Common Franchise Terms You Should Know Before Buying a Franchise

If you’re a novice to the franchise system and are thinking of owning your first franchise, research is extremely important while exploring various franchise opportunities. However, while conducting your research, you will come across many terms which might be difficult to understand for a newbie. Understanding basic franchise lingo will help you better grasp the ins and outs of franchising and to make an informed decision. Here are some of the basic franchise terms you should know before dipping your feet into franchise waters.

Franchisee

The person or company that gets the right from a franchisor to do business under its trademark or trade name.

Franchisor

The person or company that grants a franchise the right to do business under their trademark or trade name.

Area Development Franchise

Under an area development franchise, a franchisee has the right to open more than one unit during a specific period of time, within a specified area.

Disclosure Document

A disclosure document is provided by the franchisor to a prospective franchisee. The document contains information about the franchisor, the franchise being offered, and the terms and conditions of the legal relationship into which the franchisee will enter.

Initial Investment

The required amount of money required for a new franchisee to open and operate a location for at least three months. This must include all “startup” expenses, but may not be reflective of total investment.

Master Franchise

A master franchise agreement gives the franchisee more rights than an area development agreement. In addition to having the right and obligation to open and operate a certain number of units in a defined area, the master franchisee also has the right to sell franchises to other people within the territory, known as sub-franchises. Therefore, the master franchisee takes over many of the tasks, duties and benefits of the franchisor, such as providing support and training, as well as receiving fees and royalties.

Multi-unit Franchise

A multi-unit franchise is an agreement where the franchisor grants a franchisee the rights to open and operate more than one unit.

Renewal

Most franchise agreements are for a specified period of time. At the end of that period, the franchisee generally has the option to renew the agreement at a specified fee and upon signing the then current franchise agreement. The franchise agreement presented at the renewal time may be substantially different from the one originally signed; for example, the royalties and advertising fees may be higher.

Royalty

The regular payment made by the franchisee to a franchisor, usually based on a percentage of the franchisee’s gross sales. The royalty may be a percentage of sales, a fixed recurring fee, or a combination. Royalties commonly cover the use of a trademark and trade name and also constitute a fee for services given by the franchisor such as training and assistance, marketing, advertising, accounting, and so on.

Single-unit Franchise

A single-unit (direct-unit) franchise is an agreement where the franchisor grants a franchisee the rights to open and operate one franchise unit. This is the simplest and most common type of franchise.

Termination

A declaration by the franchisor that part or all of the rights and obligations, of both parties, under the franchise contract cease or have ceased as of a certain date. Certain responsibilities and/or claims and damages may survive this termination. The conditions under which a franchise may be terminated by the franchisor are commonly addressed to in the franchise agreement.

Trademark

The franchisor’s identifying marks, brand name and logo that are licensed to the franchisee are part of its trademark. Any word, name, symbol, or device or any combination thereof adopted and used by a franchisor to identify its goods and/or services and distinguish them from those manufactured or sold by others. A careful franchisor grants only clearly defined or restricted use of its trademark.