Franchise Terms

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Glossary of Franchise Terms

If you are new to franchising and thinking of applying for a start-up or new franchise, there few franchise terms you need to be aware of. The information will help in your research and buying process with the franchisor.

• Advertising Fee: A fee paid by the franchisee to the franchisor for corporate advertising expenditures which is generally usually less than three percent of the franchisee’s annual sale.
• Designated Supplier: A supplier designated by the franchisor as the source for purchasing approved products.
• Disclosure: Revealing facts to others that may be complimentary to the franchisor or may be uncomplimentary, such as disclosing a prior bankruptcy or litigation involving the franchisor or key persons as defendants.
• Discovery Day: A discovery day is an event set up by the franchisor for potential franchisees. This gives the interested buyer of the franchise the chance to meet face to face with the franchisor. This event usually takes place at the franchisor’s main headquarters or in some cases, at an actual franchised location that is usually in the same town/city of the franchisor’s main office.
• Disclosure Statement: Also known as the FDD, or Franchise Disclosure Document, the disclosure document provides information about the franchisor and franchise system.
• Franchise: A license that describes the relationship between the franchisor and franchisee including use of trademarks, fees, support and control.
• Franchise Agreement: The legal, written contract between the franchisor and franchisee which tells each party what each is supposed to do.
• Franchise Consultant: An individual who can give business advice with significant knowledge of the design, development and operation of a franchise system.
• Franchise Contract: The legal agreement between the parties which sets out the terms under which the Franchisee will operate the business. The terms usually include, the right to use the trade name, The Franchisee’s obligations, The Franchisor’s obligations, The premises and the territory, Length of Franchise contract, Financial aspects such as initial franchisee fee and ongoing royalties, Renewal terms, Control of standards, Rights of sale, Performance targets, Termination, Effects of termination etc.
• Franchise Disclosure Document (FDD): A document that provides information on the franchisor and the terms of the franchise agreement. The Provinces of Alberta, Ontario and Prince Edward Island have laws that require the franchisor to provide a disclosure statement to a potential franchise buyer at least 14 days before signing the franchise agreement or paying any non-refundable money.
• Franchisor – A company that owns a product, service, trademark or business style and provides this to a business buyer in return for a fee and possibly other considerations. A franchisor often establishes the conditions under which a business owner operates but does not control the business or have financial ownership.
• Franchisee: A business owner who purchases a franchise from a franchisor and operates a business using the trademarked name, product, business model and other items provided by the franchisor to operate under agreed terms and conditions.
• Franchise Fee:  This is a one-time initial fee paid by the franchisee to the franchisor. The fee is paid for permission of business operation using business concept, trademarks, management assistance, product and other services from the franchisor.
  Franchising: A method of business expansion characterized by a trademark license, payment of fees, and significant assistance and/or control. 
• Franchise Model: A business model that has in place policies and procedures to create consistency from one franchise location to the other.
• Franchise System: A system of marketing and distribution in which an independent businessperson, for a fee, is granted the right to market the goods or services of the franchisor according to the established standards and practices of the franchisor.
• Gross Sales: The overall sales of a franchise not including operating expenses,  cost of goods sold, payment of taxes or any other expenses.
• Head Lease: Locations where the franchisor has leased the premises and then sublets to the franchisee. There are a number of reasons for this practice. Landlords prefer to have the company financially committed in exchange for leasing prime locations, possibly providing tenant inducements of some free rent or financial assistance towards the tenant improvements such as lighting, floor covering and restrooms. Many times the franchisor finds an ideal site and leases the space before a suitable franchise applicant has been found. If the head lease is not held and the franchisee negotiates the lease, the franchisor usually reserves the right to approve any lease, sub-lease or other tenant-landlord relationship which is established.
• Manuals: These provide the day-to-day guidance on how the franchisor will expect the franchisee to operate.
• Master Franchise: Master Franchising allows people or corporations to purchase the rights to sub-franchise within a certain territory. This allows the master franchisee the opportunity to grow business in a fairly short time-frame.
• Non-compete Clause: A clause in a contract that prohibits you from entering into the same line of business for a specified time and within a specified area after you leave employment or after you terminate, sell, or otherwise leave a franchise.
• Operating Manual: Comprehensive guidelines advising a franchisee on how to operate the franchised business. It covers all aspects of the business, including general business procedures not necessarily peculiar to the franchised business addressing such subjects as accounting, personnel, advertising, promotion and maintenance.
• Royalty:  This is a continuous fee paid by the franchisee to the franchisor in business operation and  is usually a percentage of the gross revenue earned by the franchisee.
• Trademark: A name, symbol or other device identifying a product or service of the franchisor that distinguishes them from similar products and services supplied by third parties.

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