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Franchising Glossary of Terms

Provided by Small Business Resource Referral Network, content partner for the SME Toolkit.

Franchising, as with most other areas of business, contains some industry-specific terms and expressions. Review the following information to better understand the language of franchising in order to make more informed choices.

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Acknowledgement of Receipt - The last page of an Offering Circular, signed to indicate you received the documents on a certain date.

Advertising Fee - Not all franchisors charge advertising fees. An annual fee paid by the franchisee to the franchisor for corporate advertising expenditures; It is often less then three percent of the franchisee's annual sales and typically paid in addition to the royalty fee.

Agreement - The franchise "contract".

Area Development Rights - The right to open several franchise locations in a specific area.

Area Franchise - (Development Agreement, Master Franchise): A franchise granted to develop a defined geographical area, which may include a strict performance schedule and franchise sales rights.

Assignment / Fees - The monthly fees you pay to the franchise company to support corporate marketing and advertising. It is usually figured in as a percentage of your gross revenues.

Business Format Franchise - A type of franchise that establishes you as a business owner, offering distinguishable products and services in the marketplace.

Capital Required - The amount of cash you are required to have available.

Company-owned Outlet - Some franchisors establish company-owned stores or offices that, in appearance, are identical to the franchised outlets.

Conversion Franchise - This is a franchise that permits existing businesses to join a national franchise system to use its recognized name and trademark and operating system.

Default - To agree to perform in a said manner and then not perform.

Designated Supplier - Approved suppliers of products and services that meet the requirements of a particular franchise company.

Disclosure Document - Also known as an "offering Circular", this is background and contractual information required by the FTC and given to you by franchise companies.

Distributorship - A right granted by a manufacturer or wholesaler to sell a product to others. A distributorship is normally not a franchise. However, certain distributorship arrangements may qualify as a franchise, may be licensed or be considered as a business opportunity requiring disclosure.

Earnings Claims - Representations made by franchise companies that their franchisees have achieved specific levels of sales or profitability.

Entrepreneur - A person who is willing to assume the responsibility, risk and rewards of starting and operating a business.

Exclusive Territory - The "territory" granted to you by a franchise company, which restricts the franchisor from establishing any other location within your area.

Federal Trade Commission (FTC) - The federal agency in Washington, DC that regulates various trade practices including the franchise industry.

Franchise - The rights you acquire to offer designated products or services under specific guidelines at a certain location for a stated period of time.

Franchise Agreement - An official document that sets forth franchisor expectations and requirements. It describes the franchisor's commitment to the franchisee, and includes information about territorial rights of the franchisee, location requirements, training schedule, fees, general obligations of the franchisee, and general obligations of the franchisor.

Franchisee - The owner of one or more franchises.

Franchise Fee - The initial fee you pay to a franchisor to acquire a franchise.

Franchising - Neither an industry nor a business, but a method of doing business within a given industry. At least two parties are involved in franchising: the franchisor and the franchisee.

Franchisor - The person or company that owns or controls the right to grant franchises for a specific "brand".

Franchise Solutions - An innovative provider of franchise solutions, services and resources ideally tailored to individuals, veterans, women and groups who seek quality franchise opportunities.

FTC Rule 436 - The law passed in 1979 that regulates the franchise industry. It set forth "disclosure" requirements and prohibited franchisors from making earnings claims.

Industry - The category of business that a specific franchise belongs to.

Initial / Ongoing Training - The initial and subsequent training offered to franchisees in the operation of a specific business.

Initial Investment - Generally, the initial cash investment required of you to buy and open a franchise. This can include the franchise fee and other initial start-up costs and expenses you may incur, but may not be reflective of your total investment.

Liquid Capital - Also known as, liquid assets, quick assets, and realizable assets. Assets held in cash or in something that can be readily turned into cash.

Master Franchisee - Describes an individual or company owning the exclusive rights to develop a particular territory for the franchising company.

Master Region - A large territory acquired by a franchisee with the intent to subdivide and resell individual franchise locations.

National Alliance of Franchisees (NAF) - A national coalition organized in 1977 to represent and protect the interests and rights of franchisees. The national headquarters are in Washington, DC.

Net Worth - Total assets, once you've subtracted your total liabilities.

Non-Compete Clause - Upon termination, non-renewal, or other sale or transfer, some franchise agreements prohibit you from competing in any way with the franchised company.

Offer - An oral or written proposal to sell a franchise to a prospective franchisee upon understood general terms and conditions.

Offering Circular (Disclosure Document or Uniform Franchise Offering Circular) - Provides background information in over 20 categories as well as a copy of the proposed franchise agreement.

Operations Manual - Typically consists of several volumes, which contain all the information regarding the operation of a particular franchise.

Product Format Franchise - When you acquire the right to market a product or service that does not constitute a majority of all that you offer, you have a "product franchise".

Pro Forma - A balance sheet, profit and loss, or cash flow statement, which estimates income and expense sources. Assets, liabilities and net worth are forecast as well. Pro forma statements issued by the franchisor to the franchisee should be based on actual operating results of the franchisor's units or franchise establishments.

Protected Territory - A designated area or geographic boundary granted to the franchisee by the terms of a franchise agreement. The franchisor promises not to open another franchised or company-owned business of a similar nature within the franchisee's protected territory.

Public Figure Involvement - If a celebrity or well-known figure endorses a franchised product or service, the nature of the agreement must be disclosed.

Qualification Questionnaire - A document prepared by the franchisor to be completed by the prospective franchisee, which provides initial information to the franchisor in order to assist in determining whether or not the prospect is capable and motivated enough to own a franchise. Often a financial statement is included in the questionnaire format.

Registration - A requirement in several states that specific information be submitted and approved by state regulatory authorities before franchises may be offered in that state. It is quite extensive in the information required and may ask for: a bond, fingerprints and pictures.

Renewal - The signing of a new franchise agreement upon the expiration of the old one.

Sector - The categories included within a broader scope of franchise opportunities, otherwise known as industries. The sector permits for more ease during the search process.

Start-Up Costs - The required amount of money the franchisor will request that a new franchisee have to invest in the new franchise unit in its earliest stages of development.

Total Investment - The amount of money estimated for complete set up of a franchisee's business, including the initial investment, the working capital, and any additions to inventory and equipment deemed necessary for a fully operational and profitable business.

Turnkey - The franchisor is responsible for fully developing a method and program for a franchisee to follow which allows the doors of a franchise to be opened and the business to be run with little or no input by the franchisee.

Tying - Forcing a franchisee to purchase one product as a condition to the sale of another.

UFOC(Disclosure Document or Uniform Franchise Offering Circular) - Provides background information in over 20 categories as well as a copy of the proposed franchise agreement.

Variable Cost - Any costs, which changes significantly with the level of output such as material costs.

Venture Capital - Money used to support new or unusual undertakings. This funding is provided to new or existing firms, which exhibit potential for above-average growth.

About Your Sponsor

"Franchise Solutions, founded in 1993, is a leader in the franchise industry, serving a global market, with the mission to help educate entrepreneurs on the opportunities available for buying businesses, and committed to the core mission of helping people discover and live the great American dream of business ownership."

Copyright (c) Knowledge Institute, Inc., 11 Court Street, Exeter, NH 03833, USA
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