key Terms in Franchising

Familiarising yourself with the key terms of franchising is vitally important to understand how the franchising industry works and to help you feel confident when starting your franchising journey. Franchise Administration has provided the key terms in franchising below.

Due Diligence – is gathering and analysing information about a business or investment opportunity before making a decision. It helps prospective franchisees to assess the risks and benefits of the franchise opportunity and make an informed decision.

Franchise Disclosure Document (FDD) – the Franchise Disclosure Document provides information about the franchisor and franchise system to the franchisee. It is a lengthy document that contains detailed information on the franchise, including a description of the business model, the estimated costs of starting a franchise, names of officers and franchise owners, and other key information.

Franchise – is a contractual arrangement whereby the franchisor allows the franchisee to use its intellectual property, as well as its business processes and systems.

Franchise Agreement – the legal, written contract between the franchisor and franchisee which articulates the responsibility of each party. The contract a franchisor and franchisee sign to confirm the agreement to open one or more franchise business(es).

Franchise Operations – the processes, procedures, and strategies employed by the franchise business to provide the product and/or services to its customers.

Franchise Operations Manual – is a document that outlines the standards, procedures, and policies that govern the operation of a franchise network. It serves to ensure consistency, quality, and compliance across all franchise locations, as well as to provide guidance and support to franchisees.

Franchisee – the person or company that obtains the right from the franchisor to do business under the franchisor’s trademark or trade name.

Franchising – a method of business expansion characterised by a trademark license, payment of fees, and significant assistance and/or control.

Franchisor – the person or company that grants the franchisee the right to do business under their trademark or trade name.

International Franchise Association (IFA) – the largest and best-known organisation representing the franchising industry. The IFA works to provide resources to franchisors, franchisees, and suppliers to franchise companies and is active in the political space for franchise and small business interests.

Master Franchise – a franchise agreement in which the franchisor agrees to allow a franchisee to sell franchise units in a specific geographic region. A master franchisee may, but does not necessarily own one or more franchises in their allotted territory.

Product Distribution Franchisee – a franchise where the franchisee simply sells the franchisor’s products without using the franchisor’s method of conducting business.

Royalty – the regular payment made by the franchisee to the franchisor, usually based on a percentage of the franchisee’s gross sales.

Supplier/Vendor – a business providing a service or product to another business. Franchisors often establish “preferred” supplier/vendor relationships wherein individual franchises receive negotiated discount pricing.

Territory – a designated area that comprises a franchise “unit,” typically used for service-based or mobile franchise business models. Many franchisors provide exclusive territories to prevent conflict between franchisees.

Trademark – a type of intellectual property that helps to protect your brand by distinguishing it from competitors. This includes the marks, brand name, and logo that identify a franchisor which is licensed to the franchisee.

Unencumbered Funds – unencumbered funds is the franchisee’s own cash available in liquid form. These funds are not obtained from a bond or any other loan, as this increases the debt level of the franchisee in their personal capacity.

Validation – is a part of “due diligence” when buying a franchise. Calling to speak with existing franchise owners in an attempt to validate the virtues of the franchise opportunity as explained by the franchisor. The prospective franchisee will typically contact several franchisees from the list provided in the company’s FDD.