Franchise Business – 14 Most Common Terms

Setting up a business is a difficult undertaking, even if you’re aiming to develop a franchise outlet. Even though franchise firms have a tested business plan, well-established operating procedures, and well-established brand recognition, new entrepreneurs and investors still have a lot of territory to cover when opening a franchise.

Before submitting applications to franchisors, everyone interested in purchasing a franchise must conduct their own research. Numerous factors need to be taken into account, including cash, possible profits, understanding the company concept, and assuring total transparency. Let’s take a step back, though, and consider who a franchisor is, what the FDD is, and what exactly a franchise agreement comprises. Understanding all of the franchising industry jargon is necessary in order to respond to these inquiries.

14 Franchise Industry Terminology Terms You Should Know

Franchising
Franchisee
Franchisor
Franchisee fee
Startup Fee
Franchise Disclosure Document (FDD)
Franchise Consultant
Financing
Business Format Franchising
Product and Tradename Franchising
Exclusive Territory
Return on Investment
Turnkey Franchise
Franchise Agreement

On this are 14 among the most popular franchise terminology you should be familiar with so you won’t be taken off guard.

Franchising

This is a typical strategy for growth when a company wishes to expand up without making a sizable financial commitment or taking on a sizable amount of risk. An established company concept is replicated in numerous areas through franchising. When someone wants to use the company’s name and logo, the founders of the company sell such rights to them.

Franchisee

The person who purchases the right to operate a business under the original franchisor’s brand. A multi-concept franchisee is one who owns locations for several different franchise businesses. While some franchisors do not support this, others look for franchisees with existing brands. The phrase “multi-unit franchisee” is used to describe a franchisee who controls many franchise locations of the same brand.

For a certain region, a master franchisee serves as a sub-franchisor. They are required to sign up new franchisee owners, issue Franchise Disclosure Documents (FDD; more on this later), offer continuous assistance and training, and get a portion of the territory’s royalties.

Franchisor

the organisation or firm that, in return for a starting fee and royalty payments, permits and assists franchisees in opening a business using its trademarks and goods.

Franchisee fee

This initial cost, which is a portion of the launch price paid by a franchisee to a franchisor, should not be confused with the startup fee. Some franchises charge a fixed price, which is typical for everyone interested in becoming a franchisee, while others charge more or less depending on the size of the area, previous business experience, and other considerations.

The franchisee fee is a component of the initial costs, which also cover things like working capital, inventory, company permits, and equipment.

Additionally, franchisees must periodically pay a royalty charge on a weekly, monthly, or annual basis. Management Service Fee is another name for royalty fees. Either a portion of the sale, the profit, or a flat charge might apply. Typically, this represents less than 10% of total sales, however it may be larger or lower depending on the company and the sector. If a company offers more services or support, they may be able to demand a larger rate.

Additionally, some franchisors demand a separate charge for marketing and advertising. The production and placement of advertisements are normally covered by the advertising cost.

Startup Fee

This is the overall sum needed to start the franchise. This covers the franchise fee as well as other costs. Other costs include the money needed to identify the ideal location, workers, any necessary equipment, inventory, permits needed to operate the firm, and working capital.

Franchise Disclosure Document (FDD)

This is the important document that a franchisor gives a franchisee to sign and return to complete the contract. This document, which comprises various parts with the history of the firm, beginning expenditures and projected earnings, and any prior bankruptcies, is updated yearly.

A franchisor may also publish earnings claims of past franchisees and other locations in the Franchise Disclosure Document. Although not required, the franchisor may choose to offer this. When contrasting franchises, franchisees should consider these factors.

This material has to be carefully read. Franchisees often get 14 days to examine it; however, there is no set period of time for this. franchise consultant might be useful at this point to assist you evaluate the material and carry out in-depth investigation.

Franchise Consultant

Franchise consultants link franchisors with the appropriate partners to help them grow their businesses and assist investors in selecting the best franchise business opportunity. A franchise consultant has invaluable networks across many sectors and a wealth of information regarding the growth, structure, and management of the franchising sector. It is strongly advised that you hire a franchise consultant if you have no prior business expertise and are launching a franchise.  Â

Financing

The two types of finance are internal and external. The franchisor provides internal finance to aid with costs, which could include the franchisee fee and launch charge. Among other expenses are salaries and inventory. Â

The franchisee receives third-party funding from banks. Furthermore, if the original franchisor is prosperous and well-known, banks are more inclined to fund a franchisee than an ordinary firm.

Business Format Franchising

When a company grants a franchisee a licence to use its name and business practises. The franchisor oversees the franchisee’s business operations while also giving the franchisee the necessary training and assistance. A franchisee compensates the franchisor for this by paying both the franchisee fee and the royalty payments.

Product and Tradename Franchising

This differs from business format franchising in that the focus is on the product rather than the method of distribution. The franchisor grants a licence to the franchisee to sell or distribute a certain product using the name, trademark, logo, etc. of the original franchisor.

Exclusive Territory

Franchise owners may provide franchisees exclusive rights to particular regions. Without being concerned about competition from other franchisees, the franchisee may operate exclusively in this region. Additionally, it can allow the franchisee to set up other stores nearby. There can be a cost associated with this exclusivity for franchisees. Protected territories are another name for exclusive regions.

Return on Investment

ROI is a performance metric that is used to assess how appealing an investment is and to compare the effectiveness of other investments. A specific investment’s return is calculated in direct proportion to the investment’s cost. This formula is used to determine ROI: [Total Cost – Current Value] / [Total Cost] * 100

Turnkey Franchise

This company is set up so that a new franchisee may assume control of day-to-day activities on Day 1. The franchisor provides the franchisee with all of the assistance, guidance, and training they require, as well as the inventory and staff members they need to launch their business right away. A turnkey franchise is very advantageous if the franchise concept has proved to be successful, even though it gives the franchisee less creative flexibility.

Franchise Contract

The Franchise Disclosure Document contains this in part. The FCC specifies the obligations of both the franchisee and the franchisor as well as the formal contract. It also contains the duration of the contract, which may be between five and twenty years. Most franchisors will extend the conditions of the deal for a portion of the existing franchisee fee at the end of the contract if the franchisee and the franchisor are still amicable.

A master franchise is a franchise agreement that grants a franchisee the right to market franchise units in a particular area. A master franchise may have many franchisee locations within the region.

A master franchise agreement and an area development agreement are comparable. Typically, this means that the planned units should be set up in a certain amount of time. An area development franchise has the choice of either becoming the sole owner of every franchise or locating a buyer for them. An area development agreement often covers a smaller geographic region than a master franchise agreement.

What factors should you think about before investing in a franchise business opportunity?

A franchise and a business opportunity may be mistaken by someone who is new to franchising. A business opportunity is similar to a franchise in many ways and offers a business plan, but it differs in that it is less in-depth. A franchise agreement is thirty to forty pages lengthy, whereas the agreement is often one or two pages long. When opposed to a franchisee, a business opportunity may occasionally demand a cheaper investment (depending on the sector and area), but it carries far greater risks.

Even so, it’s crucial that you conduct your research while considering possible franchises. Before agreeing to any agreement with the franchisor, pay strict attention, in particular, to the Franchise Disclosure Document (FDD). Make sure you and the franchisor agree on the sort of assistance and instruction you will get in return for the franchise fee. Visit the franchisor’s corporate offices, attend seminars, and stop by other franchise locations to speak with the owners directly. The nice thing about a franchise business opportunity is that you can still launch your own company even if you have no prior business expertise as long as you perform the necessary preparation and have the necessary funding.