Franchising Glossary

Terms and Definitions

Designated Supplier
A supplier designated by the franchisor as a source for purchasing approved products. The use of a designated supplier guarantees the franchisor that each franchisee is offering the same products to its clients or customers.


Discovery Day
A discovery day is an event set up by the franchise company 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. Some discovery days are very structured and will have up to 20 candidates in attendance while others will be on a one to one basis.


Earnings Claims
Earnings claims are claims made by the franchisor in regards to financial performance of past franchisees or the potential financial performance of franchisees.


Federal Trade Commission
The Federal Trade Commission (FTC) is an independent agency of the United States government that regulates franchising. The Federal Trade Commission puts rules in place for franchisors to follow.


Franchise Agreement
The franchise agreement is a legally binding agreement which outlines the franchisor's terms and conditions for the franchisee. The franchise agreement also clearly outlines the obligations of the franchisor and the obligations of the franchisee. The franchise agreement is signed at the time an individual has made the final decision to buy the franchise. It is strongly suggested that anyone who is considering buying a franchise should consult with a professional franchise attorney.


Franchise Broker
A franchise broker (also known as a franchise consultant) is an individual who acts as an intermediary between the franchisor and an individual interested in buying a franchise. In most cases a franchise broker is not directly employed by the franchisor and represents many different franchises. There is no fee incurred by the individual interested in buying a franchise. The franchise brokers are paid a commission by the franchisor.


Franchise Brokers Association
The Franchise Brokers Association is a national network of Franchise Brokers and Consultants that have joined together to further the franchise brokerage industry. FBA members have access to ongoing continuing education materials, sales and consulting materials and valuable information on franchisors who work with brokers.


Franchise Disclosure Document
Starting in July 2008, the Uniform Franchise Offering Circular (UFOC) will be replaced with the Franchise Disclosure Document (FDD). This is a legal document that must be provided by the franchisor to the prospective franchisee at least 14 calendar days before any agreement of sale is signed and finalized. This legal document is intended to provide prospective franchisees with enough information to help them make an educated decision about buying the franchise.


Franchise Fee
The franchise fee is an up-front (one-time) cost that a new franchisee pays to the franchisor. In most cases the franchise fee will cover the costs for training, support and site selection.


Franchise A franchise is a right granted to an individual or group to market a company's goods or services within a certain territory or location. The purchaser of a franchise is called a franchisee. The franchisee purchases the franchise from the franchisor for a fee and/or a percentage of sales.


Franchisee
A franchisee is an individual who purchases the rights to use a company’s trademarked name and business model to do business. The franchisee purchases a franchise from the franchisor. The franchisee must follow certain rules and guidelines already established by the franchisor, and in most cases the franchisee must pay an ongoing franchise royalty fee to the franchisor.


Franchisor
The franchisor owns the overall rights and trademarks of the company and allows its franchisees to use these rights and trademarks to do business. The franchisor usually charges the franchisee an upfront franchise fee for the rights to do business under the franchise name. In addition, the franchisor usually collects an ongoing franchise royalty fee from the franchisee.


Gross Sales
The overall sales of a franchise not including operating expenses, cost of goods sold, payment of taxes or any other expenses.


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 a decent business in a fairly short timeframe. Not every franchisor offers master franchising opportunities. Franchisors that do use this system of usually grow very rapidly.


Multi-Unit Franchise
Multi-unit franchising creates the opportunity for a franchisee to open more than one unit. In this case, multiple units are sometimes sold at a reduced rate per unit. In this type of operation, the franchisee partakes less in the day-to-day operations of the unit. Instead, the multi-unit franchisee manages all the locations at a higher level. Usually the franchisee will hire managers and staff for each location to perform the daily operations.

This type of franchising is not typically limited to a particular area. Therefore, the franchisee may have several units located in different parts of a town, or even in other countries.

Although the initial total investment is higher than opening a single unit franchise, the risk is sometimes lower for the franchisee. Owning more units can increase the overall probability of success. Also, the multi-unit franchisee is likely to have more input with the franchisor, creating a win-win situation on both sides.


Royalty Fee
A royalty fee is an ongoing fee that the franchisee pays to the franchisor. This fee is usually paid monthly or quarterly and is typically calculated as a percentage of gross sales.


Single Unit Franchise
Buying a single unit franchise is the most likely place a brand new entrepreneur would begin. In this type of franchise, the franchisee would only be responsible for running one unit. However he or she would be extremely involved with all of the daily operations of the business. The franchisee typically has a particular territory that is covered by the unit. Usually the franchisor assigns a number of miles to be covered by each unit in operation. If the business is home-based, there may be four or five zip codes included.

With a single unit franchise, the investment costs are less than opening up multiple units. Although most single unit franchises yield a nice income, there is more earnings potential with multi-unit franchises.


Uniform Franchise Offering Circular
Also nnown as a UFOCA... Legal document that must be provided by the franchisor to the prospective franchisee at least 10 business days before any agreement of sale is signed and finalized.

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