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Franchise Terms

What are common franchise terms?

Advertising fee
The advertising fee covers the franchise system’s advertising and promotions. It is usually calculated as a percentage of the franchisee’s gross sales or net sales. According to a franchise survey carried out by NatWest/BFA the average advertising fee is three and a half per cent in the UK.

Agreement
This is a legal written document between the franchisor and franchisee. It specifies the terms of the franchise contract such as rights and responsibilities of the parties, fees and payments, territory and the duration of the agreement.

Approved site
The approved site is the territory that the franchisor chooses for the franchisee’s business.

Area franchisee
An area franchisee purchases the right to open and operate a specified number of franchise locations, in a defined area, over a certain period.

Business format franchise
A license to use the franchisor’s product, service and trademark. The entire business format is provided, including (where relevant) the operating system, accounting systems, trademark, marketing and training.

Business plan
This is a detailed document that defines the development goals and objectives of a business.

Capital
This is the wealth required by a franchisee. Working capital is the money needed for the running and operation of the franchise until it becomes profitable. This includes legal costs, salaries, insurance, advertising costs, leasing costs, and living expenses.

Collateral
Collateral is a form of security that a borrower may offer a lender to guarantee a loan or other credit. Collateral can be resources, belongings, or something of wealth and value to the borrower. If the borrower fails to pay back the credit, the asset acting as collateral may become subject to seizure. This ensures payment or performance of the obligations stated in the lending agreement.

Copyright
Copyright is the exclusive legal to use, reproduce, publish or sell works of art, music, or literature, and to protect these works from any unauthorised use. This right prevents others from copying or exploiting another person’s work.

Disclosure document
This is a document provided by a franchisor when approached by a potential franchisee and both like each other. The document contains key information about the franchise and the franchisee's obligations.

Earnings claims
Forecasted franchise sales, profits, or earnings stated by a franchisor. If a franchisor is a member of the bfa (British Franchise Association) it is required by law to state its financial earnings.

Equity
Equity is the total value of an asset. It is the ownership of an asset after all debts have been paid, and the asset liquidated.

Exclusive territory
An exclusive area in which the franchisor will not set up another franchise to compete with the franchisee that holds that territory.

Feasibility study
A company looking to franchise its business will carry out a feasibility study. This includes market factors and business issues that may influence a franchise opportunity in the future.

Franchise
A relationship entered into between the owner of a business and an individual or group, to use the same identification name and format.

Franchisee
The person (business owner) who receives the license from a franchisor to conduct business under their trademark. Franchising A business method that involves a parent company (franchisor) and someone who pays for the right to sell the parent company's products (franchisee) to use their trademark/name. Read more here

Franchisor
The person or company that owns the right to sell the business under a trademark to a franchisee.

Franchise attorney
A lawyer who specialises in franchising law is known as a franchise attorney.

Franchise consultant
This is an expert in the franchising industry. They give advice on franchise operations, companies, and relationships.

Franchise fee

The initial fee or amount of money that the franchisee needs to pay the franchisor to purchase the franchise concept for an agreed period. 

Initial investment fee
The upfront cash investment required initially to open a franchised business.

Licensing
This is the legal act of the franchisor granting rights to a franchisee to a legally protected property in exchange for a fee.

Managed franchise
A franchise that doesn’t involve the nine-to-five running of the business. The franchisee should demonstrate strong sales, management and business skills to qualify for a management franchise opportunity.

Marketing
Grabs the attention of customers by using slogans, packaging, and celebrity support. Marketing manages the relationships with the customer and stakeholders to benefit the company.

Master franchisee
This is an individual who assumes the rights and obligations of the franchisor in a defined territory, and is the most common in international franchising. They purchase the rights to sell franchises to sub-franchisees, and provide them with some of the services provided by the franchisor. The master franchisee pays the franchisor both initial and ongoing fees based on the number of franchisees operating in the territory.

Multi-unit franchisee
A multi-unit franchisee owns and operates more than one unit of the franchise, however they do not have the rights to a defined territory.

Net cash flow
The amount of cash that is generated by the business after expenses, interest, and principal repayment on financing are paid.

Net worth
The total an asset is worth, after past transactions have been accounted for.

Non-competition clause
The restrictions that apply on competing with a franchised company, during and after the termination of a franchise agreement.

Operations manual
The manual contains instructions advising a franchisee how to operate the franchise. It covers general business procedures such as accounting, advertising, personnel, promotion, and maintenance.

Pro forma
The pro-forma document is a description of financial statements, which rely on historical data to assume levels of revenue, expenditure, assets, liabilities, and net worth.

Renewal
The continuation of term of the franchise agreement once it has expired. An agreement should also state the terms and conditions to renew that business relationship.

Resale
This is a purchase of an existing business from a franchisee.

Royalty fee
This is a percentage of gross sales the franchisee pays to the franchisor. They are usually based on a percentage of the gross revenue of the franchise unit.

Supplier
A supplier is the authorised individual or company who has been approved by the franchisor to supply products or services to the franchisee.

Territory
This is a specific area in which the franchisee has the exclusive rights to conduct business without the threat of competition from fellow franchisees.

Trademark
A franchise trademark is a form of identification such as a brand name or logo, which is associated with the franchise.

Turnkey
Literally, a business where a new owner has to simply "turn the key" to start operation, where everything is provided for example: shop, fittings and stock.

Transfer
The sale or other transfer of the ownership of the franchise agreement to another person.