Franchising Key Words

Royalty

A continuing payment to the franchisor that is payable on a periodic basis (usually weekly, biweekly, or monthly) throughout the term of the franchise agreement.

Advertising Fund

A continuing periodic payment to the franchisor that, like the royalty payment, can be a fixed amount or a percentage of gross sales.

Protected Territory

A designated area or geographic boundary granted to the franchisee by the terms of a franchise agreement. The franchisor agrees not to open another franchised or company owned business of a like or exact nature within the franchisees protected (assigned) territory.

Business Plan

A document that summarizes the operational and financial objectives of a business and contains the detailed plans and budgets showing how the objectives are to be realized.

Franchise Fee

A fee paid by the franchisee enabling the franchisee to use the name of the franchisor.

Area Franchise (aka Area Development Agreement, Master Franchise)

A franchise granted to develop a defined geographical area. May include a strict performance schedule and franchise sales rights.

Franchise

A franchise is a business model that involves one business owner licensing trademarks and methods to an independent entrepreneur. Sometimes, franchises are referred to as chains.

UFOC

Uniform Franchise Offering Circular. The UFOC contains explicit items of information related to the franchise, including the franchisor's background; important provisions of the franchise agreement; amount and terms of the franchise fee and royalty and advertising-fund fee; estimated start-up costs; details on existing franchisees; the franchisor/franchisee relationship; audited financial statements for the last three fiscal years; and copies of all contracts that will be used.

Initial Investment

Usually includes the franchise fee and the total investment amount including working capital required to commence operating a franchise.

Cannibalization

Building 2 franchise stores too close to each other, resulting in competition and a potential loss of customers for one or both of the stores.

Brand

A name, term, design, symbol, or any other feature that identifies one seller's product distinct from those of other sellers.

Venture Capitalist

A person who invests in a business venture, providing capital for start-up or expansion. Venture capitalists are looking for a higher rate of return than would be given by more traditional investments.

Franchise Agreement

A written contract detailing the mutual responsibilities of franchisors and franchisees. It is usually for a several-year term, and when the term is up, the contract expires and must be renewed.

Working Capital

Cash in the bank, trade credit, borrowing capacity or cash flow to meet start-up expenses and see the business through any unusual dips and changes in its daily activity. Initially funds are needed to pay first and last months rent, utility deposits, licenses and any number of incidental costs.

Product/Trade Name Franchising

Franchisor owns the right to the name or trademark and sells that right to a franchisee.

SBA

The U.S. Small Business Administration

Business Format Franchising

The franchisor licenses the franchisee a complete plan - a business format, operating system and trademark to his/her franchisee. The plan provides step-by-step procedures for major aspects of the business and, anticipating most management problems, provides a complete matrix for management decisions confronted by the franchisees.