Franchise Vocabulary

10-day and 5-day Rules The FTC requirement that the franchisor give potential franchisees a complete copy of the Franchise Disclosure Document a minimum of 10 business days before any contract is signed or any money changes hands (the 10-day Rule). In addition, the potential franchisees must be given a completed contract, with all blanks or negotiated parts completed (except signatures) at least five business days before any contract is signed or any money changes hands (the 5-day Rule).
Absentee ownership An absentee business owner is one who does not personally manage the business he owns, or who does not live in the community in which the business operates. This is an option offered only by certain franchisors allowing a individual to own a franchise without being actively involved in its day-to-day operations.
Acknowledgement of Receipt The final page of a Franchise Disclosure Document (FDD), which, once signed and returned, confirms to the franchisor the date you received the document.
Advertising Fee/Fund An ongoing fee paid by franchisees, usually a percentage of gross revenues, enabling franchisors to develop and purchase national advertising. This fee is not a component of every franchise; if it is required it is typically paid in addition to the royalty fee.
Arbitration Arbitration, a form of alternative dispute resolution (ADR), is a technique for the resolution of disputes outside the courts. The parties to a dispute refer it to arbitration by one or more persons (the “arbitrators”, “arbiters” or “arbitral tribunal”), and agree to be bound by the arbitration decision (the “award”). A third party reviews the evidence in the case and imposes a decision that is legally binding on both sides and enforceable in the courts.
Area Developer The franchisor awards a single franchisee the right to operate more than one unit within a defined area, under a development agreement and based on an agreed‐upon development schedule.
Area Developer/Master Franchisee A specific agreement provided for multiple unit or territory purchases of a particular franchise.  Generally, an ADA will allow a prospective Franchisee to purchase several units – but not have to open all of the units or territories at once.  With a cash deposit, the Franchisee can “hold” the units, and then open them at a designated time in the Area Development Agreement – usually 12-15 months after the opening of the prior unit.
Article / Item 19 Item 19 of the Franchise Disclosure Document (FDD) is 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.
B2B An acronym for “Business to Business.”  Used to describe a type of franchise whereby a Franchisee offers products or services of use to other businesses, not to consumers.
B2C An acronym for “Business to Consumer.”  Used to describe a type of franchise whereby a Franchisee offers products or services of use to consumers, not to other businesses.
Broker See “Franchise Broker / Consultant”
Business Broker An intermediary who manages the sale and/or purchase of an existing business, whether a franchise or stand-alone . Brokers can represent either sellers, buyers, or both. A business broker commonly, but not always, has a “Fiduciary Duty” within the relationship. A “business broker” usually have some of the same, but also different, functions than a “franchise broker.”
Business Opportunity A term used to describe a non-regulated business offering. This is different than a franchise.  Buyers should be beware that these offerings are not protected by UFOC compliance laws.
Capital Required The amount of liquid assets a potential franchisee is required to have to provide for the start up and initial operation costs of the business.
Cash Investment The amount of cash or other liquid assets a potential franchisee is required to purchase a franchise.
Cash/Initial Cash Required One of a number of terms—the meanings of which vary from franchisor to franchisor—that are used to describe cash monies that the franchisee must spend prior to opening for business. Any of the following terms may be used in this context
Collateral Assets used as security for a loan in the event of default.
Company Owned Units A business which is operationally similar to a franchise entity, but owned directly by the Franchisor corporation.
Copyright The exclusive right of a person to use, and to license others to use, an intellectual property such as a book, pamphlet, or other published material.
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.
DBA DBA stands for “doing business as.” For example, if the name of your corporation is XYZ Co. but is known to the public as ABC Co., your business would be classified as XYZ Co. d/b/a ABC Co.
Demographics A range of factors that may influence consumer behavior in a specific trade territory e.g. age, income, house prices, industry, socioeconomic conditions.
Disclosure Document Disclosure statement: Also known as the FDD, or Franchise Disclosure Document, the disclosure document provides information about the franchisor and franchise system. See “Franchise Disclosure Document”
Discovery Day A pre-purchase meeting between a potential Franchisee and a Franchisor’s leadership. This meeting is one of the final steps before a potential Franchisee buys into the franchise and usually is conducted at the headquarters of the Franchisor.
Discrimination Treating one franchisee differently from another. A number of statutes and legal cases restrict a franchisor’s ability to discriminate among businesses that are similarly situated.
Distributor A business authorized to sell the products or services of a parent company. This is usually a manufacturer/reseller relationship, not necessarily a franchise.
Due Diligence A process of information verification. Review of the Franchise Disclosure Document (FDD) and other financial information, Franchisee validation calls, and independent research of both the industry in general and the franchise specifically are extremely important to making a truly informed decision.
Earnings Claims Claims made by the franchisor regarding the past performance of franchisees or to the potential financial performance of a franchisee. If given, claims must be disclosed in item 19 of the FDD. See “Financial Performance Representation.”
EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization. It measures cash flow available to meet debt payments.
Estimated Initial Investment A detailed listing of all fees and expenses you can expect to incur in staring your franchised business. This listing represents the total amount that you would need to pay or get financing for, including fees paid to the franchisor, estimates for furniture; fixtures and equipment; opening inventory; property costs; insurance etc. This estimate should include a provision for working capital through the start up phase. (also see Total Investment)
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.).
Expiration of Term In a franchise agreement, the date upon which the contract expires if it is not renewed.
FDD Please See “Franchise Disclosure Document”
Federal Trade Commission (FTC) The agency of the U.S. government that regulates franchising in the United States.
Fiduciary Duty A requirement that a person act toward others and the public with the watchfulness, attention, caution, and prudence that a reasonable person in the circumstances would use.
Financial Performance Representation Previously called an “Earnings Claim”, the FPR is found in Item 19 of the FDD.  If a franchise system want to provide a potential franchisee with any financial information about ranges of potential or actual sales of a franchise unit, it must be disclosed in the Item 19 of the FDD.
Franchise ” A franchise is a grant by the franchisor to the franchisee, entitling the latter to the use of a complete business package containing all the elements necessary to establish a previously untrained person in the franchised business, to enable him or her to run it on an ongoing basis, according to guidelines supplied, efficiently and profitably”.
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 Broker / 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 Disclosure Document The Franchise Disclosure Document (FDD) is the form for providing disclosure in the U.S. under the FTC Franchise Rule. Before the 2007 amendments to the FTC Franchise Rule, the principal format for providing disclosure in the U.S. was a document prepared under the “Uniform Franchise Offering Circular” (UFOC) format. The FDD provides extensive information about the franchisor and the franchise organization in a uniform format, which a prospective franchisee can use to compare different franchise offerings. The FDD is meant to give a potential franchisee certain specified information to help make educated decisions about their potential investments. Also see “Disclosure Document” and “FTC Franchise Rule.”
Franchise evaluation Some franchisors require franchise evaluations to make sure you are capable of owning a franchise. There are many areas that prospective business owners should be familiar with and a good understanding of business and financing is pertinent. Franchisors require franchise evaluations to help determine your knowledge of these topics. They may also use these evaluations to help match talents, skills and strengths of prospective owners.
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.
Franchise financing Franchise financing is the process of gathering funds for franchise investing. In the United States, this process falls into three basic categories
Franchise Salesperson An agent of the franchisor whose business it is to market and sell franchises. The franchise salesperson’s role is to meet with prospective franchisees, present disclosure materials, gather the prospect’s financial information, answer questions, assist with obtaining financing, and facilitate the signing of a franchise agreement.
Franchise Term The length of time for which a franchisee is granted licensing and other rights under the franchise agreement.
Franchisee The person or company that gets the right from the franchisor to do business under the franchisor’s trademark or trade name.
Franchisee Training Education and instruction on how to properly run the business, which the franchisor provides to the franchisee after the franchise agreement is signed. The training may be provided as part of the initial fee or may be an added expense for the franchisee. The training may take place at the franchisor’s training facility, at the franchisee’s actual business location, or both.
Franchisee Validation During the process of investigating a franchise opportunity a prospective franchisee will interview current and past franchisees, obtaining unfiltered opinions about the quality of the franchise system.
Franchising A method of conducting business in an industry that involves a franchisor (parent company) and franchisee (someone who pays for the right to sell the parent company’s products and use their trademark/name).
Franchisor A company that grants to an individual or entity the right to use its name, trademark, and system of business operations for distribution of a product or service, in return for a fee and other considerations.
FTC The Federal Trade Commission (FTC) is the governmental body charged with the regulation of the Franchise industry.
FTC Franchise Rule A nationwide regulation issued by the Federal Trade Commission that principally requires franchisors to provide disclosure to prospective franchisees. The FTC Franchise Rule requires disclosure in the form of a “Franchise Disclosure Document” (or “FDD”). The FTC Franchise Rule was issued in 1978 and took effect in 1979; the regulation was extensively amended in 2007. There is no requirement to file the FDD with the FTC.
Full‐Time Work Requirement This is a franchise system with a franchise agreement that requires the franchisee to be involved in the daily operations of the business on a full‐time basis.
Gross Profit Sales less the Cost of Goods Sold (COGS). This is your profit before taking out any expenses other than the COGS.
Gross Sales Revenue generated before any expenses are deducted.
Group Purchasing Power In franchising, the ability of a group of store operators, including franchisees and company‐owned units, to obtain a lower price for goods and materials when such goods and materials are purchased in large quantity. Also implied is the groups’ greater influence with the supplier in terms of timely delivery, service, and so on.
Guarantee A promise or assurance, especially one in writing, that something is of specified quality, content, or benefit; or that it will perform satisfactorily for a given length of time.
IFA The International Franchise Association is a non-profit organization that lobbies for the Franchise Industry.
Initial Investment An estimate of the initial cash investment required to buy and open a franchise business. This estimate includes the franchise fee and other initial start-up costs, but not necessarily the total cost of operating the business.
Initial Training The initial instruction the franchisor offers to franchisees about how to set up and run the franchised unit.
Intellectual Property Rights The franchisor’s secrets of doing business and various trademarks, branding, manuals etc, which should be legally protected before being sold in a franchise package. Also known as Know How.
International Franchise Association The industry trade association representing franchising. The IFA is based in Washington, D.C.
Item 19 Financial Performance Representations, also known as the “earnings claim.” Franchisors are not required to provide this information.
Item 23 This is a receipt acknowledgment that must be signed once the FDD has been reviewed.
Keogh Plan  A tax deferred pension plan available to self-employed individuals or unincorporated businesses for retirement purposes. A Keogh plan can be set up as either a defined-benefit or defined-contribution plan, although most plans are defined contribution.
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.
Letter of Intent A written statement of intention to perform an act. In franchising, the franchisor sometimes provides to the prospective franchisee a letter of intent stating the company’s intention to offer a franchise agreement. In commercial banking practices, a letter of intent, or commitment agreement, may state the bank’s intention to make a loan to the prospective franchisee. Letters of intent are usually not binding legal commitments.
Licensee In business : a person or company that has a license to have, make, do, or use something.  This permission is given by the entity that owns the item of concept.  A “licensee” is similar to a franchisee in a “business opportunity” relationship, as opposed to a franchise relationship.
Licensor In business : a person or company that has a license to have, make, do, or use something.  This permission is given by the entity that owns the item of concept.  A “licensor” is similar to a franchisor in a “business opportunity” relationship, as opposed to a franchise relationship.
Liquid Assets Please see “Liquid Capital.”
Liquid Capital Assets held in cash or in something that can be readily turned into cash.
Location The site of the franchised or company-owned operation.
Management Fee A sum of money the franchisee pays for continuing management aid and assistance. Such fees may be included in the royalty or service fee or may be an additional charge.
Management Service Fees (MSF) Fees due to the franchisor, often based on total turnover. (Also see Royalty Fee)
Manager Operated/Run A franchise A system that does not require the franchisee to be personally involved in the daily operations of the franchised unit on a full‐time basis. An operation that is well suited for investors and part‐time involvement.
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.
Marketing Plan Generally, a marketing plan is a written document that details the necessary actions to achieve one or more marketing objectives. In regard to franchising, the marketing plan is a term that is often used as a short‐hand way of describing the second element of the term “franchise” under the FTC’s Franchise Rule. Please also see “Franchise.”
Master Franchise A Master Franchise Agreement gives the Franchisee more rights than an area development agreement. The Master Franchisee has the right to sell franchises to other people within the territory, known as sub-franchises. Therefore, the Master Franchisee takes over many of the tasks, duties, and benefits of the Franchisor, such as providing support and training, as well as receiving fees and royalties. A master franchisee serves as a subfranchisor for a certain territory. Master franchisees can issue FDDs, sign up new franchisees, provide logistical support and receive a cut of the territory’s royalties.
Maximum Investment Maximum dollar amount an investor is both comfortable and qualified investing (cash and borrowed) into a business. This amount generally includes both cash and debt.
Minority Business Enterprise (MBE) An MBE is a business that is typically majority‐owned and controlled by U.S. citizens who are members of certain defined minority groups. Some MBEs may be granted preferences in terms of obtaining contracts, for example, when municipalities control a venue, such as an airport concession authority on toll roads, etc.
Multi Unit Franchise A Franchisee that owns more than one unit.  Multi-unit owners are often the strongest operators in a franchise system – plus, a system with many multi-unit operators is one that is likely performing quite well.
Net Cash Flow Shows how much cash is generated by the business after expenses, interest, and principal repayment on financing are paid.
Net Profit The bottom line figure after all expenses have been taken into account.
Net Worth Total assets minus total liabilities.
Non-Compete Clause A clause in a contract that prohibits a person from entering into the same line of business for a specific period of time. This will apply after a franchise agreement, an employment or termination agreement is signed.
Non-Solicitation Provision, which requires a former franchisee or employee form soliciting the franchisor or other franchisee’s employees or clients for a specific term.
Offering Circular Please see “Franchise Disclosure Document.”
Opening The time when a franchised unit first opens for business.
Operating Manual or Operations Manual Comprehensive guidelines advising a franchisee on how to operate the franchised business. It covers all aspects of the business, including general business procedures not necessarily peculiar to the franchised business. It may be separated into different manuals addressing such subjects as accounting, personnel, advertising, promotion and maintenance.
Personal Guaranty A non-standard requirement to secure a business loan where the lender asks a corporation’s owner(s) to personally guarantee the debt should the corporation default.
Personal Living Expenses The amount of money required for you and your family to live. Also called “Family Expenses.”
Pre‐opening Promotion Special marketing, promotion, or advertising that precedes by some length of time the opening of a new franchised or companyowned outlet. Pre‐opening promotion heightens consumer awareness and puts the new business on sound footing.
Principal Register The U.S. Patent and Trademark Office (USPTO) maintains a list of all registered trademarks. The USPTO list includes the “Principal Register.” When a trademark is listed on the Principal Register, it puts all parties in the country on constructive notice of the registration as well as the registrant’s use of the mark. When a mark has been included on the Principal Register, the owner of that mark is entitled to exercise all of the rights provided by the U.S. Trademark Act.
Pro Forma A financial picture of the franchisor including a balance sheet, profit and loss or cash flow statement that estimates income and expense sources, assets, liabilities, and net worth. Pro forma statements issued by the franchisor to the franchisee should be based on actual operating results of the franchisor’s units or franchise establishments.
Product Format Franchise A type of franchise where the franchisor grants the franchisee the ability to sell a particular product where the product does not constitute all that the franchisee sells. Similar to distribution networks but the franchisor is able to control the way the dealer company operates by restricting the sale of competitive products or the type of marketing that it can do.
Profit and Loss (P&L) Projections The calculations, based on the franchisor’s pilot’s and franchisees experiences, which try to predict how soon franchisees can expect a return on their investment, year to year turnover and profit.
Protected or Exclusive Territory A designated area or geographic boundary granted to the franchisee by the terms of a franchise agreement. The franchisor agrees to not to open another franchised or company-owned business of a similar nature within the franchisee’s protected territory. Also known as Exclusive Territory.
Qualification Questionnaire A document prepared by the franchisor to be completed by the prospective franchise, which provides initial information to the franchisor in order to assist him in determining whether or not the prospect is capable and motivated. Often a financial statement is included in the questionnaire format.
Quality Control The practices of a franchisor in supervising, regulating, and directing how business will be conducted in a franchised or companyowned outlet. Strict quality control is the franchisor’s most important method of insuring a uniform high‐quality of product and services in all outlets. Trademark owners are required, under the U.S. Trademark Act, to police their marks and the products and services sold under those marks.
Quality Standards The minimum requirements that a franchisee must meet in order to operate and are strictly controlled by the franchisor. The standards are set by the franchisor and outlined in the manual.
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 State(s) Fifteen states require franchisors to register their FDDs with a state agency before they are legally allowed to sell franchises within that state.
Renewal The signing of a new franchise agreement upon the expiration of the old one. Many franchisors issue 5 or 10 year agreements which have renewal rights if all conditions are met. A fee is normally associated with renewing a franchise agreement.
Return On Investment (ROI) The calculations or expectations that franchisees work on to assess when they can “break even” on their initial investment in the franchise and start earning profits.
Right of First Refusal A franchisee’s contractual right to purchase—if he so decides and if he can meet all conditions of sale established by the franchisor— any additional franchised outlets that may be for sale in the future within a pre‐defined territory. This can also apply to a franchisor’s right to repurchase a franchised unit at the same price as offered by a third party.
Royalty An ongoing payment made by franchisee to franchisor, usually a percentage of gross sales, made throughout the term of the franchise agreement.
SBA The Small Business Administration (SBA) is the governmental body charged with overseeing the affairs of small businesses, including small business funding programs.
SBA Guaranteed Loan A program of financial assistance available to small business owners from the U.S. Small Business Administration (SBA). While the SBA seldom loans money directly to franchisees, an SBA guaranteed loan makes it easier for a qualified individual to borrow money from a commercial lending institution, such as a bank. Under the program, the loan is made directly by the bank to the franchisee. The SBA protects the bank against financial loss in the event of business failure.
Service Franchising A type of franchising which primarily provides a service, assistance or advice to the consumer. Service franchises are typically business format franchises and include, but are not limited to, the following
Service Mark A distinctive name or symbol used to identify the franchisor’s services and to distinguish them from the services of others.
Sherman Antitrust Act States that it is illegal to conspire or otherwise to restrain trade. Franchisees must be diligent and franchise agreements drafted to avoid exclusive allocated territories or price fixing.
Single Unit The simplest and most common type of franchise. A single unit franchise is an agreement where the Franchisor grants a Franchisee the rights to open and operate one (1) franchise unit. It is possible for a Franchisee to purchase additional single unit franchises once the original franchise unit begins to prosper. This would then be considered a multiple, single unit relationship.
Site Selection Site Selection is the process by which the franchisee locates and secures a location for the franchise business based on criteria provided to the franchisee by the franchisor.  The criteria often include population, demographics, rent rates, visibility, traffic counts and patterns, surrounding businesses, zoning, market conditions, and other factors that will make certain locations more desirable than others.
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.
State Addendum Refers to an additional document that contains additional disclosures required by a registration state. State addenda are added into the FDD as exhibits.
Term of Agreement The Term of the Agreement is the length of the Franchise Agreement.  Franchise terms typically range from 5 to 20 years.  The Franchise Agreement typically also outlines the terms of the renewal of a franchise agreement.
Termination A declaration by the franchisor that part or all of the rights and obligations—of both parties—under the franchise contract cease or have ceased as of a certain date. Certain responsibilities and/or claims and damages may survive this termination, however. The conditions under which a franchise may be terminated by the franchisor are commonly addressed to in the franchise agreement.
Territory / Area The “exclusive” portion of land or a national, regional, county or postcode basis, which is allocated to franchisees as part of the Franchise Package.
Third-party financing Financing provided by a source other than the franchisor. Many franchisors have relationships with banks or are registered with the SBA in order to expedite the loan process for their franchisees.
Total Investment An estimate of the amount of money needed by a franchisee to start a business, including the initial fee, the working capital, and the cost to set up the business which may include site build-out, equipment, inventory, marketing and advertising, and most (but not necessarily all) items considered necessary to create a fully operational business.
Trade name Individual names and surnames, firm names, and trade names used by franchise companies to identify their business.
Training Cost/Expense The money a franchisee pays for education and instruction. Training expenses may or may not include such items as
Turn‐key Operation A franchise opportunity where most all aspects of a business prior to opening are provided to the franchisee by the franchisor. Also referred to as “Business in a Box,” a turnkey business means the franchise buyer shouldn’t need to do much more than “turn the key” in the door to start the business.
UFOC Uniform Franchise Offering Circular, see Franchise Disclosure Document
Venture Capital A A person or group of individuals who invest in a business venture, providing capital for start‐up or expansion. Venture capitalists are looking for a higher rate of return than would be given by more traditional investments.
Working Capital The amount of liquid assets you are required to have and maintain to operate the franchise. A major cause of business failure is not having enough cash in the bank, trade credit, borrowing capacity or cash flow to meet start-up expenses and see the business through any unusual dips and changes in its daily activity. Initially funds are needed to pay first and last months rent, utility deposits, licenses and any number of incidental costs. As it takes time to build up a new business the first months are usually loss months, which need to be financed.
Zee Short for Franchisee.
Zor Short for Franchisor.