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Terms To Know About Franchising

Terms to Know About Franchising

New to the world of franchising? 

The industry jargon can feel confusing and daunting at first. Review this franchising glossary of terms, and you’ll be an expert in no time.

The Basics

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

Franchise: A franchise is a license that describes the relationship between two parties, the franchisor and the franchisee, including the use of trademarks, fees, support, and control. 

Trademark: The marks, brand name, and logo that identify a franchisor, which is then licensed to the franchisee. 

Territory: Typically used for service-based or mobile business franchise models, this is a designated geographic area in which a franchisee can operate.

The Main Players

Franchisor: The franchisor is the owner of the franchise brand and business system. It is the person or company that grants the franchisee the right to do business under their trademark or trade name. 

Franchisee: The person or company who purchases the right from the franchisor to do business under a particular franchise trademark.

Franchise Broker: A person or company hired by a franchisor to help cultivate new franchisees.

Legalese

Franchise Agreement: You may see this abbreviated as FA; it is the legal, written contract that details the rights, responsibilities, and obligations of both the franchisor and the franchisee.

Franchise Disclosure Document: Referred to as an FDD, this legal document is mandated by the Federal Trade Commission and provides important information about the franchisor’s history, contract obligations, investment cost and more.

Renewal: Extension of the original franchise agreement whereby the franchisee retains ownership of the franchise business for another term.

Money & Financing

Initial Investment: The money required up front for a franchisee to open, set up, and operate a franchise business, including start-up and operating expenses. 

Franchise Fee: A one-time fee, this is a component of the initial investment and allows the franchisee to use the franchise brand’s name and likeness. 

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

Breakeven: The point at which a franchise reaches a net profit by taking in enough revenue to balance out the initial investment costs.

Types of Franchises

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 manuals. 

Product distribution franchise: A franchise agreement where the franchisee simply sells the franchisor’s products without using the franchisor’s method of conducting business. 

Single-Unit Franchisee: A person or group who has purchased one franchise location.

Multi-Unit Franchisee: A person or group who has purchased two or more franchise locations. 

Area Developer: A franchisee that has purchased the rights to open multiple franchise units within a certain area and time frame. 

Company-Owned Locations: You may hear these called corporate locations; they’re owned and operated by the corporate entity of the brand, as opposed to a franchisee.

Low-Cost Franchise: A franchise with a low initial investment, typically under $100,000.