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Franchise 101: 10 Terms You Need to Know

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If you’re DIYing your way to being an expert on all things franchise-related, you probably could use some help. In this post, we’ll look at 10 key terms that you’ll need to know if you want to become a franchise owner.

1. Area Franchise

Some franchisees prefer to open multiple locations of the same franchise. It’s necessary to have an area franchise agreement to specify territory and the timeline for opening several locations.

Area franchisees may be required to pay an area fee for the rights granted by the franchisor.

2. Feasibility Study

Prior to opening a new franchise, it’s a good idea to analyze whether a given franchise will succeed in a market or location.

3. Franchisee

If you plan to buy a franchise, you will become a franchisee, who is a person who buys the right to operate a business using a franchisor's name and branding.

4. Franchisor

This refers to the company that sells franchises to franchisees. They’re the parent company that has established processes, products, and branding that they then require franchisees to implement in exchange for a fee.

5. Franchise Fee

This is the initial, up-front fee a franchisee pays a franchisor to operate a franchise. Sometimes this is a flat fee, while other times it’s based on territory size or experience. Some franchisors

offer discounts to veterans, minorities, or existing franchisees.

6. Franchise Disclosure Document

This is a legal document required by the U.S. Federal Trade Commission. The document (often referred to as the FDD) includes:

  • Franchisor history

  • Fees and costs of starting a franchise

  • Contractual obligations

  • Unit data

  • Other key information pertinent to the franchisor/franchisee relationship

The FDD is typically updated annually. For franchisees, it’s imperative that you review this document so you completely understand what you are getting into.

7. Royalty Fee

In addition to the Franchise Fee, as a franchisee, you will also have to pay a regular fee to the franchisor. That might be weekly, monthly, or yearly, depending on the agreement. The amount of the fee varies; sometimes it's a percentage of sales, and sometimes it's a flat fee. Some franchisors also charge you a separate fee to cover advertising costs.

8. Franchise Agreement

When you are ready to invest in a franchise, you will need to review and sign this agreement. It’s essentially a contract, included in the FDD, that outlines the responsibilities of both the franchisor and the franchisee. It will be your legal lifeline if the franchisor doesn’t live up to its obligations.

9. Master Franchise

Some chains are so large that managing franchises at a national level is a challenge. For these brands, bringing on master franchisors to oversee geographic regions makes sense. These master franchisors can serve all the functions that the parent franchisor can, but at the local level, providing better customer support and interaction for you as the franchisee.

10. Product Distribution Franchise

Rather than buying the franchisor’s business processes, with a product distribution franchise, you simply sell its products and use your own strategy for running the business.

Susan Payton is the President of Egg Marketing & Communications, a marketing firm specializing in content writing and social media management. She’s written three business books, including How to Get More Customers With Press Releases, and frequently blogs about small business and marketing on sites including Forbes, AllBusiness, The Marketing Eggspert Blog, and Tweak Your Biz. Follow her on Twitter @eggmarketing.

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