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Interested in Starting a Franchise?


Interested in Starting a Franchise?

Here are some common key terms to understand before you get started.

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Franchisee: A person who purchases the right to operate a business under the franchisor’s name. This also includes using the system that the franchisor has put in place.

Franchisor: The parent company that allows a person(s) to start and operate a business using its trademarks, products, systems, and process flows for a fee.

Franchisee Fee: the initial fee charged to the franchisee to use and implement the Franchisor’s business. This is part of the Franchise Disclosure Document (FDD). The fee can be charged different ways. There can be a flat fee or a one-size fits all type of fee. It can vary on territory size, experience and other factors. Many times it is possible to get a discount if you are a veteran, minority, or own existing franchises.

Franchise Disclosure Document: All franchisors are required by U.S. Federal Trade Commission to provide this legal document to prospective franchisees. FDD’s are updated annually and consist of 23 items. This explains the company history, fees and costs, contractual agreements, inventory data, and more. Do not make any moves forward until reviewing this document.

Startup Cost / Initial Investment: The total amount required to open the franchise. This is outlined in the FDD document. This includes the franchise fee, along with other startup expenses such as real estate, equipment, supplies, business licenses and working capital.

Royalty Fee: Most franchisors require franchisees to pay a fee on a regular basis (weekly, monthly, quarterly, annually). Usually this is a percentage of sales or a flat fee. Some franchisors also require a separate royalty fee to cover advertising and marketing.

Franchisee Agreement: This is a written contract included in the FDD document. This outlines the responsibilities of the franchisor and the franchisee.

Term of Agreement: This describes the length of time that your franchise is valid (usually anywhere from 5-20 years). At the end of your term, if you are in good standing, you will be allowed to renew your agreement for a percentage of the current franchise fee rate.

Company-Owned Units: These are locations that are owned and run by the parent company (the franchisor) rather than by the franchisee.

Conversion: Some franchisors offer entrepreneurs the opportunity to convert their existing independent business into a franchise.

Registration States: Fifteen states require franchisors to register their FDD’s with a state agency before they are legally allowed to sell frnachises within that given state. Find the list of states at www.ftc.gov

In-house Financing: Financing offered by the franchisor to franchisees to help with expenses. The financing can include the initial franchise fee, startup costs, equipment and inventory as well as day-to-day expenses as payroll.

Third Party Financing: Financing provided by another company other than the franchisor. Many franchisors have relationships with banks or registered with the SBA in order to expedite the loan process for their franchisees.

Absentee Ownership: An option offered by some franchisors that allows a person to own a franchise without being actively involved with its day-to-day operations.

Master Franchise: A master franchise serves a sub-franchisor for a certain territory. Master franchisees can issue FDD’s, sign up new franchisees, provide logistical support, and receive a percentage or fee of the territory’s royalties.

Area Developer: An area developer agrees to open a certain number of franchise units in a large territory within a specified time period. They may open and operate the units themselves or recruit other franchisees to open them.

 

As you can see, there is much to learn about starting a franchise. There many businesses that offer franchisee options. Click here to find businesses that offer franchisee options.

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