Glossary of Franchise Industry Terminology

Glossary of Franchise Industry Terminology

By: Jack Findaro, Finance Director of Visa Franchise

Overview: We at Visa Franchise have helped numerous clients from countries all around the world find and analyze the best franchise investments for them and their family. We realize that the franchise industry uses many terms that are unique to the franchise industry. As such, please find below a list of many of the most common words and terms used within the franchise industry as well as their definitions:

  • Advertising Fund (Ad-Fund): The regular payment made by the franchisee to the franchisor or dedicated advertising fund that is then used exclusively for brand level and local marketing initiatives. It is usually based on a percentage of the franchisee’s gross sales.
  • Distributorship: The right granted by a manufacturer or wholesaler to sell their products.
  • Franchise Disclosure Document (FDD): A legal document which is presented to prospective buyers of franchises in the pre-sale disclosure process. It provides information about the franchisor and franchise system to the franchisee.
  • Franchise: A license that describes the relationship between the franchisor and franchisee including use of trademarks, fees, support, and control.
  • Franchise agreement: It is the legal, written contract between the franchisor and franchisee which tells each party what each is supposed to do. This is usually included within the FDD.
  • Franchisee: The person or company that gets the right from the franchisor to do business under the franchisor’s trademark or trade name.
  • Franchise fee: The initial fee paid to a franchisor to become a franchisee, outlined in Item 5 of the Franchise Disclosure Document (FDD). For some franchises, this is a flat, one-size-fits-all fee while for others it varies based on territory size, experience, multi-unit / area developer commitments, or other factors.
  • Franchising: A method of business expansion characterized 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.
  • Item 7: The section in the Franchise Disclosure Document requires franchisors to set out in a prescribed format a franchisee’s estimated initial investment needed to start the franchise business. It is important for individuals looking to purchase a franchise to fully understand what Item 7 contains as it provides the low and high ranges of the investment size.
  • Item 19: The section in the Franchise Disclosure Document showing the financial performance representation, or FPR. It includes any oral, written, or visual representation to a prospective franchisee (including a general dissemination in the media) that states or suggests a specific level or range of actual or potential sales, income, gross or net profits, or “break-even” figures. Note that not every franchisor provides an Item 19 in their Franchise Disclosure Document.
  • Joint Venture: A commercial enterprise undertaken jointly by two or more parties that otherwise retain their distinct identities. As applied to franchising, it can be where the franchisor also takes a financial stake in the franchise unit and helps to manage it on a day-to-day basis.
  • Protected Territory: The “exclusive” portion of area based on a national, regional, county, postcode, or population basis, which is allocated to franchisees as part of the franchise package. This is granted by the franchisor against the opening of company, franchisee, or other locations within the territory assigned to the franchisee.
  • Royalty: The regular payment made by the franchisee to the franchisor, usually based on a percentage of the franchisee’s gross sales.
  • Startup Cost & Initial Investment: The total amount required to open the franchise, outlined in Item 7 of the FDD. This includes the franchise fee, along with other startup expenses such as real estate, equipment, supplies, business licenses and working capital.
  • Trademark: The marks, brand name and logo that identify a franchisor which is licensed to the franchisee
  • Turnkey: A term used to describe a location which is provided to a franchisee fully equipped and ready to operate.
  • Working Capital: Working capital is the money needed to fund the day-to-day operations of the business. This can include paying bills, employee salaries, and miscellaneous expenses.

The above list and definitions covers the most commonly used terminology in the franchising world. However, a more in-depth list can be found here.

If you have any questions regarding these terms or franchising in general, please feel free to call (+1-888-550-7556) or email us (info@visafranchise.com) at Visa Franchise anytime!