When looking for a franchise to invest in, it’s crucial to understand the language and terms used in the industry to be able to make the right choice. We have provided below a list of the common terms you should know as you start the franchise research process:
Advertising Fee: The money that the franchisee pays to the franchisor as their contribution to the fund for the franchise’s system advertising campaigns. This fee could be a fixed amount or percentage of gross sales, and it is usually paid monthly.
Area Developer: An individual who is given the right to set up a specified number of franchise locations in a particular geographical area within a given time frame.
Broker: A third-party agent that promotes and sells franchises for the franchisor in return for a fee or commission.
Disclosure Document: Also called the franchise disclosure document (or FDD), it’s a legal document that franchisors are required to give to those who are interested in buying their franchise. This document contains information about the franchisor’s history, total investment costs, contract obligations, financials, and other details.
Exclusive Territory: A specified geographical area where only one franchisee has the right to operate.
Franchise Agreement: A contract that both the franchisor and franchisee are required to sign when beginning a partnership. It outlines the obligations and rights of both parties involved.
Franchise Consultant: A business professional who can help prospective franchisees choose a franchise opportunity to invest in or help a business start franchising.
Franchise Fee: The upfront fee that the franchisor collects from a franchisor for the rights to use its branding and operating system. It is typically paid after the franchise agreement is signed.
Franchisee: An individual or entity who buys the license or rights to do business using a franchise system’s trademark.
Franchisor: The owner of the franchise system who sells usage rights to prospective franchisees.
Initial Investment: This refers to the total costs for setting up a franchise location, including the upfront fee, operating capital, real estate, inventory, equipment, etc.
Master Franchisee: An individual who is granted the right to sub-franchise within a specified geographical area in return for a certain percentage of the franchise and royalty fees.
Net Worth: An individual’s total assets after liabilities have been deducted.
Royalty Fee: Payments that the franchisee is required to pay to the franchisor on a monthly basis. They are usually a percentage of gross sales.
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