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Franchise Research Library
Glossary of Common Franchise Terms:

Advertising Fee:
An amount paid by the franchisee to the franchisor as a contributions to the franchise system’s advertising fund(s). The fund is typically established to pay for the creation and placement of advertising and used to offset the franchisors administrative costs relating to “retail”/”brand” advertising. Payments are typically calculated as a percentage of gross sales.
 
Area Franchise:
A franchise relationship which allows the franchisee to open multiple locations, usually in a defined territory on a pre-agreed time line. Area franchisees usually pay an area fee for the rights granted by the franchisor.

Broker:
An outside salesman or firm which undertakes for a fee or commission the sale of franchises for a franchisor. Franchise brokers are disclosed within the offering circular.

Business Format Franchising:
The licensing of a trademark or service mark together with a prescribed format for conducting a particular type of business, under the control or supervision of the franchisor, coupled with the payment of a fee. Describes the system of delivery, not the specific product or service associated with the delivery as in Product or Trademark Franchising.

Company Owned Location:
Locations, owned and operated by the franchisor, usually identical in appearance and operations, to those of the systems franchises. While not required, most company owned locations contribute to the systems advertising funds.

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.

Conversion Franchising:
The conversion of an existing business within the franchisors industry into the franchise system.

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

Disclosure Document:
Also known as the Uniform Franchise Offering Circular (UFOC). The format of the UFOC is specified by Federal and State regulators and provides information about the franchisor, the obligations of the franchisor and the franchise, fees, start up costs, and other required information about the franchise system. Includes a listing of current and former franchisees. Does not typically include unit earnings information.

Distributorships:
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. Franchisor’s 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:

The agency of the U.S. Government which regulates franchising.

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.

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.

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

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

Franchising:
A method of distribution..

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

Initial Investment:
The total estimated cost for establishing the business including: 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:
The industry trade association representing franchising.

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 enables the franchisor to alter and evolve the business.

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.

Product and Tradename Franchising:
The licensing of a franchisee/dealer to sell or distribute a specific product using the franchisors trademark, tradename and logo. (Automobile dealerships, 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 is Business Format Franchising.

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

Registration:
A requirement to submit the franchisors 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.

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 under the law.

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

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

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