Franchise Terminology

Acknowledgement of Receipt
This document states that you received the legal franchise documents on a certain date.
Advertising Fee/Fund
A fee or fund paid by franchisees for advertising expenditures. The fee usually is less then 3 percent of the franchisee's annual sales and is in addition to royalty fees.
An entity that is controlled by the franchisor, or that controls the franchisor, or that is under common control with the franchisor.
Approved Supplier
A supplier of products and services is approved by the franchisor to provide products or services to its franchisees. A franchisor may designate itself or its affiliates as approved suppliers. Franchisee may be required to purchase certain products or services only from approved suppliers.
An alternative to a lawsuit in which a neutral third party hears both sides to a dispute and renders a decision.
Area Development Rights
Optional right to develop multiple individual franchises in a specific geographic area.
Owned property that can be used for payment of debt.
Balloon Payment
A final payment due at the end of a loan.
Bid Letter
The initial letter sent to a borrower defining the terms of the transaction.
Business Plan
A detailed document that defines a business's development goals and plots how and where the resources needed to accomplish the objectives will be obtained and used.
Assets used as security for a loan in the event of default.
An outlet owned directly by the corporation.
Conversion Franchise
A franchise that is sold to an existing business to allow that business to convert to a franchised business.
DBA stands for "doing business as." For example, if the name of your corporation is XYZ Co. but is known to the public as ABC Co., your business would be classified as XYZ Co. d/b/a ABC Co.
Failure to meet terms of an agreement.
Designated Supplier
Exclusive suppliers of products and/or services used in the franchisee business.
Development Agreement
An agreement between a franchisor and a developer in which the developer is given the right to open more than one franchised location in a specified territory.
Disclosure Laws
State and federal laws that require franchisors to provide certain information to prospective franchisees before the sale of a franchise.
A business authorized to sell the products or services of a parent company. This is usually a manufacturer/reseller relationship, not necessarily a franchise.
This stands for "Earnings Before Interest, Taxes, Depreciation and Amortization." It measures cash flow available to meet debt payments.
Earnings Claims
Statements of sales, profit or other financial information made by the franchisor regarding their franchisees.
Exclusive Territory
A specifically defined geographic area in which franchisees retain the sole right to operate.
The time when a franchise agreement ends by the natural expiration of its term.
Federal Trade Commission (FTC)
Federal agency regulating trade practices, commerce and franchises.
A legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business.
Franchise Agreement
The franchise contract.
A franchise owner.
Franchise Fee
The amount of money you need to pay the franchisor to purchase a franchise concept.
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
The person or company that owns the right to manage/sell franchises.
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 to any prospective franchise purchaser before he or she buys a franchise.
Initial Investment
The upfront cash investment required to purchase and start a franchise business. Your total investment can vary depending on several factors.
Initial Training
The initial instruction the franchisor offers to franchisees about how to set up and run the franchised unit.
Master Franchisee
A separate class of franchisees responsible for developing additional franchise locations within a designated geographic territory.
Master Region
A specific geographic region purchased by a franchisee with the intent to divide and sell additional franchises.
Net Cash Flow
Shows how much cash is generated by the business after expenses, interest, and principal repayment on financing are paid.
Net Worth
Total assets after liabilities.
Non-Compete Clause
Restrictions on competing with the franchised company during or upon termination of a franchise agreement.
A verbal or written proposal to sell a franchise to a prospective franchisee upon understood general terms and conditions.
Operations Manual
Provided by the franchisor to the franchisee, contains all training, reference and business specifications required to operate the franchise business.
The time when a franchised unit first opens for business.
Pro Forma
Complete projected financial picture of the franchisor including
balance sheet, profit and loss statement, assets, liabilities, net worth and/or cash flow statement.
Many states require franchisors to file documentation before a franchise can be sold.
Relationship Laws
State laws that govern the relationship between franchisors and franchisees, such as laws that limit the grounds for which a franchise can be terminated.
The mechanism used to continue the term of the franchise agreement once it has expired.
A percentage of gross sales that you pay to the franchisor monthly.
Service Mark
A distinctive name or symbol used to identify the franchisor's services and to distinguish them from the services of others.
Difference between cost of funds and lending rate.
The time period during which the franchise agreement will be in effect.
Total Investment
This may include the Initial Investment plus any required inventory, advertising or equipment purchases.
The sale or other transfer of the ownership of the franchise agreement, the franchised unit, or assets of the franchised unit from the franchisee to another person.
FDD (Franchise Disclosure Document)
Provides background information in over 20 categories, as well as a copy of the proposed franchise agreement.
Working Capital
The amount of liquid assets you are required to have and maintain to operate the franchise.