees analyze the merits of a franchiser.

Distributorship:

The right granted by a manufacturer or a wholesaler for distribution or sale of products. Distributorship does not generally qualify as a franchisee, however certain franchisees can qualify as a distributorship.

Earnings Claims:

Assertions made by franchise companies of specific acquired sales levels or profitability levels.

Entrepreneur:

The person who assumes the responsibility for organizing and operating the business. He or she also assumes the risks, including the financial risks for a business venture.

Exclusive Territory:

Exclusive territory gives the right of the territory to the franchisee preventing the franchiser from appointing any other franchisee for the territory or carrying on business himself in the territory.

Federal Trade Commission (FTC):

The U.S. government agency that regulates franchising. Based in Washington, D.C., it regulates a variety of trade practices.

Franchise Business Plan:

A strategic plan that lays down the company’s objectives and the specific steps that need to be taken to achieve those objectives. This is usually prepared by company management.

Franchise Renewal:

The signing of a new franchisee agreement upon the expiration of the existing one.

Franchise Agreement:

Sets the nature of the business explaining the expectations of the franchiser. It includes information about territorial rights of the franchisee, location requirements, training schedule, fees, and general obligations of the franchise.

The person or the entity which has acquired the rights of conducting the business from the franchiser or licencor.

Franchise Feasibility Studies:

A study conducted to determine the degree to which a company can become a successful franchisor.

Franchise Fee:

The fee paid by the franchisee to the franchiser initially to acquire the franchise.

Franchise Registration:

In several states specific information needs to be submitted and approved before a franchise isgranted. This contains more information than the Disclosure.

Franchise Venture Capital:

Venture Capital is the money invested in new businesses which show chances of above average growth.

A mode of doing business where two parties are involved. The franchiser, the franchisee, and the contract binding them is franchise.

The entity or person owning the rights or licenses of the business who grants the license or permission to the various franchisees.

FTC Rule 436:

FTC Rule 36 was passed in 1979 to regulate the franchise industry by setting forth “disclosure” requirements and prohibiting franchisers from making earnings claims.

Furniture Fixtures and Equipment (FFE):

The movable property used in the business.

Gross Sales:

The total of all sales for any period of time before any deductions.

Housemark:

A trademark which is used to identify the operations of an organization. This may, in certain cases, also be the company name. This trademark is used to identify one or more products and at times is used in combination with other trademarks.

Identify Items:

The items that can be identified with the franchiser as they display the registered trademarks of the franchiser. Items such as paper products, uniforms, point of sale materials or exterior signs are usually the identify items used in a franchise.

Industry:

The category of business that a franchise belongs to. It is an all-encompassing area of business that can incorporate several different sectors.

Initial Investment:

The investment incurred by a franchisee at the beginning of a franchise. It includes start up expenses, franchise fees and other such costs.

Initial Ongoing Training:

The training and the support that a franchiser gives to the franchisee for the running of the franchise according to the standards set by the franchiser.

International Franchise Association (IFA):

International Franchise Association, based in Washington, D.C is a trade association for franchisers.

Liquid Capital:

Cash or assets that can be readily converted into cash. Liquid Capital is also known as liquid assets, quick assets, and realizable assets.

Marketing Plan:

The detailed plan setting the marketing activities of the organization.

Master Franchisee:

An individual or a company that owns the exclusive rights to develop a particular continent.

Master Region:

The territory under a master franchisee. Normally the franchisee subdivides it and resells individual franchisee locations.

National Alliance Of Franchisees (NAF):

Based in Washington, DC., this is a national coalition which was organized in 1977 to represent and protect the interests and rights of franchisees.

Net Worth:

Total assets minus the liabilities.

Non Compete Clause:

This clause states that the franchiser cannot compete with the franchised company upon termination, non-renewal, or other sale or transfer.

Offer:

A proposal to sell a franchise that can be either written or oral.

Offering Circular:

Provides background information from over 20 different categories. The offering circular also contains a copy of the proposed franchise agreement. It is also known as Disclosure Document and Uniform Franchise Offering Circular (UFOC)

Operations Manual:

The Operations Manual covers all the aspects of the business and consists of guidelines for the franchisee on how to operate the franchised business.

Product Format Franchise:

One where the franchised product or service does not constitute the majority of the products or services offered by the franchisee.

Pro Forma:

Statements issued by the franchiser to the franchisee based on actual operating results of the franchiser’s units or franchise establishments. It can be in the form of any statement which measures profits and expenses.

Protected Territory:

Territory allotted to a franchisee where the franchiser has promised not tofranchise to another franchisee or open a company owned business.

Public Figure Involvement:

When a Public Figure is endorsing a franchised product, then the nature of the agreement between the public figure and the franchiser must be disclosed.

Qualification Questionnaire:

A document prepared by the franchiser to seek information from a prospective franchise. A Qualification Questionnaire provides initial information to the franchiser and assists him in determining whether or not the prospective franchise will become an asset.

Quality Control:

The method used by the franchiser to enforce the rules set in the operating manuals, involving regional coordinators visiting each franchisee.

Royalty:

The franchisee is required to pay to the franchisor a percentage of the gross sales on monthly basis. This is referred to as Royalty.

Sector:

The categories included within a broader scope of franchise opportunities, also known as the industry.

Slick:

A pre-prepared piece of advertising material which the franchiser gives to the franchisee for use in local print media. It can be used without any significant additional cost to franchisees for composition or makeup.

Start-Up Costs:

The investment required to be made by the franchisee at tha start of the franchise.

Total Investment:

Total Investment consists of initial investment, the working capital, and subsequent additions to inventory and equipment which will be necessary for a fully operational and profitable enterprise.

Trade Secret:

Trade Secrets of the franchiser are revealed to the franchisee by the franchise transaction. This is information central to the operation of the business. Appropriate legal provisions are in the franchise agreement to protect these trade secrets.

Turnkey:

The franchiser is expected to provide the platform to run the business to the franchisee, even without any input from the franchisee.

Tying definition

Selling of a product as a franchise in combination with another product. This is illegal unless the second product is equal to or better than the first product.

Uniform Franchise Offering Circular (UFOC):

The Uniform Franchise Offering Circular (UFOC) provides background information from over 20 different categories. It also contains a copy of the proposed franchise agreement.

Variable Cost:

Costs which vary with the level of Production are known as Variable Costs.

Vertical And Horizontal Competition:

Horizontal competitors are those competitors who offer a franchise or franchise product for the same price, whereas vertical competitors are those who offer the same products but for a different price.

Definitions from HJ Ventures International, Inc. – Business Planning.