Franchise glossary terms and phrases explained
General franchise terms
The following are franchise phrases and terms that are often used in the industry*.
Business Plan
This is a detailed document that defines the development goals and objectives of a business.
Business Format Franchise
A license to use the franchisor's product, service and trademark.
Default
Failure to meet terms of an agreement.
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization. A measure of cash flow available to meet debt payments.
Exclusive Territory
The specific area of operation outlined to a franchisee and sometimes gives them the sole right to operate within that territory.
Franchise
A relationship entered into between the owner of a business and an individual or group, to use the same identification name and format.
Franchise Agreement
This is the contract that the franchisee signs with a franchisor.
Franchisee
The person (business owner) who receives the license from a franchisor to conduct business under their trademark.
Franchise Fee
The initial fee or amount of money that the franchisee needs to pay the franchisor to purchase the franchise concept for an agreed period.
Franchising
A business method that involves a parent company (franchisor) and someone who pays for the right to sell the parent company's products (franchisee) to use their trademark/name.
Franchisor
The person or company that owns the right to sell the business under a trademark to a franchisee.
Initial Investment
The upfront cash investment required initially to open a franchised business.
Managed Franchise
A franchise that doesn’t involve the hands on day-to-day running of the business. The franchisee should demonstrate strong sales, management and business skills to qualify for a management franchise opportunity.
Master Franchisee
A franchisee responsible for developing and/or selling additional franchise locations within a specific geographic area.
Net Cash Flow
The amount of cash that is generated by the business after expenses, interest, and principal repayment on financing are paid.
Net Worth
The total amount of an assets worth, after past transactions have been accounted for.
Non-Competition Clause
The restrictions that apply on competing with a franchised company on, during and after the termination of a franchise agreement.
Renewal
The continuation of term of the franchise agreement once it has expired. An agreement should also state the terms and conditions to renew that business relationship.
Resale
This is a purchase of an existing business from a franchisee.
Royalty / Management Service Fees
A percentage or amount of gross sales that the franchisee pays to the franchisor.
Total Investment
This can include the initial investment, plus any other required purchases to run the franchise.
Turnkey
Literally, a business where a new owner has to simply "turn the key" to start operation, where everything is provided for example: shop, fittings and stock.
Transfer
The sale or other transfer of the ownership of the franchise agreement to another person.
Disclosure Document or Uniform Franchise Offering Circular – UFOC
A document which states background information that the franchisor must provide to the prospect franchisee before selling the franchise.
Working Capital
The amount of liquid assets you are required to have and maintain to operate the franchise.
Types of franchises
Product Franchise
Typically, tyre and car dealerships. A store owner is granted the right to trade a brand by the manufacturer for a fee and distribution agreement.
Manufacturing Franchise
A franchisee is able to manufacture and sell a product to the specific manufacturing specifications of a company for the franchisees local market.
Business Opportunity Franchise
Generally, this is an exclusivity agreement for a franchisee in return for a fee, for the franchisor to provide the customers, products and brand.
Business Format Franchise
This is the form of franchise that the British Franchise Association sign up. Known as the second generation of the franchise concept, the system is distinct in its method of business. The franchisee buys into a proven concept and the franchisor benefits from rapid growth and limited risk.
British Franchise Association (bfa) membership explained
The bfa is a self-regulating governing body that has been in existence since 1977. The bfa established the ethical code of conduct for franchisors and ensures the strict enforcement of this code within the UK.
Exhibitors are not all members of the association but have been accredited for exhibition purposes.
Full Members
Full members will have a proven trading and franchising record. The four key criteria must be met, as well as abiding by the Advertising Standards Authority’s code of practice and the bfa’s own complaints and disciplinary, appeals and re-accreditation rules.
Associate Members
As above, except that the criteria relating to the length of time the franchise has been operating, the size of the network and the range of experiences, are less demanding. Associate Members are franchisors working their way towards Full Membership.
Affiliate Membership
Any organisation or individual that provides advice on franchising, for example Banks, Lawyers, Accountants and Consultants. These companies must display qualified, experienced and committed advice and have provided evidence of this to the bfa to obtain the status.
Provisional Listing Companies
Companies new to franchising can join a Provisional List, providing they can demonstrate they are taking all reasonable measures to ensure that their business is properly developed and tested for the franchise method.
*Please use these terms as a guide, always remember to check the meanings of all terms that may be stated in contracts and terms of agreements with a franchise consultant.
