Franchisee: An individual who purchases the right to operate a business under the franchisor's name and system.
Franchisor: The parent company that allows the rights to specific individuals to start and run a business using its trademarks, products and processes for a fee.
Franchise fee: The one-time initial fee paid to a franchisor to become a franchisee, outlined in Item 5 of the Franchise Disclosure Document (FDD). For some franchises, this is a flat, one-size-fits-all fee; for others, it varies based on territory size, experience or other factors. Many franchisors offer franchise fee discounts for veterans, minorities.
Franchise Disclosure Document: All franchisors are required by the U.S. Federal Trade Commission to provide this legal document to prospective candidates that might become franchisees. FDDs are updated annually and consist of 23 Items that detail the company history, the fees and costs, contractual obligations, unit data and more. ****IMPORTANT****
Startup cost/initial investment: The total amount required to open the franchise, outlined in Item 7 of the FDD. This includes the franchise fee, along with other startup expenses such as real estate, equipment, supplies, business licenses and working capital.
Royalty fee: Most franchisors require franchisees to pay a fee on a regular basis (weekly, monthly or yearly). This is usually a percentage of sales but rarely it can be a flat fee.
Franchise agreement: The written contract, included as an exhibit in the FDD, which outlines the responsibilities and obligations of both the franchisor and the franchisee.
Term of agreement: Length of time that your franchise agreement is valid Varies from franchise to franchise but the average is anywhere from five to 20 years. At the end of your term, if you are a franchisee in good standing and wish to renew, most franchisors will allow you to renew your agreement for a nominal fee.
Company-owned units: These are locations that are owned and run by the parent company (the franchisor), rather than by franchisees.
Registration states: Fifteen states require franchisors to register their FDDs with a state agency and pay additional fees before they are legally allowed to award any franchises within that particular state.
Conversion: Some franchisor companies offer franchisees the opportunity to convert an existing independent business into their franchise brand, saving you thousands of dollars and allowing for speed to market for service.
In-house financing: Financing offered by the franchisor to franchisees to help with expenses, which may include initial franchise fee, startup costs, equipment and inventory as well as day-to-day expenses such as payroll.
Third-party financing: Financing provided by a source other than the franchisor. Many franchisors have relationships with banks or are registered with the SBA in order to expedite the loan process for their franchisees. Working with a franchise advisor as your coach can also connect you with reputable professional funding sources to help you learn of your many funding options available.
Absentee ownership: An option offered by some franchisors that allows a person to own a franchise without being actively involved in its day-to-day operations.
Master Opportunity: A master franchisee serves as a sub-franchisor for a certain territory. Master franchisees can issue FDDs, sign up new franchisees, provide additional support and training to the Corporate HQ and receive a share of the franchise royalties and initial franchise fee.
Area Developer/ Rep: An area developer (AR) 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 seek and sell these to other franchisees to open and operate.
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