Defining Key Franchise Terminology

Here are definitions of some key franchise terms, phrases and concepts:

Acknowledgement of Receipt: A document provided to you by the franchisor that you sign and return to the franchisor. It confirms that you received the legal franchise documents on a certain date.

Advertising Fee/Fund: A fee or fund paid by franchisees, usually to the franchisor, for advertising expenditures. The fund may be used locally, regionally or nationally. A franchisor may have more than one fund. This fee is usually a percentage of the franchisee's annual sales and is in addition to royalty fees.

Arbitration: A method of resolving disputes that is an alternative to going to court. Many franchise agreements require that disputes between the franchisor and the franchisee be resolved by arbitration. The American Arbitration Association is often identified as the organization that will provide the arbitrator (a neutral, disinterested third party). The arbitrator hears from both sides and renders a ruling.

Area Development Rights: The rights one obtains by which you receive the right to develop or sell multiple franchise rights for the franchisor in a specific geographic area. Normally, the area development agreement will provide a build out schedule that details how many locations are to be opened within a given period of time.

Balloon Payment: A final payment due at the end of a loan.

Business Plan: A critical document that details your company's management, plans and strategy and details the resources, financial and otherwise, that are needed to succeed. Used for your own planning and required by lenders and investors to evaluate your business. You usually can't get a loan without one.

Collateral: Assets used as security for a loan in the event of default.

Company-owned: A site or location owned and operated directly by the franchisor.

DBA: DBA stands for "doing business as." You can organize your corporate entity under one name but be known to the public under a different name. Thus, you are "doing business as …" You usually must fill out appropriate forms to register your business name with the states in which you do business.

Default: Failure to live up to obligations or otherwise comply with the terms of a legal agreement. Designated Supplier: To ensure quality standards are met, some franchisors require that franchisees buy supplies or products for their franchised business only from a designated, exclusive list of suppliers.

Distributorship: A distribution method for a company's products by which a business, the distributor, is authorized under the terms of the Distributor Agreement, to sell the products or services of another company. This is usually a manufacturer/reseller relationship and, although somewhat similar to a franchise, is different. Distributorship agreement may but need not provide exclusive rights to the distributor.

EBITDA: A calculation used to value businesses. It stands for "Earnings Before Interest, Taxes, Depreciation and Amortization."

Earnings Claims: Statements of sales, profit or other financial information made by the franchisor regarding the operations of their franchisees' locations.

Exclusive Territory: A specifically defined geographic area in which a franchisee has the exclusive, protected right to operate with in the franchisor's system.

Federal Trade Commission (FTC): The agency of the federal government charged with regulating trade practices including franchises. The Uniform Franchise Offering Circular (UFOC) exists because of FTC regulation.

Franchise Agreement: The legal agreement which governs the relationship between a franchisor and a franchisee.

Franchisee: The owner of franchise rights who is entitled to use the franchisor's trade names, trademarks and systems.

Franchise Fee: The initial amount of money paid to the franchisor for the right to become a franchisee in that system.

Franchising: A method of conducting business in an industry that involves a franchisor (parent company) and franchisee (someone who pays for the right to sell the parent company's products and use their trademark/name).

Franchisor: The company that owns a business system, products, trade names and trademarks that has decided to and has registered to sell its products and services through a distribution method using franchisees.

FTC Rule: A federal regulation that requires franchisors to prepare an extensive disclosure document called The Uniform Franchise Offering Circular (UFOC) and to give a copy of the UFOC to any prospective purchaser of a franchise. A franchisor may not accept any money from or enter into a contract with a potential franchisee until no less than ten (100 days after delivery of the UFOC.

Initial Investment: The upfront cash investment required to purchase a particular franchise business. Generally refers to the amount of the franchise fee or deposits needed at time of signing of a franchise agreement.

Master Franchisor: A term, sometimes used synonymously with Area Developer, describing the right of a franchisee to sell franchise locations to other franchisees within a designated geographic territory. Net Operating Income (NOI): The amount of cash generated by the business after deducting operating expenses. NOI us usually calculated without considering debt payments.

Net Profit: Sometimes also referred to as Net Cash Flow, the amount of cash generated by the business after deducting operating expenses and debt payments.

Net Worth: A calculation determined by subtracting the value of a person or entity's total liabilities from their total assets.

Non-Compete Clause: A clause often found in a Franchise Agreement which purports to restrict the franchisees ability to, during and upon termination of the Franchise Agreement, compete with the franchisor's business.

Operations Manual: A detailed manual that is provided by the franchisor to the franchisee and which contains the training and operational details and specifications required to properly operate the franchise business.

Pro Formas: Projected financial results for a business.

Registration: Many states require franchisors to file documentation before a franchise can be sold and thereby "register" with the state.

Renewal Rights: Franchises are generally offered for a period of time with a right to renew the relationship. The franchise agreement will detail what renewal rights, if any, are provided to the franchisee.

Royalty: A percentage of gross sales that a franchisee pays to the franchisor.

Total Investment: Generally speaking, the total amount of funds you will need to get started in a particular franchised business. This amount should include may include the Initial Investment plus any required build out, inventory, equipment purchases and working capital for at least three months of operation.

Uniform Franchise Offering Circular (UFOC): Required by the FTC to be provided by franchisors to potential franchisees, it is a treasure trove of information for a potential franchisee. Sometimes also referred to as the Disclosure Document, the document provides detailed information in 23 specified categories. A copy of the proposed franchise agreement is attached as an exhibit.

Working Capital: The amount of money you need to have and maintain in order to operate your franchised business. Planning for and having sufficient working capital available at the time you start your business and until your business is generating profits, is critical to your success.

NO RISK ... NO OBLIGATION

With no risk and no obligation you can add Franchise Success Center to your Success Team today!

The process of identifying and acquiring the right franchise business opportunity can be daunting and you can make very costly mistakes if you try to do it on your own. We designed our educational, coaching and broker/referral program to help you avoid making those costly mistakes. Our goal is to make you a more informed, smarter buyer and to help you become a successful franchise business owner.

Register now for your Free Consultation with one of our franchise broker representatives and you will be on your way to owning your own franchised business.

We look forward to your success!

Franchise Success Center provides educational and broker services but is not qualified to advise in any part of the purchase of a franchise or business opportunity. This report in no way offers business advice. Investing in a franchise is a complicated and serious matter. You are urged to seek professional advice and to consult with a franchise attorney, an accountant, and/or other professionals before you make your decision.