Franchise Glossary

The advertising fee covers the franchise system’s advertising and promotions. It is usually calculated as a percentage of the franchisee’s gross sales or net sales. According to a franchise survey carried out by NatWest/BFA the average advertising fee is three and a half per cent in the UK.

This is a legal written document between the franchisor and franchisee. It specifies the terms of the franchise contract such as rights and responsibilities of the parties, fees and payments, territory and the duration of the agreement.

The approved site is the territory that the franchisor chooses for the franchisee’s business.

An area franchisee purchases the right to open and operate a specified number of franchise locations, in a defined area, over a certain period.

A licence to use the franchisor’s product, service and trademark. The entire business format is provided, including (where relevant) the operating system, accounting systems, trademark, marketing and training.

This is a detailed document that defines the development goals and objectives of a business.

This is the wealth required by a franchisee. Working capital is the money needed for the running and operation of the franchise until it becomes profitable. This includes legal costs, salaries, insurance, advertising costs, leasing costs, and living expenses.

Collateral is a form of security that a borrower may offer a lender to guarantee a loan or other credit. Collateral can be resources, belongings, or something of wealth and value to the borrower. If the borrower fails to pay back the credit, the asset acting as collateral may become subject to seizure. This ensures payment or performance of the obligations stated in the lending agreement.

Copyright is the exclusive legal right to use, reproduce, publish or sell intellectual property, such as, logos, brand names and other designs as well as works of art, music, or literature, and to protect these works from any unauthorised use. This right prevents others from copying or exploiting another person’s work.

A document the franchisor provides to a potential franchisee interested in the next step towards working together. The document contains key information about the franchise and the franchisee’s obligations.

Forecasted franchise sales, profits, or earnings stated by a franchisor. If a franchisor is a member of the BFA (British Franchise Association) it is required by law to state its financial earnings.

Equity is the total value of an asset. It is the ownership of an asset after all debts have been paid, and the asset liquidated.

An exclusive area in which the franchisor will not set up another franchise to compete with the franchisee that holds that territory.

A company looking to franchise its business will carry out a feasibility study. This includes market factors and business issues that may influence a franchise opportunity in the future.

A relationship entered into between the owner of a business and an individual or group, to use the same identification name and format.

The person (business owner) who receives the licence from a franchisor to conduct business under their trademark.

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.

The person or company that owns the right to sell the business under a trademark to a franchisee.

This is an expert in the franchising industry. They give advice on franchise operations, companies, and relationships.

The initial fee or amount of money that the franchisee needs to pay the franchisor to purchase the franchise concept for an agreed period.

A lawyer who specialises in franchising law can also be known as a franchise solicitor.

The upfront cash investment required initially to open a franchised business.

This is the legal act of the franchisor granting rights to a franchisee to a legally protected property in exchange for a fee.

A franchise that doesn’t involve the nine-to-five running of the business. The franchisee should demonstrate strong sales, management and business skills to qualify for a management franchise opportunity.

Grabs the attention of customers by using slogans, packaging, and celebrity support. Marketing manages the relationships with the customer and stakeholders to benefit the company.

This is an individual who assumes the rights and obligations of the franchisor in a defined territory, and is one of the most common ways a franchise brand expands into an overseas market. The master franchisee purchase the rights to sell franchises to sub-franchisees, and provide them with some of the services provided by the franchisor. The master franchisee pays the franchisor both initial and ongoing fees based on the number of franchisees operating in the territory.

A multi-unit franchisee owns and operates more than one unit of the franchise, however they do not have the rights to a defined territory.

The amount of cash that is generated by the business after expenses, interest, and principal repayment on financing are paid.

The total an asset is worth, after past transactions have been accounted for.

The restrictions that apply on competing with a franchised company, during and after the termination of a franchise agreement.

The manual contains instructions advising a franchisee how to operate the franchise. It covers general business procedures such as accounting, advertising, personnel, promotion, and maintenance.

The pro forma document is a description of financial statements, which rely on historical data to assume levels of revenue, expenditure, assets, liabilities, and net worth.

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.

This is a purchase of an existing business from a franchisee.

This is a percentage of gross sales the franchisee pays to the franchisor. They are usually based on a percentage of the gross revenue of the franchise unit.

A supplier is the authorised individual or company who has been approved by the franchisor to supply products or services to the franchisee.

This is a specific area in which the franchisee has the exclusive rights to conduct business without the threat of competition from fellow franchisees.

A franchise trademark is a form of identification such as a brand name or logo, which is associated with the franchise.

A business where a new owner has to simply “turn the key” to start operation, that is to say, everything is provided – for example: shop, fittings and stock.