Understanding The Well-Known (And Some Not-So-Well-Known) Language of Franchising
Franchisee
An individual or company that holds a franchise for the sale of goods or the operation of a service.
Franchisor
An individual or company that sells or grants a franchise for the sale of goods or the operation of a service.
Semi-Absentee
A business that can be started and run while still maintaining other obligations. The owner hires managing staff for the day-to-day operations and then focuses on leading the business strategy and managing the managers. This type of franchise is a good fit for those who are good people managers.
Owner-Operator
A small business owner who also runs the day-to-day operations of the company. Owner-operators are found in many business models and franchising companies in many different industries like restaurant chains, health care, logistics, maintenance, repair, and operations.
Franchise Agreement
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. Typically the agreement has a 10-year term.
FDD (Franchise Disclosure Document)
The Franchise Disclosure Document is a legal disclosure document that must be given to individuals interested in buying a U.S. franchise as part of the pre-sale due diligence process. The document contains information essential to potential franchisees about to make a significant investment.
Item 7 (From The FDD)
Estimated initial investment: The franchisee must be aware of what the low and high range of the initial investment must be, including an estimate of their working capital.
Item 19 (From The FDD)
Financial performance representations: An optional space for a franchisor to estimate a franchise's potential performance based on reasonable assumptions.
Franchise Fee
A one-time fee to start operating under their name and using their trademarks and proprietary information. This fee is included in the Item 7 Total Initial Investment.
Royalty Fee
An ongoing fee that a franchisee pays to the franchisor. This fee is usually paid weekly, monthly, or quarterly, and is typically calculated as a percentage of gross sales.
Validation
The process of interviewing franchise owners by someone who is interested in investing in that franchise. It is a best practice for prospective franchise owners.
Unit/Territory
A geographic area which provides the franchisee with certain rights, which may include exclusive operation.
Feasibility Study
An examination of the potential of a company to franchise, or of the potential success of a unit within a specific market or specific location.
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