Like most industries, franchising has its own language. For people who are new to the world of franchising, hearing this language for the first time can be enough to make their head spin. The terminology can be confusing.
In an industry that’s steeped in opportunity, we aim to eliminate that confusion by defining 10 of the most commonly used terms. In doing so, we hope that you’ll be better able to research what’s available to you and use this deeper understanding to make the best decision for your future.
Franchising Terms to Know
Franchise: A franchise is a license that gives the person buying the ability to use trademarks, fees, and support from an established business.
Franchisor: The franchisor is the established business and the parent company that allows a person to start operating under their name for a fee.
Franchisee: The franchisee is the person who buys the rights to operate the franchise from the franchisor.
Franchise Disclosure Document (FDD): Before you buy a franchise, it’s imperative that you review the franchise disclosure document (FDD). This document gives you all of the insight you need to know whether the franchise is right for you. It uncovers the franchise system and provides detailed information about the franchisor.
Franchise Agreement: Once you’ve made the decision to buy the franchise, you’re ready to sign the paperwork and get started. It’s at this point that you sign the franchise agreement, or the contract between yourself (the franchisee) and the company (the franchisor). It’s in here that you’ll document your role and what’s expected of you.
Term of Agreement: The term of agreement is the length of time the franchise agreement is good for. Typically this term lasts anywhere from five years to twenty years. Once the term is up, the franchisor can renew the agreement if things are going well and/or the contract can be readjusted.
Franchise Fee: Most franchisors will require a fee to start operating under their name and using their trademarks and proprietary information. This fee is known as the franchise fee.
Royalty Fee: In addition to the franchise fee, many franchisors require franchisees to pay a royalty fee on what they sell. This fee is paid at given intervals of time, such as weekly, monthly, or annually. Sometimes it’s a flat fee, other times it’s a percentage of sales.
In-House Financing: Franchise fees can be daunting in the beginning, so many franchisors offer in-house financing options for their potential franchisees. Financing options can cover the fee or other expenses, such as inventory and equipment.
Third-Party Financing: Sometimes franchisees opt to get financing elsewhere, such as from a bank or specialty financing source. Any organization outside of the franchisor that offers fees is a third-party financing agent.
Ready to Franchise?
You might not be ready to buy a franchise quite yet, but you’re one step closer now that you’ve learned these terms. Now go ahead and dive in. Take a look at the various industries where you can start your own franchise and discover your next big move.
Also See:
Franchise 101: 10 Terms You Need to Know
Franchise Terms Glossary
Susan Guillory 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.