In case you’re new to franchising and considering buying your first franchise, there are a few words you should be familiar with to traverse the research and buying process effectively. Understanding basic franchise jargon will enable you to better understand the advantages and disadvantages of franchising, allowing you to make an informed and confident decision.
The knowledge of these terms comes in handy in various situations in the franchising world. Whether you’re in a meeting, talking to a client, or filing the needed paperwork, knowing what all words mean and using them in the conversation is a big plus.
For this reason, many people are eager to get acquainted with the basic and essential terms. If you’re one of them, stay here as we will uncover a complete list of them.
Important Terms in the Franchising World
- Master Franchise: Franchisees that have secured special rights to launch a franchise unit in a particular region, generally on a timetable or timeframe established when signing an agreement, are known as area franchisees.
- Advertising Fund: represents a pool of money set aside by the franchisor to promote the brand. Franchisees frequently pay a monthly payment to the advertising fund in addition to different royalties.
- Area Representative: Franchisees that simultaneously take the role of salespeople for the franchisor in a specific region are area representatives. The local representative identifies new franchisees, but the franchise agreement and cash are exchanged between the corporation and the fresh franchisee. The franchisor may pay the area representative a commission later.
- A breakeven: is when a franchise (or any firm) earns enough money to cover operating expenses. To put it another way, the moment at which it achieves a net loss and profit of zero dollars.
- Company-Owned Locations: As the name suggests, the owner of the company-owned location is the brand’s organization and not a franchisee. This organization is responsible for running the location or unit, as well.
- A “rebranding”: transforming a current firm into a franchise unit of another corporation is known as conversion. Conversions are preferable for some franchisors to new companies since they save money and ensure that they operate.
- A Corporate Location: also known as a company-owned site or unit, is owned and controlled by the brand’s corporate organization rather than a franchisee.
- Candidate: Prospective franchisees who have contacted franchisors about their franchise opportunity are referred to as candidates by franchisors.
- Churning: refers to the transfer of a franchisee’s ownership between franchise A failing location was acquired by the franchisor and resold to a franchisee even though the franchisor felt that the location had a high chance of failure regardless of ownership. While churning is not a common occurrence in franchising today, it does occur, and sometimes a single location may be churned several times
- Discovery Days: This is a phrase used when a franchisor brings a potential franchisee (or many) to the corporation’s office to get to know the employees and explore the firm. Frequently, it represents an important stage before making a final investment decision.
- Franchise Agreement: The contract between a franchisor and a franchisee confirms their commitment to start one or more franchise businesses is called a franchise agreement. It will incorporate, among other things, a term generally going between five and twenty years, during which the franchisee agrees to continue to own the units being bought.
- Franchise Broker: A person or organization engaged by a franchisor to assist in the cultivation of potential new franchisees is known as a franchise broker. Most brokers simultaneously deal with many franchise companies and connect potential franchisees with their matches, judging by specific
- Field Consultant: A franchisee’s employee or contract worker whose job is to help and assist them in the field at their sites. Field consultants are often allocated to a geographic region. However, this can vary depending on the size of the franchise system, the business model, and other reasons.
- Franchise Expo: Prospective franchisees can visit various franchise firms in person to explore the prospects they provide at a franchise expo. Each year, MFV Expositions hosts the major expos in the United States in New York City, Houston, and Anaheim. Of course, there are many more whose purpose is to present themselves in the best manner to secure clients and collaborators.
- Franchise Development: The practice of adding additional franchisees to a franchised firm is known as franchise development. Staff with the term “development” often bring new franchisees on board; nevertheless, the most successful franchise companies handle this process more like a job interview than a sale. They should be searching for a good fit for both themselves and you as a potential franchisee.
- Company-Owned Locations: An individual or a corporation that owns a franchised firm is referred to as a franchisee. This is the person who launched and operated the franchise, making them in charge of its work.
- Franchise Disclosure Form (FDD): In the United States, all firms providing franchise opportunities must submit a standardized document called a Franchise
- Disclosure Document (FDD). This is a document with extensive details about the franchise, such as a business plan description, executives and franchise owners’ names, anticipated startup expenses, and other information.
- Franchise Fee: A portion of a franchisee’s initial payment permits the franchisee to utilize the franchise brand’s name and likeness. It’s a one-time payment.
- The Franchisee Satisfaction Index (FSI) shows how satisfied the franchisee is when it comes to the brand. The Franchise Business Review established the FSI in 2007, and it is based on a scale of 100 points.
- Franchisor: A franchisor represents a firm, which provides opportunities for franchising to reach expansion. It’s also known as a “franchise.”
- The International Franchise Association (IFA) is the world’s largest and most well-known trade association for franchising. The IFA strives to provide information to franchisors, franchisees, and franchise suppliers and advocate for franchise and small company interests in the legislative arena.
- Initial Investment: The entire amount of money a franchisee will require to get their franchise up and to operate. The initial investment, usually a range with a low and high end, can be located within Item 7 in the FDD. The franchise fee, equipment, site leasing, and other ramp-up expenditures will all be included in the price.
- Item 19: A franchisor may utilize this part of the FDD to present claims of earnings made by current franchise owners and organization locations. Keep in mind that this information is not required to be included in the Franchise Disclosure Document. The provided information can reflect a subset of franchisees or franchises owned by corporations. When comparing claims from different brands, make sure to read the tiny text to learn about the origin of the statistics.
- Liquid Capital: Cash and other assets that can be quickly converted to cash are referred to as liquid capital. Prospective franchisees will be required to have a certain level of liquid cash available.
- Lender: A lender is a bank or other financial organization that makes a loan, in this case, a business loan.
- Low-Cost Franchise: A franchise that requires a little beginning investment, usually less than $100,000.
- Multi-Concept Franchisee: Franchisees that own units from several distinct brands are known as a multi-concept franchisee. Some franchise businesses forbid their franchisees from owning several brands, while others aggressively recruit franchisees who already own many brands.
- Master Franchisee: The agreement of the franchisor to let a franchisee sell units in a particular territory falls under a master franchise agreement. A Master Franchisee may possess one or more franchises in their assigned region, but this is not required.
- Area Franchise: A franchisee who owns numerous franchise business units is known as a multi-unit franchisee. This usually refers to the same brand’s units, although it may also relate to “multi-concept” ownership.
- Net Worth: Calculation of one’s entire worth is known as net worth (total assets minus total liabilities). Many franchise companies demand prospective franchisees to have a particular net worth and a minimum amount of liquid cash.
- Operations: A company’s methods, procedures, and strategies to supply its clients with a product or service.
- Return on Investment (ROI) is a proportion of a business’s (or any investment’s) worth compared to the cost of starting it. An investment of $200,000 in a firm whose worth is now $400,000 has a return of 100 percent. You should minus the total cost from the current value and divide the result by the total cost to calculate this. Afterward, multiply it by 100.
- Renewal: An extension of the initial franchise agreement in which the franchisee keeps control of the franchise for a new period.
- Royalties/Royalty Fees: A cost of money that a franchisee pays to a franchisor regularly (typically monthly) within the franchise agreement, generally as a percentage of gross sales. Typical royalty costs are less than 10% of total sales, although depending on the services/support provided by the franchisor, some firms may charge higher fees or have a different price structure.
- Single Unit: One franchise unit, opposite ownership, spread across multiple units, where a single franchisee controls many franchise units.
- Senior Care: This industry sector focuses on senior in-home care or services related to senior care. Companies that provide non-medical care, with some that also provide medical services. In recent years, senior care has become a trendy and profitable franchising area.
- Supplier/Vendor: A firm that provides a service or product to another business is known as a supplier or vendor. Individual franchisees often obtain negotiated discount pricing through “preferred” supplier/vendor connections established by franchisors.
- Startup Expenditures: The entire upfront (not ongoing) costs associated with launching a franchise. This can include fees such as the fee of the franchise, fees for building, legal fees, purchasing equipment, and additional expenses.
- Transfer: A franchise business’s ownership is transferred from one side to another.
- Territory: A defined region that makes up a franchise’s “unit,” most commonly employed in service-based or mobile franchise business models. Several franchisors provide entire regions to avoid disagreements between franchisees.
- Turnover: A franchise agreement that is not renewed, was canceled, transferred, or the business has stopped working is referred to as turnover.
- UFOC: A Uniform Franchise Offering Circular was the initial term for what is now known as the Franchise Disclosure Document – FDD.
- Validation: is an integral part of the “due diligence” process when purchasing a franchise—calling current franchise owners to verify the benefits of the franchising chances as the franchisor described them. Usually, a potential franchisee can get in touch with some franchises on the company’s FDD list.
All of these terms play a big part in the life of those that work in franchising. They cover various aspects and are used mainly in professional conversations in this field. That’s why it’s vital to know what they mean and enrich your communication with them. Aside from this, they can help people understand the paperwork and make deals more quickly.