FRANCHISE "LINGO" As you begin to venture into the franchise business, you will want to know the terms

and “Lingo” that goes with it. Best way to become an educated buyer is to know the language first. The following list of terms will greatly benefit you. Acknowledgement of Receipt: A document provided to you by the franchisor that you sign and return to the franchisor. It confirms that you received the legal franchise 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. A franchisor may have more than one fund. This fee is usually a percentage of the franchisee's annual sales and is in addition to royalty fees. Arbitration: A method of resolving disputes that is an alternative to going to court. Many franchise agreements require that disputes between the franchisor and the franchisee be resolved by arbitration. The American Arbitration Association is often identified as the organization that will provide the arbitrator (a neutral, disinterested third party). The arbitrator hears from both sides and renders a ruling. Area Development Rights: The rights one obtains by which you receive the right to develop or sell multiple franchise rights for the franchisor in a specific geographic area. Normally, the area development agreement will provide a build out schedule that 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, plans and strategy and details the resources, financial and otherwise, that are needed to succeed. Used for your own planning and required by lenders and investors to evaluate your business. You usually can't get a loan without one. Collateral: Assets used as security for a loan in the event of default. Company-owned: A site or location owned and operated directly by the franchisor. DBA: DBA stands for "doing business as." You can organize your corporate entity under 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 your business name with the states in which you do business. Default: Failure to live up to obligations or otherwise comply with the terms of a legal agreement. Designated Supplier: To ensure quality standards are met, some franchisors require that franchisees buy supplies or products for their franchised business only from a designated, exclusive list of suppliers. Distributorship: A distribution method for a company's products by which a business, the distributor, is authorized under the terms of the Distributor Agreement,

to sell the products or services of another company. This is usually a manufacturer/reseller relationship and, although somewhat similar to a franchise, is different. Distributorship agreement may but need not provide exclusive rights to the distributor. EBITDA: A calculation used to value businesses. It stands for "Earnings Before Interest, Taxes, Depreciation and Amortization." Earnings Claims: Statements of sales, profit or other financial information made by the franchisor regarding the operations of their franchisees' locations. Exclusive Territory: A specifically defined geographic area in which a franchisee has the exclusive, protected right to operate with in the franchisor's system. Federal Trade Commission (FTC): The agency of the federal government charged with regulating trade practices including franchises. The Uniform Franchise Offering Circular (UFOC) exists because of FTC regulation. Franchise Agreement: The legal agreement which governs the relationship between a franchisor and a franchisee. Franchisee: The owner of franchise rights who is entitled to use the franchisor's trade names, trademarks and systems. Franchise Fee: The initial amount of money paid to the franchisor for the right to become a franchisee in that system. Franchising: A method of conducting business in an industry that involves a franchisor (parent company) and franchisee (someone who pays for the right to sell the parent company's products and use their trademark/name). Franchisor: The company that owns a business system, products, trade names and trademarks that has decided to and has registered to sell its products and services through a distribution method using franchisees. FTC Rule: A federal regulation that requires franchisors to prepare an extensive disclosure document called The Uniform Franchise Offering Circular (UFOC) and to give a copy of the UFOC to any prospective purchaser of a franchise. A franchisor may not accept any money from or enter into a contract with a potential franchisee until no less than ten (100 days after delivery of the UFOC. Initial Investment: The upfront cash investment required to purchase a particular franchise business. Generally refers to the amount of the franchise fee or deposits needed 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 franchisees within a designated geographic territory.

Net Operating Income (NOI): The amount of cash generated by the business after deducting operating expenses. NOI us usually calculated without considering debt payments. Net Profit: Sometimes also referred to as Net Cash Flow, the amount of cash generated by the business after deducting operating expenses and debt payments. Net Worth: A calculation determined by subtracting the value of a person or entity's total liabilities from their total assets. Non-Compete Clause: A clause often found in a Franchise Agreement which purports to restrict the franchisees ability to, during and upon termination of the Franchise Agreement, compete with the franchisor's business. Operations Manual: A detailed manual that is provided by the franchisor to the franchisee and which contains the training and operational details and specifications required to properly operate the franchise business. Pro Formas: Projected financial results for a business. Registration: Many states require franchisors to file documentation before a franchise can be sold and thereby "register" with the state. Renewal Rights: Franchises are generally offered for a period of time with a right to renew the relationship. The franchise agreement will detail what renewal rights, if any, are provided to the franchisee. Royalty: A percentage of gross sales that a franchisee pays to the franchisor. Total Investment: Generally speaking, the total amount of funds you will need to get started in a particular franchised business. This amount should include may include the Initial Investment plus any required build out, inventory, equipment purchases and working capital for at least three months of operation. Uniform Franchise Offering Circular (UFOC): Required by the FTC to be provided by franchisors to potential franchisees, it is a treasure trove of information for a potential franchisee. Sometimes also referred to as the Disclosure Document, the document provides detailed information in 23 specified categories. A copy of the proposed franchise agreement is attached as an exhibit. Working Capital: The amount of money you need to have and maintain in order to operate your franchised business. Planning for and having sufficient working capital available at the time you start your business and until your business is generating profits, is critical to your success.

Getting Into the Groove: Learn the Franchise Lingo
Jul 14, 2006 -
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Common Definition: A method of doing business by which a franchise is granted the right to engage in the business of offering, selling or distributing goods and services under a marketing plan or system prescribed in substantial part by a franchisor and which is substantially associated with the franchisor’s trademark, name, logo and advertising.

Legal Definition

Franchising is a contract or agreement, express or implied, oral or written, between two or more persons by which: • • A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan prescribed in substantial part by a franchisor; The operation of the franchisee’s business pursuant to that plan or system as substantially associated with the franchisor’s trademark, service mark, tradename, logo type, advertising, or other commercial symbols designating the franchisor or its affiliates; and The franchisee is required to pay directly or indirectly, a franchise fee.

Franchisor The parent company or operator of a franchise concept or system that grants, for a fee and other considerations, the right to use its name and system of business operations.

Franchisee An independent business person or novice entrepreneur who has been granted by the franchisor the right to duplicate its entire business format at a particular location and for a specified period, under terms and conditions set forth in the contract (franchise agreement).

Franchise Agreement A written contract detailing the mutual responsibilities of franchisors and franchisees. It is usually for a several-year term, and when the term is up, the contract expires and must be renewed. Some state laws require the contract to be renewable at the franchisee’s option. Usually, a franchise agreement may not be sold, transferred or otherwise assigned without the franchisor’s permission.

Operations Manual A written document which clearly explains the franchisor’s standards of operation, and identifies the operational tasks required to establish and operate the franchise business. The operations manual supports and promotes the use of consistent and uniform day-to-day procedures at each franchise unit within the network franchise unit in order to maintain the quality of service and products in every franchise outlet.

Franchise Opportunity A franchise opportunity is a business opportunity that involves the sale of good and services that enable a novice entrepreneur to begin a franchise business.

Master (or Regional) Franchising A model of multi-level franchising wherein the master franchisor sells the development rights in a particular geographic market to a master franchisee, who, in turn, sells individual or single-unit franchises within the territory. In return for a front-end master franchise fee, the master franchisee has the sole responsibility of developing that area or market under a mutually agreed upon schedule. The master franchisee is rewarded by sharing in the franchise fee and ongoing royalties paid by the franchisees within the territory to the master or parent franchisor.

Area Development Agreement This is another variation of multi-level franchising where the franchisor grants exclusive development rights for a particular geographic area to an area development investment group or an area developer. In return for the rights to an exclusive territory, the area developer pays the franchisor a front-end development fee and commits to develop a certain number of units within a specified period of time.

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