Franchising – Main Terms You Must Know

date icon 3 minutes to read date icon 27th July, 2021

Familiarise Yourself With Franchising

Confused by the very specific terminology that’s used with regards to franchising? Don’t worry, we’re here to help you! Below, you’ll find the answers to frequently asked questions such as ‘what does franchising mean?’, and so many others.

The Main Terms You Must Know

Business Model

A franchisor’s proven strategy for accomplishing economic success. It encompasses everything needed for a franchisee to succeed. This includes the products and services to be sold, the audience to be targeted, and that’s not all.

Business Plan

A document that details the objectives of an individual franchise, and describes the strategy and financial commitment required to achieve these goals. This documentation will need to be presented to a moneylender, in the event a franchisee needs to secure funding.

Discovery Days

One of the more prevalent franchising terms, a Discovery Day is an in-person meeting between a franchisor and a prospective franchisee. In most cases, this takes place at the franchisor’s head office, and the franchisee is able to familiarise themselves with the brand and the business people involved. A Discovery Day is often conducted shortly before a franchise agreement is finalised.

Franchise

The definition of franchising in business is simple. It’s a license granted to a franchisee by a franchisor, that allows the franchisee to use the franchisor’s intellectual property, as well as market, and then sell its goods and services.

Franchisor

An established, successful company that allows an independent business person, or ‘franchisee’, to trade under their umbrella, and use their proven business model and intellectual property.

Franchisee

An independent business person who pays a franchisor for the right to join their franchise network, use their intellectual property, follow their business model, and provide them with training and support as needed.

Prospective Franchise

An independent business person who communicates with, or meets with a franchisor, to discuss the possibility of entering into a franchise agreement.

Franchise Unit

A single franchise outlet located within a specific territory.

Multi-unit Franchisee

A franchisee that manages more than one franchise unit.

International Franchising

The expansion of a successful domestic franchise network into another country.

Trade Name Franchising

What is trade name franchising? A license that allows a franchisee to sell a particular product while using the branding of a given franchisor.

Master Franchise

A type of franchising agreement that involves a franchisee assuming the role and responsibilities of a franchisor in a specific region. It must be remembered that the master franchisee may only actually own one or more franchise units in the region.

Franchise Agreement

A contract signed by both a franchisor and a franchisee that formalises the agreement between the two parties. In most circumstances, this contract will contain a number of stipulations, and won’t expire for between three and ten years.

Exclusive Territory

A geographically defined area within which a single franchisee operates. Its exclusivity means that no other franchisee from the same franchise network can market or sell products or services within its boundaries.

Franchise Disclosure Document (FDD)

Otherwise known as a ‘prospectus’, this document must be provided to prospective franchisees by franchisors before any agreements are made. It covers the required initial investment, ongoing charges, the business model, and much more.

Operations Manual

A document that contains in-depth instructions that enable a franchisee to run their operation in compliance with their franchisor’s guidelines.

Working Capital

Money that a franchisee will need to cover expenses until their business begins sustaining itself. These expenses could include staff wages, insurance, office rent, and so on.

Royalty Fee

A recurring payment that must be made by a franchisee in order to stay within a given franchise system. It’s normally a percentage of the franchisee’s turnover.

Marketing Fee

A payment made to the franchisor by the franchisee in exchange for marketing and advertising support. This fee usually amounts to a set percentage of the franchisee’s monthly turnover.

Franchise Fee

The cost that a franchisee must cover to gain the right to use a franchisor’s intellectual property. This is expected to be paid up-front and isn’t commonly a recurring expense. It’s important to realise that this fee doesn’t include working capital or startup costs.

Initial Investment

The sum total of the capital required to make an investment in a franchise. This includes, but isn’t limited to, the franchise fee, startup costs, and working capital.

Next Steps

After you’ve read through the above franchising terms, you’ll find it much easier to fully comprehend the franchise opportunities you come across. Got more questions that need answering? Just reach out to Franchise Fame. Or alternatively, take a look at our guide that tells you about the things you must consider before buying a franchise.