Why knowing the common franchise terms is necessary
Common Franchise Terms
Franchise: A license that describes the relationship between the franchisor and franchisee including use of trademarks, fees, support and control.
Franchisor: A parent company that allows individuals to start a business, using their trademarks, products, and processes, usually for a fee.
Franchisee: A person who purchases the right to operate a business under the franchisor’s name and system.
Franchise Agreement: Legally, written contract between the franchisor and franchisee, informing each party about their role.
Franchise Fee: The initial fee paid to a franchisor to become a franchisee, usually upon signing the franchise agreement.
Franchise Disclosure Document (FDD): Also known as the Disclosure Statement, it provides information about the franchisor and franchise system to the franchisee.
Start-up Cost: The total amount required to open the franchise, including the franchise fee and other expenses such as real estate, supplies, licenses, working capital, and equipments.
Royalty Fee: Many franchisors ask franchisees to pay fees on a regular basis (weekly, monthly or yearly). It’s a percentage of sales, as sometimes it’s a flat fee.
Term of Agreement: It is the length of time a franchise agreement is valid, usually from 5-20 years. At the end of the term, if a franchise is doing well, franchisors renew the agreement for a new and current percentage market.
In-house Financing: Finance offered by the franchisor to franchisees, helping with expenses, including the initial fee, start-up costs, inventory, and equipments.
Third-party Financing: A finance offered by another source than the franchisor to a franchisee. Many franchisors expedite the loan process for their franchisees from different source and relation.
Master Franchise: A sub-franchisor for a certain territory. Master franchisees can issue FDDs; sign up new franchisees, providing logistical support to the territory royalty.
Intellectual Property Rights: It serves as franchisor’s secrets of carrying business forward, with various trademarks, branding, manuals, etc which should be legally protected.
