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Top Franchise Terms Decoded

Purchasing a franchise is a big decision, one that you want to get right. There are many documents to go over, contracts to sign and terms you may not understand. With such an important financial and legal undertaking, you want to make sure that you understand every term you come across. Here are the top franchise terms you may see, and what they mean:

Franchisee:

The franchisee is the individual who purchases a franchise, or a business under the franchisor’s name.

Franchisor:

The parent company that allows franchisees to open and operate their own place of business under the Franchisor’s name, with their products, trademarks and processes.

Absentee ownership:

This is an option that is offered by some franchisors that will allow you to own a franchise, without having to be involved in actively running it.

Franchise fee:

This is the initial fee that is paid to the franchisor in order to become a franchisee. In some cases, this is going to be a one-time thing, whereas for others the terms may be different. You will need to refer to your agreement for the specifics.

Royalty fee:

Many franchisors require that franchisee pay them a fee on a regular basis. This can be weekly, monthly or annually. The royalty fee is typically a percentage of the franchisee’s sales, although it can be a flat fee.

Franchise disclosure document:

Under the United States Federal Trade Commission, all franchisors are required to provide this legal document to their prospective franchisees. The document consists of 23 sections, or items, and is updated annually. It can include information about the history of the company, the costs and other fees, contract obligations, product details and more.

How A Properly Written FDD Helps Franchisors and Franchisees

Franchise agreement:

The contract that outlines the responsibilities of both parties in the arrangement. It should be included in the franchise disclosure document.

Company-owned units:

These are locations under the same business name that are run by the franchisor and not separate franchisees.

In-house financing:

In some cases, the franchisor can offer financing to their franchisees, in part or in whole. This financing can be used to help with expenses such as fees, startup costs or equipment.

Third-party financing:

This refers to financing that is provided by a source other than the franchisor. Many franchisors have a relationship with specific banks, where they refer their franchisees for their small business loans.

Master franchisee:

The master franchise can serve as the middleman between the franchisees and the franchisor in a certain territory. They can sign up new franchises, issue franchise disclosure documents and sometime receive a cut of the royalties from their territory.

When purchasing a franchise, you will want to make sure that you understand all the information and paperwork. Use this brief guide to help you decipher any terms that you come across that you may not understand.

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