The
Franchise Success
Formula

"Profitable Franchising Without The Pain"

A Comprehensive Listing of Franchise Terminology

Absentee ownership

An option offered by some franchisors that allows a person to own a franchise without being actively involved in it's day-to-day operations.

Advertising Fund

A fund created to pay for co-operative advertising on a regional or national scale. This is usually paid by franchisees in the form of a percentage of turnover monthly, quarterly or annually.

Arbitration

A dispute mediating process. This can be done through a third party, such as the BFA, if the franchisor is a member.

Area Developer

An area developer agrees to open a certain number of franchise units in a large territory within a specified time period. They may open and operate the units themselves or recruit other franchisees to open them.

British Franchise Association (BFA)

The BFA grants membership to those franchisors it considers meet it's Code of Ethics and procedures.

Business Format Franchise

The franchisee buys into a total turnkey system of brand, know-how, training, methodology and support.

Business Plan

A document that summarises the operational and financial objectives of a business and contains the detailed plans and budgets showing how the objectives are to be realised. Because the business plan contains detailed financial projections, forecasts about your business's performance and marketing plan. It's an incredibly useful tool for business planning.

Buyback

Where the franchisor agrees to purchase a franchise back from a franchisee if the latter no longer wishes to continue.

Capital Required

The amount of cash you are required to have available.

Code of Ethics

The Code of Ethics is set by the BFA and all members are required to abide by it's terms.

Company Owned Units

These are locations that are owned and run by the parent company (the franchisor), rather than a franchisee.

Conversion

Some franchisors offer entrepreneurs the opportunity to convert their existing independent business into a franchise.

Demographics

A range of factors that may influence consumer behaviour in a specific trade territory e.g. age, income, house prices, industry, social economic conditions.

Designated Supplier Approved, chosen suppliers of products and services, all of who meet the requirements of a particular franchise company.
Disclosure The practice of revealing detailed information about the franchisor's business track record and franchise package. This is a legal obligation in some countries, but voluntary in the UK.
Dispute Resolution Most franchise agreements written today include a provision for alternative dispute resolution methods because of the expense and delay involved in using the courts. The two most common methods of handling disputes are by arbitration and mediation.
Equity Investment The amount available to be borrowed against your security property based on a formula calculated by the lending institution.
Earnings Claims Assertions of specific acquired sales levels or profitability levels declared by franchise companies.
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 Territory / Area Where the franchised business is to be operated from a single location the franchisee may receive exclusivity solely to that site or to a market area usually a set distance surrounding the location. In a mobile service business the franchisee may be awarded a geographical territory large enough to ensure growth potential. A franchise system can be impaired by having too many franchisees in one market where there may not be enough business to support them, but on the other hand a cluster of units where they are not directly competing can take advantage of the synergy that is created by dominating the market, keeping out the competition and benefiting from joint marketing promotions.
Franchise Agreement Documents the legal relationship of obligations existing between the franchisor and a franchisee.
Franchisee The person who buys a licence to replicate a business system. Also known as the Franchise Owner.
Franchise Package The sum total of franchise system rights licensed to the franchisee, including branding, know-how, systems, territory and training for which an initial Franchise Fee is charged by the franchisor.
Franchising Method of marketing goods and services via a business formula licensed for others to copy.
Franchisor A company that offers the licence to replicate it's system.
Franchise Fee The initial fee paid to a franchisor to purchase a franchise.
Initial Investment Usually includes the franchise fee and the total investment amount including working capital required to commence operating a franchise.
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.
In-house financing Financing offered by the franchisor to franchisees to help with expenses, which can include the initial franchise fee, start up costs, equipment and inventory as well as day-to-day expenses such as payroll.
Irish Franchise Association (IFA) Set up by Business Format Franchisors to regulate the industry on an ethical basis, granting membership to those franchisors it considers meet the demands of its Code of Ethics and procedures. (Note: IFA can also refer to the International Franchise Association)
Job Franchise Where the franchisee is a hands-on owner-operator rather than a manager, usually linked with van-based services such as maintenance.
Joint Venture Franchise Where the franchisor also takes a financial stake in the project - often in International Franchise Agreements.
Management Franchise A franchise in which the owner manages the operation and co-ordinates employees to do the actual work.

Management Service Fees (MSF) Fees due to the franchisor, often based on total turnover. (Also see Royalty Fee)
Master Franchisor The entity that grants Master Franchisees to others - this is usually used in an international context.
Master Franchisee Is the franchisee with the licence to run and sell franchises within a given territory (usually a country when used in an international context).
Multi-unit Franchising The franchisor awards the right to a franchisee to operate more than one unit within a defined area based on an agreed upon development schedule.
Non-competition Clause Prevents the franchisee from entering a similar line of business not only during the term of the agreement and renewal term, but also for a period of time after the agreement ends unless prior approval has been received from the franchisor.
Operations Manual The detailed document or "bible", which describes every item of the business system and work procedures.
Pilot Operation An independent operation that tests the franchise concept and incorporates actual financial, organisational and logistical pressures to be faced by franchisees in different areas.
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.
Qualification Questionnaire A document prepared by the franchisor to be completed by the prospective franchisee, which provides the 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.
Renewal The legal provisions in the Franchise Agreement for renewing or not renewing the franchise for a further term of years.
Resale A franchised area already established by a franchisee, which is offered for sale because the original franchisee wants to realise his investment, move on, or simply retire. More expensive to buy than a "virgin" franchise area, a franchise resale has the advantage of an ongoing customer base, referrals, goodwill and income from day one.
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.
Royalty Fee Most franchisors require franchisees to pay a fee on a regular basis (weekly, monthly or yearly). Usually, it's a percentage of sales; sometimes it's a flat fee. Some franchisors also require a separate royalty fee to cover advertising costs.
Start-up Fee / Initial Investment The total amount required to open the franchise. This includes the Franchise Fee, along with other start-up expenses such as rent, equipment, supplies, business licences and working capital.
Sub-Franchisee A subordinate level of franchisee to a Regional Franchisee or Area Developer, usually appointed after the Regional or Area franchise has set up a training and support infrastructure for the territory.
Terms The agreed period of years (e.g. 5, 10, 15) for which a franchise is granted through the Franchise Agreement.
Termination The legal provisions by which either party in the relationship may terminate the contract, e.g. for breach of contract.
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 who are happy to lend to franchisees.
Total Investment Is what a franchisee can expect to spend all together in order to start your business and immediately begin to generate revenue. The total investment includes the franchise fee along with other applicable categories, such as leasehold improvements, equipment, inventory, supplies, marketing funds for the grand opening, insurance costs, staffing, working capital and anything else necessary to open the business.
Working Capital A major cause of business failure is not having enough cash in the bank, credit, borrowing capacity or cash flow to meet start-up expenses and see the business through any unusual dips and changes in the daily activity.

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