September 24, 2024

Your A-Z Glossary for Franchise Success

Navigating the franchise industry can be complex, with its own set of terms and jargon that are crucial for understanding the industry. Whether you’re a prospective franchisee, a seasoned franchisor, or simply interested in the franchise model, our A-Z glossary of franchising terms is here to help. Each term provides a clear and concise explanation to ensure you have a comprehensive understanding of the franchising landscape. Dive into our glossary to familiarize yourself with the essential terms and make informed decisions in your franchising journey.

A

  • Acknowledgement of Receipt: The signed confirmation at the end of the Franchise Disclosure Document (FDD) indicating the date it was received by the franchisee. (see also Receipt Page – FDD Item 23)
  • Advertising Co-op: A group of franchisees, sometimes including the franchisor, who pool funds to finance shared marketing efforts at a regional or national level. Also called “Regional Advertising Co-op” or “National Advertising Co-op”
  • Antitrust Law: Laws that prevent monopolistic practices and promote fair competition in the marketplace.
  • Approval/Consent: A requirement in franchise agreements for one party to obtain permission from the other before proceeding with certain actions.
  • Approved Supplier/Vendor: A provider approved by the franchisor from which franchisees are either recommended or required to purchase specific products or services for the development or operation of their business.
  • Arbitration: A method of resolving disputes outside of court, where an impartial third party makes a binding decision.
  • Area Developer: A franchisee granted the rights to open multiple franchise units in a specific territory. Terms of the development schedule are pre-defined. The Area Developer may choose to recruit and represent the franchisor in the sales process. In return, they share in the revenues collected from the initial franchise fee and/or the royalties. (Abbreviated to “AD”. Also called Regional Developer or “RD”.)
  • Area Development Agreement: The Agreement that outlines the rights granted to the Area Developer to open multiple franchise units in a specific territory according to a development schedule.
  • Area Representative: A type of franchisee who not only operates franchise units but also assists the franchisor in recruiting new franchisees and providing ongoing local support.
  • Assignment: The ability of a franchisee to transfer their rights and franchise obligations under the franchise agreement to another party, subject to the franchisor’s approval.

B

  • Business Broker: A person who facilitates the sale or purchase of an existing business, including franchised businesses, by acting as an intermediary. (See also, Franchise Broker.)
  • Business Coach (BC): A representative from the franchisor’s team to support franchisees in their business operations as a guide, mentor and sounding board – but also someone who reviews compliance with regard to brand guidelines, customer service and reputation management. Often this role is local to the franchisee or visits the franchise unit/territory on a regular basis. (Also called Field Support, Area Manager, Operations Manager or Regional Manager)
  • Business Plan: A detailed document outlining a company’s objectives, strategies for achieving them, and the resources required.
  • Buy-back Option: A provision in a franchise agreement allowing the franchisor to repurchase the franchisee’s business under specific conditions.

C

  • Cash-Flow Projections: Financial forecasts that estimate the cash inflows and outflows of a business over a specific period, helping to assess financial needs and stability.
  • Certified Franchise Executive (CFE): A professional development designation awarded upon completion of a program designed by the IFA to elevate ones knowledge of the franchising industry involving rigorous study of the legal and business components of franchise sales, management and compliance. Participation enhances industry awareness, fosters a leadership mentality and establishes connections within cohort groups of industry peers seeking certification in the program.
  • Competing Operation: Any business activity conducted by a franchisee that competes with the franchise, often restricted by non-compete clauses in the franchise agreement.
  • Conversion Franchise: The process of converting an existing independent business into a franchise location, adopting the franchisor’s branding and operational model.
  • Copyright: Legal protection for original works, such as operational manuals or marketing materials, that are licensed for use within the franchise.

D

  • Decision-Making Matrix: A structured tool used to evaluate different franchise opportunities based on key criteria and data.
  • Deferral of Fee: The amount owed by the franchisee to the franchisor, often related to the initial franchise fee as required by a Registration State.
  • Demographics: Characteristics of a population, such as age, income, or education level, that influence consumer behavior and market potential.
  • Designated Supplier/Vendor: A specific supplier that franchisees are required to use for certain products or services to maintain quality and consistency. (Also called a Required Supplier/Vendor).
  • Development Agreement: A contract granting a franchisee the rights to open and operate multiple franchise units in a defined area within a set timeframe.
  • Development Fee: A payment made by the franchisee to the franchisor under a Development Agreement for the rights to develop a certain number of units.
  • Development Rights: The rights given to a franchisee to open multiple locations within a specified territory.
  • Development Schedule: The timeline set in the Development Agreement outlining when and how many franchise units must be opened.
  • Disclosure Document: A document provided to prospective franchisees that includes important information about the franchise offer, including financials, fees, and legal obligations. (See also FDD)
  • Discovery Day: An event organized by the franchisor for potential franchisees to learn more about the franchise system, typically involving a visit to the franchisor’s headquarters. Franchisors utilize this as an interview of the candidate to determine the fit and alignment of the brand and its culture. (Also known as “Meet the Team Day”.)  
  • Distributor: An entity that buys products from manufacturers and resells them to retailers or end customers, which can be a franchised business.
  • Brand Development Fund:
  • Due Diligence: A thorough investigation conducted by potential franchisees to verify the viability and integrity of the franchise opportunity.

E

  • Entrepreneur: A person who starts and runs a business, assuming all associated risks and rewards.
  • Equity Interest: Ownership stake in a business, often referring to the franchisee’s investment in their franchise unit.
  • Estimated Initial Investment: A detailed list of all costs a franchisee is expected to incur in the startup of their franchise, as outlined in the Franchise Disclosure Document (FDD) in Item 7.
  • Exclusive Territory: A geographic area where no other franchises of the same brand can operate, granted to a franchisee to protect their market.
  • Executive (Franchise) Coach: An experienced advisor, mentor and motivational leader who engages with franchisors to support their growth initiatives.
  • Expiration of Term: The end date of a franchise agreement if it is not renewed.

F

  • FDD (Franchise Disclosure Document): The key legal document that provides prospective franchisees with vital information about the franchise opportunity and the franchisor.
  • Federal Trade Commission (FTC): A U.S. government agency that regulates franchises, enforcing rules against unfair and deceptive practices.
  • Financial Performance Representation: Information provided by a franchisor about the potential or actual financial performance of its franchises, found in Item 19 of the FDD.
  • Fractional Franchise: A franchise that is exempt from certain regulations due to the franchisee’s prior business experience and the small scale of operations.
  • Franchise: A legal relationship where a franchisor licenses its trademark and business model to a franchisee in exchange for fees.
  • Franchise Agreement: The legal contract that defines the terms and conditions of the franchise relationship, including rights and obligations.
  • Franchise Broker: any individual or entity that promotes or sells franchises in exchange for compensation from a franchisor or franchisee. This includes not only people but also organizations
  • Franchise Consultant: A professional who helps advise entrepreneurs in the franchising process. Sometimes, it is used to refer to a Franchise Broker (see also Business Broker) who is compensated in the sale of a franchise by the franchisor from the initial franchise fee collected.
  • Franchise Development Website: Information shared via the internet to allow a candidate to learn more about the franchise opportunity and the brand.
  • Franchise Disclosure Laws: Regulations requiring franchisors to provide a disclosure document to potential franchisees before any agreement is signed.
  • Franchise Expo: An exhibition in a trade show format for the purpose of introducing, marketing and promoting the sale of franchise agreements.
  • Franchise Fee: The initial payment made by a franchisee to a franchisor for the rights to operate a franchise under the franchisor’s brand.
  • Franchise Founder: The original owner who started up the franchise company to initially offer franchises for sale. The founder need not be the original business owner of the brand but is always the person (or people) who brought the brand to market as a franchise.
  • Franchise Relationship Laws: Laws that regulate the ongoing relationship between franchisor and franchisee, including termination and renewal rights.
  • Franchise Sales Material: Promotional materials provided to prospective franchisees, often including the FDD and information about the business model.
  • Franchise Term: The period of time for which a franchise agreement is valid, often with options for renewal.
  • Franchisee: An individual or entity that operates a franchise business under a licensing agreement from the franchisor.
  • Franchise Advisory Board (FAB) or Franchise Advisory Council (FAC): A group of franchisees selected to provide input and feedback to the franchisor, collect perspectives of other franchisees they represent, and act as liaisons between the franchisor and franchisees on marketing, operations and products or services for the brand.
  • Franchisee Sales Organization: A company that is engaged to represent the franchisor in the sales of franchise agreements, acting as an “external sales” team, but in some cases presented as an “internal sales” team with brand e-mails
  • Franchisee Training: Education and instruction provided by the franchisor to help franchisees operate their businesses effectively.
  • Franchised Unit: A business location or territory operated by a franchisee under the franchisor’s brand and system.
  • Franchisee Validation: The process where prospective franchisees speak with existing franchisees to gain insights into the franchise system.
  • Franchising: A method of business expansion where a company allows others to operate their own businesses under its brand and system.
  • Franchisor: The company that owns the brand and business model and licenses it to franchisees.

G

  • Goodwill: The positive reputation and customer loyalty that a franchise or business has built over time, contributing to its value.
  • Gross Sales: The total sales revenue generated by a business before any expenses are deducted.
  • Guarantee: A formal promise or assurance that certain conditions will be fulfilled, such as product quality or performance.

I

  • Independent Contractor: An individual who provides services to a business but is not considered an employee, often for tax and legal purposes.
  • Infringement: The unauthorized use or violation of someone’s intellectual property rights, such as trademarks or copyrights.
  • Initial Investment: The total amount of money a new franchisee needs to start a franchise, covering all estimated startup costs. This is typically outlined as a low to high range based on prior openings and outlined in Item 7 of the FDD.
  • International Franchise Association (IFA): A global organization representing the interests of franchising and promoting best practices.
  • International Franchising: The practice of expanding a franchise system beyond national borders.

J

  • Joint Employment: A situation where two or more businesses share control over an employee’s work conditions, responsibilities, or employment terms, potentially making both liable for legal and financial obligations related to that employee. This should be avoided between the franchisee and the franchisor in franchising.

L

  • Lanham Act: The U.S. law governing trademarks, protecting them from infringement and unfair competition.
  • Lease Security Payment: A payment made by the franchisee to a landlord to secure a lease, typically to cover potential damages or defaults.
  • Letter of Intent (LOI): A non-binding document outlining the basic terms of a lease and indicating a party’s intention to enter into a formal agreement, often used in preliminary negotiations with real estate lessors and/or property owners.
  • Liquid Capital/Assets: Cash or assets that can be quickly converted to cash, often required for starting a franchise.

M

  • Management Fee: A fee paid by the franchisee for ongoing management support from the franchisor.
  • Manager Operated/Run: A franchise model where the franchisee is not required to be involved in day-to-day operations, suitable for investors or absentee owners.
  • Marketing Commitment: The amount a franchisee agrees to spend on local marketing to promote their business.
  • Marketing Contribution: The required payment by a franchisee to a shared marketing fund used for collective marketing and promotions.
  • Marketing Fund: A pool of money managed by the franchisor specifically for funding advertising and promotional activities of the brand. (See also the more current term, Brand Development Fund)
  • Marketing Plan: A strategic plan outlining the marketing efforts needed to achieve business goals; in franchising, it also refers to the franchisor’s prescribed marketing strategies.
  • Multi-Unit Franchisee: A franchisee who owns and operates multiple franchise units, typically within a specific geographic area.
  • Multi-Unit/Multi-Brand Owner (MUMBO): A franchisee who owns and operates multiple franchise units with multiple franchise brands that do not compete with each other, typically within a specific geographic area.

N

  • Net Worth: The total value of an individual’s or company’s assets minus its liabilities.
  • Non-compete Clause: A provision in the franchise agreement that restricts the franchisee from starting or operating a competing business during and after the term of the agreement.
  • Non-Disclosure Agreement (NDA): A provision in the franchise agreement that restricts the franchisee (and it’s representative) from disclosing trade secrets during and after the term of the agreement.

O

  • Operations Manual: A comprehensive guide provided by the franchisor detailing all aspects of the franchise system, including how to open, market and operate the business; identifies brand guidelines, on-going obligations and compliance standards of the franchise brand.

P

  • Product Distribution Franchise: A type of franchise where the franchisee primarily sells the franchisor’s products, often within a specific territory.

Q

  • Quality Control: The processes and standards set by the franchisor to ensure consistent quality across all franchise locations.

R

  • Receipt Page: Confirms that the franchisee has received and reviewed the FDD. It must include signatures from both parties and details about the delivery date, meeting legal requirements for transparency.
  • Royalty Fee: Ongoing payments made by the franchisee to the franchisor, usually a percentage of the franchisee’s gross revenue.

S

  • Single-Unit Franchise: A franchise agreement where the franchisee operates only one franchise location.
  • Supply Chain: The network of suppliers and logistics providers that deliver goods and services necessary for the operation of the franchise.

T

  • Term: The duration for which the franchise agreement is valid, often with options for renewal or extension.

U

  • Uniform Franchise Offering Circular (UFOC): A document (and term) no longer used. This was superseded in franchising by the Franchise Disclosure Document (FDD) in 2008.

W

  • Women’s Franchise Committee (WFC): A delegation of female leaders within the IFA to represent franchisors, suppliers and franchisees with a mission to educate, mentor and advocate for women in franchising.
  • Women’s Franchise Network (WFN): Local chapters of female leaders within the IFA membership (franchisors, suppliers and franchisees) who embody and foster the mission of the WFC within a geographic region of the country.
  • Working Capital: Funds estimated to cover the day-to-day operational expenses of a franchise to keep it running for an initial period, typically three months.

Understanding key franchising terms is crucial for anyone involved in the industry, whether you’re just starting out or already established. This A-Z glossary provides a solid foundation for grasping the essential terminology and concepts that drive franchise success.

If you’re a small or medium-sized business owner thinking about franchising your business, now is the perfect time to explore this growth opportunity. Expanding through franchising can help you reach new markets, grow your brand, and empower others to replicate your business model. Whether you’re building your first franchise or scaling your operations, the right support can make all the difference.