So you’ve officially decided to seek out a franchise opportunity. You’re about to hear a LOT of new words and phrases. How exciting! In order to keep you thinking – and sounding – like a pro, I’ve compiled an easy list of definitions for you here. You’re welcome!
Types of Franchises
Single-Unit Franchise – The franchisee purchases one unit and is only responsible for running that unit. However, he/she would be extremely involved with all of the daily operations of the business.
Multi-Unit Franchise – The opportunity for a franchisee to open more than one unit, usually purchased at a reduced rate per unit. In this type of operation, the franchisee partakes less in the day-to-day operations of the unit. Instead, the Multi-Unit franchisee manages all the locations at a higher level. This type of franchising is not typically limited to a particular area. Therefore, the franchisee may have several units located in different parts of a town, state, or even in other countries.
Regional Developer – This license usually grants the franchisee the right to open a certain number of franchises in a given area. There is usually a production schedule where the franchisee must open a certain number of franchises during a certain period. The franchisee has an exclusive area where no other franchisees can be allowed to open a franchise.
Master Franchise/ Area Representative (Also described as the Ultimate Business Model) – A special type of franchise agreement that gives the Master Franchisee the exclusive right to sell or open a given number of franchises in a large geographical area. It is common for Masters or ARs to encompass large areas or areas containing millions of people. The investment in this type of franchise may be large, but the rewards can far exceed those of any other opportunity. This low overhead business, requiring few to no employees, can be built into a business worth millions of dollars over time, as this investor is also sharing in collected franchise fees and collections on gross royalty.
Terms
Franchisee – An individual who purchases the right to operate a business under the franchisor’s name and system.
Franchisor – The parent company that allows individuals to start and run a business using its trademarks, products and processes, usually for a fee.
Franchise fee – The initial fee paid to a franchisor to become a franchisee, outlined in Item 5 of the Franchise Disclosure Document (FDD). For some franchises, this is a flat, one-size-fits-all fee; for others, it varies based on territory size, experience or other factors. Many franchisors offer franchise fee discounts for veterans, minorities or existing franchisees.
Franchise Disclosure Document (FDD) – All franchisors are required by the U.S. Federal Trade Commission to provide this legal document to prospective franchisees. FDD’s are updated annually and consist of 23 sections, called items, which explain the company history, the fees and costs, contractual obligations, unit data and more.
Franchise fee – The initial fee paid to a franchisor to become a franchisee, outlined in Item 5 of the Franchise Disclosure Document (FDD). For some franchises, this is a flat, one-size-fits-all fee; for others, it varies based on territory size, experience or other factors. Many franchisors offer franchise fee discounts for veterans, minorities or existing franchisees.
Item 19 (in the FDD) – The section that provides details on earnings, costs, and other factors likely to affect future financial performance after a candidate signs on to become a franchisee.
Item 7 (in the FDD) – This is the total amount required to open the franchise-startup cost/initial investment. This includes the franchise fee, along with other startup expenses such as real estate, equipment, supplies, business licenses and working capital.
Franchise agreement – The written contract that outlines the responsibilities of both the franchisor and the franchisee.
Term of Agreement – This spells out the length of time that the franchise agreement is valid-usually anywhere from five to 20 years. At the end of the term, most franchisors will allow the franchisee to renew their agreement for a percentage of the then current franchise fee, if they are a franchisee in good standing.
Validation Calls – During the validation process, the prospect will call on as many franchisees as possible and conduct extensive interviews to gather information about the franchise opportunity. Interviewing franchisees is a valuable source of information for the prospect since it is a way to get unfiltered opinions about the franchise system.
Business Funding – Businesses can be financed in a number of ways, each of which features its own advantages, disadvantages and unique features. Common methods of financing a business include taking on debt and taking advantage of credit arrangements, financing through equity investment or earning income through investment products that bear interest or increase in value. I’ll introduce you to several third party sources to assist you in navigating these waters, too.
Startup cost/initial investment – The total amount required to open the franchise, outlined in Item 7 of the FDD. This includes the franchise fee, along with other startup expenses such as real estate, equipment, supplies, business licenses and working capital.
Royalty fee – Most franchisors require franchisees to pay a fee on a regular basis (weekly, monthly or yearly). Usually, it’s a percentage of sales; sometimes it’s a flat fee. Some franchisors also require a separate royalty fee to cover advertising cost.
Advertising Fee – The three most common forms of advertising are national/general, local, and cooperative/regional. National advertising is used mainly for brand and large-scale advertising campaigns; local advertising is usually determined by the franchisee and specifically advertises the unit; cooperative/regional programs typically promote within a geographically designated market area. Advertising fee percentages reflect the contract amounts that a franchisee can be assessed.
Absentee Ownership – An option offered by some franchisors that allows a person to own a franchise without being actively involved in its day-to-day operations.
Company-owned units – These are locations that are owned and run by the parent company (the franchisor), rather than by franchisees.