The Most Important Terms in the Franchising Industry

So, you want to become an entrepreneur and you realize the best way to do that is to open a franchise. Great! But where do you even begin? As you research various franchise opportunities, brands, and industries, you will come across numerous terms that are common within franchising. Understanding these terms is key to understanding the franchise process. Once you speak the language of franchising, you’ll be better equipped to follow the path that is best for you.

Common Terms in Franchising

  • Brand: The mark, name logo and identity of a company or business, and a franchise system’s most valuable asset.
  • Broker: An outside salesperson. For a fee, a broker will sell a franchise for the franchisor.
  • Franchise Disclosure Document (FDD): A document that outlines a franchisor’s entire written franchise program. Provides information about the franchisor, franchise agreement and a complete description of initial investment costs.
  • Franchise Representative: Franchisor employee whose primary responsibility is to consult with franchise owners regarding their business – growing sales, profits and building an infrastructure to support it.
  • Franchisee: The person(s) who is given the right from a franchisor to do business under its brand name.
  • Franchise Agreement: The written contract between the franchisor and franchisee.
  • Franchisor: The business that grants the franchisee the right to do business under the franchisor’s brand.
  • Franchise Sales Recruiter (FSR): Franchisor employee that works directly with franchisees during the start-up period.
  • The Federal Trade Commission (FTC): The U.S. government agency that regulates franchising.
  • Gross Revenue: The term refers to the total revenue made as a result of some activity. It can refer to things such as total profit or total sales.
  • Initial Franchise Fee: This fee is the initial cost paid by the franchisee for the right to use a business’ brand name, business model, receive funding and other potential serviced provided by the franchisor. It is typically paid after a franchise agreement is signed.
  • Initial Investment: This is the initial cost of getting into business that includes the franchise fee; location build-out; any furniture, fixtures and equipment; décor; inventory down payment, professional fees, grand opening advertising and operating capital needed to support the business for the first few months.
  • Multi-Unit Development (MUD): A franchisee committing to develop multiple locations within a franchise system during an agreed upon time frame.
  • Royalty Fee: A continuing fee paid by the franchisee for the use of a brand and business model.
  • Single Unit Franchise: The traditional franchise model involving a franchisee committing to develop a single location.
  • Vendor: A supplier of products or services.

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