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Franchise Terms
Every industry or field of study has its own buzzwords and unique language.  This is true in medicine, real estate, book publishing, or just about any other venture.  People interested in buying a franchise will find it difficult to make wise business decisions without understanding the franchise terms that are in use – both as part of general conversation as well as what is contained in legal documents.  The following franchise glossary – a listing of franchise terms and franchise definitions – includes a basic explanation of words in common usage.  This list also includes franchise agreements terms.  It should be noted that many of these words or phrases have multiple meanings.  The intention of this franchise glossary is to convey only their meaning as they relate to franchising.

List of Franchise Terms & Franchise Definitions
Agent – A person or business entity that is legally empowered to act on behalf of an individual or company.

Agreement – Another term for franchise agreement, which is the document that binds the franchisee to the franchisor.

Approved products – Under the terms of a franchise agreement, these are items that the franchisee must purchase from the franchisor (or approved vendors) in order to maintain the high standard of quality from one franchise location to another.

Arbitration – A method of resolving disputes between franchisee and franchisor carried out by a third party; binding arbitration requires both sides to agree that they will abide by the arbitrator’s decision.

Area development rights – The granting of a particular geographic area in which a franchisee is required to open and operate a set number of franchise locations within a specified period of time.

Broker – Someone who manages the sale of a franchise, much the same way a Realtor manages the sale of a home; most brokers act on behalf of one or more franchisors and earn a commission based upon the sale, although buyer-brokers (acting for the franchisee) are becoming more popular in the marketplace.

Business plan – A formal document that lays out the managerial and financial goals and expectations of a prospective franchisee; it serves the twofold purpose of providing the prospective business owner with a game plan and also can be used to secure outside financing.

Buy-sell agreement – The document that outlines specific rules and regulations as to how some or all of a business can be sold; where multiple owners are involved, it usually contains provisions that give the remaining owners first crack at buying the seller’s share of the business.

Capital – The amount of cash on hand, although it can also include the cash value of insurance policies, stocks and bonds held in a non-IRA account, and company receivables less than 30 days old.

Company-owned outlet – A retail location that is owned and operated by a parent company rather than a franchisee; other than its ownership structure, it is usually indistinguishable from a franchise location.

Conversion franchise – The process whereby an existing business is turned into a “branch” of a national franchise, adopting its name and trademarked items; for example, where Main Street Hardware (an independent store) would become an Ace Hardware outlet.

Copyright – The exclusive right to reproduce or sell a work of literature or art; for example, where artist Jasper Johns might grant a company the right to print one of his paintings on a t-shirt.

Default – The failure of a party to live up to one or more elements of a contract.

Designated supplier – The source where a franchisee is required to acquire inventory and supplies, according to the franchise agreement.

Disclosure document – As required by the U.S. Federal Trade Commission, this is a document provided to prospective franchisees that explains the franchise opportunity and also offers detailed information on the parent company.

Exclusive territory – The operating area of a franchisee, where the parent company guarantees that no other franchise operator will be granted access.

Federal Trade Commission (FTC) – The U.S. government agency that oversees and regulates the franchising industry.

Franchise – A formal agreement whereby a company or individual is allowed to operate a business by using copyrights and trademarked business practices under the master control of a parent company.

Franchise agreement – The document that describes the rights, privileges and duties of a franchise operator, as well as those same rights and duties required of the franchisor.

Franchise fee – A one-time payment that allows a franchisee to become part of the franchise system.

Franchisee – The individual or entity that operates a business under the terms of a franchise agreement.

Franchisor – The individual or entity that grants a franchise; can also be known as the home office or parent company.

Gross sales – The total of all business income prior to the deduction of wages, taxes, and other expenses.

Initial Investment – An amount of money, including the franchisee fee, which represents the sum total a franchisee must spend in order to open for business.

Marketing plan – Documentation on behalf of the franchisor that is used to sell franchises to prospective business owners.

Master franchise – A right granted to a franchisee that includes the ability to operate in a wide geographic area and also sell sub-franchises to other operators.

Net worth – The sum total of the wealth (or buying power) of a person or company, after all expenses or liabilities have been deducted.

Operations manual – Guidelines from the parent company that explain exactly how a franchisee should conduct business to remain in compliance with the franchise agreement.

Protected territory – The area in which a franchisor promises not to allow other franchises or corporate-owned businesses to operate.

Quality control – The process whereby a franchisor does periodic inspections of its franchise businesses to ensure that its rules are being followed.

Royalty – A percentage of a franchise’s gross sales that are paid monthly or quarterly to the parent company.

Sub-franchise – The purchase of a franchise opportunity from a master franchisee rather than directly from the parent company; sub-franchises are still bound by the same rules as any corporate franchisee but oftentimes pay a portion of their royalties to the master franchise owner.

Trade secret – Knowledge of a product, element or process passed along from the franchisor to the franchisee that provide a technological or marketing edge over the competition; the divulging of trade secrets is protected by the threat of legal action as laid out in the franchise agreement.

Turnkey operation – A franchising process where the parent company performs all the startup duties, allowing the franchisee to simply “turn the key” and open up for business.

Uniform Franchise Offering Circular (UFOC) – The disclosure document that contains all the information on a franchise, from operational methods to costs; by law, the parent company must supply a UFOC to every franchisee prior to the sale.

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