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Franchise Lingo

Franchise Lingo

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Published by: mary34d on Apr 09, 2008
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As you begin to venture into the franchise business, you will want to know the termsand
that goes with it. Best way to become an educated buyer is to know thelanguage first. The following list of terms will greatly benefit you.
Acknowledgement of Receipt:
A document provided to you by the franchisor thatyou sign and return to the franchisor. It confirms that you received the legalfranchise documents on a certain date.
Advertising Fee/Fund:
A fee or fund paid by franchisees, usually to the franchisor,for advertising expenditures. The fund may be used locally, regionally or nationally. Afranchisor may have more than one fund. This fee is usually a percentage of thefranchisee's annual sales and is in addition to royalty fees.
A method of resolving disputes that is an alternative to going to court.Many franchise agreements require that disputes between the franchisor and thefranchisee be resolved by arbitration. The American Arbitration Association is oftenidentified as the organization that will provide the arbitrator (a neutral, disinterestedthird party). The arbitrator hears from both sides and renders a ruling.
Area Development Rights:
The rights one obtains by which you receive the rightto develop or sell multiple franchise rights for the franchisor in a specific geographicarea. Normally, the area development agreement will provide a build out schedulethat details how many locations are to be opened within a given period of time.
Balloon Payment:
A final payment due at the end of a loan.
Business Plan:
A critical document that details your company's management, plansand strategy and details the resources, financial and otherwise, that are needed tosucceed. Used for your own planning and required by lenders and investors toevaluate your business. You usually can't get a loan without one.
Assets used as security for a loan in the event of default.
A site or location owned and operated directly by the franchisor.
DBA stands for "doing business as." You can organize your corporate entityunder one name but be known to the public under a different name. Thus, you are"doing business as …" You usually must fill out appropriate forms to register yourbusiness name with the states in which you do business.
Failure to live up to obligations or otherwise comply with the terms of alegal agreement.
Designated Supplier:
To ensure quality standards are met, some franchisorsrequire that franchisees buy supplies or products for their franchised business onlyfrom a designated, exclusive list of suppliers.
A distribution method for a company's products by which abusiness, the distributor, is authorized under the terms of the Distributor Agreement,
to sell the products or services of another company. This is usually amanufacturer/reseller relationship and, although somewhat similar to a franchise, isdifferent. Distributorship agreement may but need not provide exclusive rights to thedistributor.
A calculation used to value businesses. It stands for "Earnings BeforeInterest, Taxes, Depreciation and Amortization."
Earnings Claims:
Statements of sales, profit or other financial information made bythe franchisor regarding the operations of their franchisees' locations.
Exclusive Territory:
A specifically defined geographic area in which a franchiseehas the exclusive, protected right to operate with in the franchisor's system.
Federal Trade Commission (FTC):
The agency of the federal government chargedwith regulating trade practices including franchises. The Uniform Franchise OfferingCircular (UFOC) exists because of FTC regulation.
Franchise Agreement:
The legal agreement which governs the relationshipbetween a franchisor and a franchisee.
The owner of franchise rights who is entitled to use the franchisor'strade names, trademarks and systems.
Franchise Fee:
The initial amount of money paid to the franchisor for the right tobecome a franchisee in that system.
A method of conducting business in an industry that involves afranchisor (parent company) and franchisee (someone who pays for the right to sellthe parent company's products and use their trademark/name).
The company that owns a business system, products, trade names andtrademarks that has decided to and has registered to sell its products and servicesthrough a distribution method using franchisees.
FTC Rule:
A federal regulation that requires franchisors to prepare an extensivedisclosure document called The Uniform Franchise Offering Circular (UFOC) and togive a copy of the UFOC to any prospective purchaser of a franchise. A franchisormay not accept any money from or enter into a contract with a potential franchiseeuntil no less than ten (100 days after delivery of the UFOC.
Initial Investment:
The upfront cash investment required to purchase a particularfranchise business. Generally refers to the amount of the franchise fee or depositsneeded at time of signing of a franchise agreement.
Master Franchisor:
A term, sometimes used synonymously with Area Developer,describing the right of a franchisee to sell franchise locations to other franchiseeswithin a designated geographic territory.
Net Operating Income (NOI):
The amount of cash generated by the businessafter deducting operating expenses. NOI us usually calculated without consideringdebt payments.
Net Profit:
Sometimes also referred to as Net Cash Flow, the amount of cashgenerated by the business after deducting operating expenses and debt payments.
Net Worth:
A calculation determined by subtracting the value of a person or entity'stotal liabilities from their total assets.
Non-Compete Clause:
A clause often found in a Franchise Agreement whichpurports to restrict the franchisees ability to, during and upon termination of theFranchise Agreement, compete with the franchisor's business.
Operations Manual:
A detailed manual that is provided by the franchisor to thefranchisee and which contains the training and operational details and specificationsrequired to properly operate the franchise business.
Pro Formas:
Projected financial results for a business.
Many states require franchisors to file documentation before afranchise can be sold and thereby "register" with the state.
Renewal Rights:
Franchises are generally offered for a period of time with a right torenew the relationship. The franchise agreement will detail what renewal rights, if any, are provided to the franchisee.
A percentage of gross sales that a franchisee pays to the franchisor.
Total Investment:
Generally speaking, the total amount of funds you will need toget started in a particular franchised business. This amount should include mayinclude the Initial Investment plus any required build out, inventory, equipmentpurchases and working capital for at least three months of operation.
Uniform Franchise Offering Circular (UFOC):
Required by the FTC to be providedby franchisors to potential franchisees, it is a treasure trove of information for apotential franchisee. Sometimes also referred to as the Disclosure Document, thedocument provides detailed information in 23 specified categories. A copy of theproposed franchise agreement is attached as an exhibit.
Working Capital:
The amount of money you need to have and maintain in order tooperate your franchised business. Planning for and having sufficient working capitalavailable at the time you start your business and until your business is generatingprofits, is critical to your success.
Getting Into the Groove: Learn the Franchise Lingo
 Jul 14, 2006- Franlinkasia.com

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