Franchising Definitions - FranchiseProfessor.com
Introduction
Investing in a franchise is an exciting and ominous task!? As you start down the path of investigation you may encounter many new terms that you do not understand.? It is important that you truly have a grasp on what these terms mean as you study and validate your future.? I thought it might be helpful to provide some brief definitions and explanations that can help you as you chart your course to being your own boss and investing in a franchise!
?Definitions
Business Plan: A plan that provides objectives for a business and steps to achieve those objectives.
Capital Required: The amount of money a potential franchisee is required to have to cover start up and initial operation costs of a franchise.
Earnings Claims: Claims made by the franchisor regarding the performance of franchisees; may also refer to potential financial performance of a franchisee. ?The Federal Trade Commission has very strict regulations on how a franchisee can present and claims regarding earnings to potential franchisees.? These claims will be disclosed in item 19 of the Franchise Disclosure Document (FDD).
Entrepreneur: A person with the desire to be his/her own boss and who is willing to deal with risk, responsibility, and claim the rewards for their own business venture.
Federal Trade Commission (FTC): The agency of the U.S. government that regulates franchising in the United States.
Franchise: The right or license granted by a company to an individual or group to market its products or services in a specific territory.
Franchise Agreement: The contract signed with the franchisor. This document governs the relationship between the franchisor and franchisee.
Franchise Disclosure Document: Abbreviated: FDD. This document is required by the FTC and given to potential franchisees by franchisors. It contains information like terms, royalty payments, existing franchise agreements, and any litigation and other relevant data.? It also includes information on expected financial requirements to start up a franchise location (Item 7) and any earnings claims the franchise makes (Item 19).
Franchisee: A person or company to whom a franchise is granted.
Franchise Fee: The initial fee paid to a franchisor, usually due at the signing of the contract, for the right to use the franchisor?s name, trademark and business model.
Franchising: ?A long-term grant of the right or license granted by a company to an individual or group to market its products or services in a specific territory.
Franchisor: A person or company that grants a franchise.
International Franchise Association (IFA): Founded in 1960 as a membership organization of franchisors, franchisees and suppliers with the goal of helping the entire industry.
Initial Investment: An estimate of the initial money required to buy and open a franchise business. Includes: franchise fee and other initial start-up costs. May not represent the total cost of operating the business.
Non-Compete Clause: Restrictions on competing with the franchised company upon termination of a franchise agreement by either the franchisee or franchisor.
Operations Manual: A guide with all of the information necessary for the franchisee to be able to operate the business. Combined with a business plan, this is what we mean by business model.
Pro Forma: A financial picture of the franchisor. Includes: balance sheet, estimate of income and expense sources, assets, liabilities, and net worth. Should be based on actual results of the franchisor?s existing franchises.
Royalty: An ongoing payment made by franchisee to franchisor, usually a percentage of gross sales, made throughout the term of the franchise agreement.
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.
Turn Key: A franchise where most aspects of a business prior to opening are provided to the franchisee. The term indicates that the franchisee shouldn?t need to do much more than ?turn the key? in the door to start the business.
Summary
I hope that this information is helpful.? Future posts will detail what you should do and what you should ask as you investigate a franchise.? We will also discuss the Franchise Disclosure Document in greater detail.
Call Franchise Professor now at 816-479-5000 or click here for a free 1-on-1 consultation if you have questions about more franchising terms, or are excited to start a new future for you and your family!
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