16 Typical Franchise Terms

Cusine Tip Indian-Spiced Grilled ChickenFranchisee is a person who buys the right to function a company under the franchisor's name and system.

Franchisor: The mother or father organization that allows people to start and run a company using its images, products and procedures, usually for a fee.


Franchise fee: The preliminary fee compensated to a franchisor to become a franchisee, defined in Product 5 of the Series Disclosure Papers (FDD). For some businesses, this is a smooth, one-size-fits-all fee; for others, it differs depending on place dimension, encounter or other aspects. Many franchisors offer franchise fee special reduced prices for experts, unprivileged or present franchisees.



Franchise Disclosure Document: All franchisors are needed by the U.S. Government Business Percentage to offer this lawful document to potential franchisees. FDDs are modified annually and involve 23 segments, known as products, which describe the organization record, the charges and expenses, agreement responsibilities, device information and more. Don't shift without examining it.

Startup cost/initial investment: The quantity needed to start the franchise, defined in Product 7 of the FDD. This contains the franchise fee, along with other start-up expenses such as property, devices, resources, company permits and funds.

Royalty fee: Most franchisors need franchisees to pay a fee regularly (weekly, per month or yearly). Usually, it's an amount of sales; sometimes it's a smooth fee. Some franchisors also need a personal royalty fee to protect marketing expenses.

Franchise agreement: The published agreement, engaged in the FDD, which describes the required both the franchisor and the franchisee.

Term of agreement: This means out enough interval of time that your franchise agreement is valid--usually anywhere from five to 20 years. At the end of your phrase, if you are a franchisee present, most franchisors will allow you to replenish your agreement for a amount of the then-current franchise fee.

Company-owned units: These are places that are possessed and run by the mother or father organization (the franchisor), rather than by franchisees.

Registration states: 15 declares need franchisors to sign-up their FDDs with a condition organization before they are lawfully permitted to offer businesses within that condition. Find a record at FTC.gov.

Conversion: Some franchisors offer business owners to be able to turn their present personal company into a franchise.

In-house financing: Funding offered by the franchisor to franchisees to help with expenses, which can consist of the preliminary franchise fee, start-up expenses, devices and stock as well as day-to-day expenses such as pay-roll.

Third-party financing: Funding offered by a resource other than the franchisor. Many franchisors have connections with financial institutions or are authorized with the SBA in order to facilitate the loan procedure for their franchisees.

Absentee ownership: A choice offered by some franchisors that allows a person to own a franchise without being definitely engaged in its day-to-day functions.

Master franchise: An expert franchisee works as a sub-franchisor for a certain place. Master franchisees can problem FDDs, indication up new franchisees, offer logistical assistance and get a cut of the territory's royalties.

Area developer: A place designer confirms to start a certain number of franchise models in a large place within a specified interval of time. They may start and functions the models themselves or hire other franchisees to start them.