Glossary of Franchise for Sale & Business Terms


When you embark on buying a franchise or business opportunity, there may be many unfamiliar terms and words used in the conversations you have and the documents you read. To help you make sense of all of these confusing terms and phrases, we have compiled a list of commonly used words, acronyms, and phrases and included a definition for each. We hope you find this useful and we wish you all the best in your quest to find the perfect business to buy!

Glossary

Acknowledgement of Receipt
Item 23 of the Franchise Disclosure Agreement (FDD) that is signed by the prospective franchisee and provided to the franchisor (in hard copy or electronically signed) as proof of the date the FDD was received by the prospect.

Advertising Fee
Amount paid by the franchisee to the franchisor as a contribution to the franchise system’s advertising fund(s). The fund is typically established to pay for the creation and placement of advertising and used to offset the franchisor’s administrative costs relating to “retail/brand” advertising. Payments are calculated as a percentage of gross sales.

Agreement
The franchise “contract.”

Arbitration
A method of resolving disputes outside the court of law.

Area Franchise
Your entitlement to open multiple locations, usually in a defined territory within a pre-agreed upon timeline. Area franchisees usually pay an area fee for the rights granted by the franchisor.

Assignment /Fees
The monthly fees paid to the franchise company in order to support corporate marketing and advertising. This fee is typically a percentage of your gross revenues.

Broker
An outside salesman or firm which undertakes for a fee or commission the sale of franchises for a franchisor. Franchise brokers are disclosed within the FDD.

Business Format Franchising
The licensing of a trademark or service mark together with a prescribed format for conducting a particular type of business, under the control or supervision of the franchisor, coupled with the payment of a fee. Describes the system of delivery, not the specific product or service associated with the delivery as in Product or Trademark Franchising.

Business Plan
A planning document that details the objectives for the business and establishes processes and measures for meeting those objectives.

Capital Required
The amount of cash you are required to have available in order to purchase a franchise or business opportunity.

Churning
A failing location acquired by the franchisor and resold to a franchisee even though the franchisor felt that the location had a high chance of failure regardless of ownership. While churning is not a common occurrence in franchising today, it does occur, and sometimes a single location may be churned several times.

Default
Failure of either party to meet the terms of the agreement. Certain defaults in franchising are enumerated. Some can be cured in a defined period while others may not be curable.

Designated Supplier
Approved, chosen suppliers of products and services – all of who meet the requirements of a particular franchise company.

Disclosure Document
Also known as the Franchise Disclosure Document (FDD). Formerly known as the Uniform Franchise Offering Circular (UFOC). The format of the FDD is specified by the FTC and NASAA (Federal and State Regulators) and provides information about the franchisor, the obligations of the franchisor and the franchisee, fees, start-up costs, and other required information about the franchise system. It includes a listing of current and former franchisees. In addition to the disclosure portion of the FDD, the document will contain the franchise and other agreements and exhibits. It does not typically include unit earnings information. Item 19, “Earnings Claims” is an optional disclosure under the FTC Rule and State FDDs even though the performance of the franchise in terms of unit “earnings” are material facts that should be disclosed to new buyers by the seller of the franchise, who profits from the sale.

Distributorship
The right granted by a manufacturer or wholesaler to sell their products.

Due Diligence
Due diligence is the fact-finding process a prospective buyer should go through prior to buying a franchise or business. The purpose of doing due diligence is to make sure that a franchisor’s claims are accurate and their business model is a sound investment. Due diligence done properly looks at a franchise’s operations, financials, training program, interviews with current franchisees, just to name a few. It is advised that you consult with a franchise attorney or broker prior to buying a franchise or business opportunity.

Earnings Claims
Assertions of specific acquired sales levels or profitability levels declared by franchise companies.

Exclusive (Protected) Territory
A geographic area which provides the franchisee with certain rights that may include exclusive operation. Franchisors may include carve-out provisions with an exclusive territory which define an excluded type of location (malls, airports, arenas, stadiums, supermarkets, hospitals, etc).

Feasibility Study
An examination of the potential of a company to franchise, or of the potential success of a unit within a specific market or location.

Federal Trade Commission (FTC)
The agency of the U.S. Government that regulates franchising under FTC Rule 436.

Field Representative
An employee of the franchisor responsible for ensuring compliance by the franchisee with system standards. Also responsible for providing assistance to franchisees in the operation of their businesses.

Financial Performance Representation (FPR)
Formerly known as an Earnings Claim, an FPR is the Item 19 representation of unit performance by a franchisor.

Franchise
A relationship, as defined by the FTC and various states, which typically includes three basic elements: (1) the granting of the right to use the system’s mark, (2) substantial assistance or control provided by the franchisor to the franchisee, (3) the payment of a fee (in excess of $500) during a period of time six months before or six months following the commencement of a relationship.

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 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.

Franchisee
A person or company granted the rights (license) to do business under the trademark and trade name by the franchisor.

Franchisor
A person or company which grants the license to a third party for the conducting of a business under their marks.

Gross Sales
When used in franchising, generally the total sales of the business before the collection of any sales taxes and after specified deductions. Generally used as the basis for percentage royalty calculations.

Initial/Ongoing Training
The initial and all subsequent training offered to franchisees in the operations of a specific business.

Initial Investment
The total estimated cost for establishing the business, including the franchise fee, initial fixed assets and leasehold improvements, inventory, deposits, other fees and costs, and the working capital required during the initial start-up period (three months).

International Franchise Association (IFA)
The International Franchise Association (IFA) is an industry trade association representing franchising. The IFA is based in Washington, D.C.

Master Franchisee
A franchise relationship which is granted for the development of a specified area and which allows the master franchisee to sub-franchise to other franchisees within the specified territory.

Master Region
A significantly large territory obtained by a franchisee with the objective of subdividing and reselling individual franchise locations.

Multi-Unit Developer
A franchisee who agrees to open two or more locations, generally in a defined market over an agreed upon period of time.

Net Worth
Total assets, once you’ve subtracted your total liabilities. Visit Franchise Opportunities’ Net Worth Calculator to determine your net worth.

Non-Compete Clause
Some franchise agreements exclude you from competing in any way with the franchised company upon termination, non-renewal or other sale or transfer.

Offering Circular
Same as “Franchise Disclosure Document (FDD)” – see definition above.

Operations Manual
An Operations Manual generally consists of several volumes, it contains all pertinent information regarding the operation of a distinct franchise.

Protected or Exclusive Territory
Protection or exclusivity granted to a franchisee by the franchisor against the opening of company, franchisee, or other locations within the territory assigned to the franchisee.

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 States
The various states that require franchisors to submit their FDD for approval prior to offering franchises. The registration states are members of NASAA.

Royalty Fee
Typically a percentage of gross sales paid by the franchisee to the franchisor on a regular basis. May also be a fixed or other fee basis.

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.

Turnkey
A location which is provided to a franchisee fully equipped and ready to operate.