GLOSSARY OF COMMON FRANCHISE TERMS

List of Terms

Acknowledgement of Receipt: Item 23 of the Franchise Disclosure Document (FDD) that is signed by the prospective franchisee and provided to the franchisor (in hard copy or electronically signed) as proof of the date the FDD was received by the prospect.

Advertising Fee: An amount paid by the franchisee to the franchisor as a contribution to the franchise system’s advertising fund(s). The fund is typically established to pay for the creation and placement of advertising, and is used to offset the franchisor’s administrative costs relating to “retail/brand” advertising. Payments are typically calculated as a percentage of gross sales.

Agent: A party that has implied or express (oral or written) authority to act on the behalf of another.

Approved Advertising Materials: Materials provided by the franchisor for the franchisee’s use in their local market, or materials created by the franchisee which the franchisor has approved for use.

Approved Products: Specified products which a franchisee must buy for use in their business. Franchisor may also specify an authorized supplier (see authorized supplier definition below). Generally established to control the quality of the products used or sold by the franchisee in conducting their business.

Approved Site: A location that the franchisor determines will satisfactorily meet its criteria. Site approval by franchisor is generally not an indication of the sales potential or success of the location.

Arbitration: A method of resolving disputes.

Area Franchise: A franchise relationship that allows the franchisee to open multiple locations, usually in a defined territory within a pre-agreed upon timeline. Area franchisees usually pay an area fee for the rights granted by the franchisor.

Authorized/Designated Supplier: A supplier of products and/or services used in the operation of the franchise that has been approved by the franchisor to sell to franchisees. May be the franchisor or an affiliate company.

Broker: An outside salesperson or firm that undertakes, for a fee or commission, the sale of franchises for a franchisor. Franchise brokers are disclosed within the offering circular. Some brokers like to call themselves franchise consultants, but this is a misnomer (see franchise consultant definition below).

Business Format Franchising (BFF): A franchise occurs when a business (the franchisor) licenses its trade name (the brand) and its operating methods (its system of doing business) to a person or group (the franchisee) that agrees to operate according to the terms of a contract (the franchise agreement). The franchisor provides the franchisee with support and, in some cases, exercises some control over the way the franchisee operates under the brand. In exchange, the franchisee usually pays the franchisor an initial fee (called a franchise fee) and a continuing fee (known as a royalty) for the use of the trade name and operating methods. BFF describes the system of delivery, not the specific product or service associated with the delivery as in Product or Trademark Franchising.

Business Plan: A planning document that details the objectives for the business and establishes processes and measures for meeting those objectives.

Capital Required: The initial investment or required amount of investment necessary to conduct the business.

Certification: Program by which franchisor or its franchisee may test and attest to the ability of an employee to perform certain job functions within the franchisee’s business to the franchisor’s standards. Certification can generally be revoked if the employee fails to maintain standards in performing the job function.

Churning: A failing location acquired by the franchisor and resold to a franchisee even though the franchisor felt that the location had a high chance of failure regardless of ownership. While churning is not a common occurrence in franchising today, it does occur, and sometimes a single location may be churned several times. Churning is not the same as retrofranchising (see retrofranchising definition below).

Company-Owned Location: A location, owned and operated by the franchisor, usually identical in appearance and operations to those of the system’s franchises. While not required, most company-owned locations contribute to the system’s advertising fund(s).

Copyright: The right to use and license others to use intellectual property, such as system manuals or other published materials.

Continuous Training: Training provided by franchisors to its franchisees, unit management, and staff, subsequent to the initial training provided.

ConversionFranchising: The conversion of an existing business within the franchisor’s industry into the franchise system. Sometimes includes experienced operators without operating locations.

Culture of Compliance: Company culture whereby franchisees and staff do what is right for the system based on a feeling or knowledge that it is the right thing to do within the company philosophy, rather than because it is in the agreement or someone is watching.

Days: Unless otherwise stated, days generally refer to calendar days.

Day-to-Day Management: As an independent owner, the franchisee is obligated to manage the day-to-day affairs of their business to meet the franchisor’s brand standards.

Default: The failure of either party to meet the terms of the agreement. In franchising certain defaults are enumerated and some can be cured in a defined period, while others may not be curable.

Design: The trade dress used by the franchise system for the franchise locations, including logo, layout, color scheme, signage, etc.

Disclosure Document: Also known as the Franchise Disclosure Document (FDD). Formerly known as the Uniform Franchise Offering Circular (UFOC). The format of the FDD is specified by the FTC and NASAA (Federal and State regulators) and provides information about the franchisor, the obligations of the franchisor and the franchisee, fees, start-up costs, and other required information about the franchise system. It includes a listing of current and former franchisees. In addition to the disclosure portion of the FDD, the document will contain the franchise and other agreements and exhibits. It does not typically include unit earnings information.

Distributorship: The right granted by a manufacturer or wholesaler to sell their products.

Exclusive (protected) Territory: A geographic area which provides the franchisee with certain rights, which may include exclusive operation. Franchisors may include carve-out provisions within an exclusive territory which define an excluded type of location (malls, airports, stadiums, arenas, supermarkets, hospitals, etc.).

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.

Federal Trade Commission (FTC): The agency of the U.S. Government which regulates franchising under FTC Rule 436.

Field Representative: Typically an employee of the franchisor responsible for ensuring compliance by the franchisee with system standards. Also responsible for providing assistance to franchisees in the operation of their businesses. May be a commissioned Area Representative.

Financial Performance Representation (FPR): Formerly known as an Earnings Claim, an FPR is the Item 19 representation of unit performance by a franchisor.

Footprint: Layout of a location including placement of all furniture, fixtures, and equipment.

Franchise: A relationship, as defined by the FTC and various states, which typically includes three basic elements: (1) the granting of the right to use the systems mark, (2) substantial assistance or control provided by the franchisor to the franchisee, (3) the payment of a fee (in excess of $500) during a period of time six months before or six months following the commencement of the relationship.

Franchise Agreement: The agreement between the franchisor and franchisee which specifies the obligations of each party to the other during and following the franchise relationship.

Franchise Attorney: A lawyer specializing in, or with significant knowledge of, the laws, regulations and customs governing franchising.

Franchise Consultant: A business specialist with significant knowledge of the design, development, and operation of franchising and the underlying franchise relationship. Not to be confused with a Broker, who is a sales agent for the franchisor (see broker definition above).

Franchise Fee: The initial fee paid by the franchisee to the franchisor, usually upon signing the franchise agreement, as consideration for joining the system. Typically a flat payment as opposed to a percentage royalty, and is used to offset a franchisor’s franchisee start-up costs, marketing for franchisees, and other corporate expenses.

Franchisee: The person or company granted the rights (license) to do business under the trademark and trade name by the franchisor.

Franchisee in Good Standing: Franchisee operating their location and business in material compliance with franchisor’s operating standards and is current with all payments owed to franchisor and key suppliers.

Franchising: An indirect method of distribution; in other words, a method of growth.

Franchisor: A person or company which grants the license to a third party for the conducting of a business under their marks.

Gray Marketing: When a Franchisee purchases under franchisor’s negotiated agreements and uses the product or merchandise in another business, or sells products or merchandise to another company.

Gross Sales: When used in franchising, generally the total sales of the business before the collection of any sales taxes and after specified deductions. Generally used as the basis for percentage royalty calculations.

Initial Investment: The total estimated cost for establishing the business, including the franchise fee, initial fixed assets and leasehold improvements, inventory, deposits, other fees and costs, and the working capital required during the initial start-up period (three months).

International Franchise Association (IFA): The industry trade association representing franchising. The IFA is based in Washington, D.C. www.franchise.org.

Internet Sales: Any sale initiated and completed on the world wide web.

Inquiry: Anyone requesting information about the franchise opportunity, whether via the web, by telephone, by fax, or by other methods.

Key Supplier or Vendor: Supplier with whom franchisor has negotiated pricing or product availability and whose products or services are an integral part of the franchise system.

Lead: An inquiry that is prequalified after the initial interview with a member of the franchisor’s development staff as meeting the minimum criteria to become a franchisee, and who is invited to submit a franchise application.

Location: The site of the franchised or company-owned operation.

Manuals: The reference literature published by the franchisor which specifies the method of operating the business under the mark. The operations manual(s) enables the franchisor to alter and evolve the business.

Market Introduction Program: Marketing, advertising, and public relations activities used to launch the franchisee’s location.

Master Franchisee: A franchise relationship which is granted for the development of a specified area, and which allows the master franchisee to sub-franchise to other franchisees within the specified territory.

Multi-Unit Developer: A franchisee who agrees to open two or more locations, generally in a defined market over an agreed upon period of time.

Operating Principal: A single individual authorized by a franchise owner to make decisions on behalf of the franchisee. This person is the operating principal and is usually the person with whom the franchisor consults in regarding the operation and conduct of the franchise.

Product and Tradename Franchising: The licensing of a franchisee/dealer to sell or distribute a specific product using the franchisor’s trademark, trade name, and logo (automobile or truck dealerships, farm equipment, mobile homes, gasoline service stations, automobile accessories, soda, beer, bottling). Describes the specific product or service associated with the delivery, not the system of delivery as with Business Format Franchising.

Protected or Exclusive Territory: Protection or exclusivity granted to a franchisee by the franchisor against the opening of company, franchisee, or other locations within the territory assigned to the franchisee.

Prospect: A person who has expressed interest in continuing the approval process by completing and submitting the franchise application, and whose application has been preliminarily approved by the approval committee or the development director.

Quality Standards: The standards specified by the franchisor for the operation of the business. Quality standards are specified in the operations manuals, and quality franchise systems tightly control their standards for the benefit of the franchise system and its franchisees.

Registration: A requirement to submit the franchisor’s disclosure document prior to the approval to offer franchises within some states. There is no requirement to register a franchise at the Federal level. Registration is not an indication of state sanction of the value of the franchise offering.

Registration States: The various states that require franchisors to submit their FDD for approval prior to offering franchises. The registration states are members of NASAA.

Retrofranchising or Refranchising: When existing locations that may or may not have ever been franchised, and which are currently operated by the franchisor, are offered for sale to prospects. Not the same as churning – the franchisor has an expectation that the retrofranchised business will be successful (see churning definition above).

Royalty Fee: Typically a percentage of gross sales paid by the franchisee to the franchisor on a regular basis. May also be a fixed or other fee basis.

Service Mark: A mark used to identify the services of one company as distinguished from the services of another. Service Marks are afforded similar protection to registered marks under the law.

Single-Unit Franchisee: Franchisee who owns and operates a single location.

Start-Up Costs (Initial Investment): The initial investment that the franchisee will make in becoming a franchisee. It is also known as an Item 7 disclosure. Generally includes the franchise fee, the cost of fixed assets, leasehold improvements, inventory, deposits, other fees and costs, and working capital required during the start-up period.

Success: As used in franchising, the absence of failure or closing of a location. It does not relate to unit sales or profitability.

Successor Agreement: Franchisee’s ability to continue in the business for additional terms following a successful completion of their initial term.

System Brand Fund: A fund established and managed by franchisor to which all franchised and usually all company-owned units contribute monies to be spent on promoting and protecting  the franchisor’s brand. Frequently called an advertising fund.

Trademark: The mark, name, and logo which identifies the franchisor and which is licensed by the franchisor for use by the franchisee.

Turnkey: A term used to describe a location which is provided to a franchisee fully equipped and ready to operate.