Franchisee (Zee): An individual who purchases the right to operate a business under the franchisor's name and system.
Franchisor (Zor): The parent company that allows individuals to start and run a business using its trademarks, products and processes, usually for a fee.
Franchise Fee: The initial fee paid to a franchisor to become a franchisee. For some franchises, this is a flat, one-size-fits-all fee; for others, it varies based on territory size, or other factors. Many franchisors offer franchise fee discounts for veterans, minorities or existing franchisees.
Franchise Disclosure Document (FDD): All franchisors are required by the U.S. Federal Trade Commission to provide this legal document to prospective franchisees. FDDs are updated annually and consist of 23 sections, called items, which explain the company history, the fees and costs, contractual obligations, unit data and more. Fifteen states, “registration states”, require franchisors to register their FDDs with a state agency and pay fees before they are legally allowed to sell franchises within that state. The states are California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin.
Estimated Total Investment: Franchisor’s provide a detailed breakdown of the estimated total investment, low to high range, in their FDD Item 7. This is where investors learn where money is invested to get the business up and going. This includes the franchise fee, along with other startup expenses such as lease related expenses, equipment, supplies, business licenses and working capital.
Royalty Fee: Franchisors require franchisees to pay a fee on a regular basis (weekly or monthly). Usually, it's a percentage of gross sales; sometimes it's a flat fee.
Franchise Agreement: The written contract that outlines the responsibilities of both the franchisor and the franchisee.
Term of Agreement: This is the length of time that your franchise agreement is valid (10 years is most common). At the end of your term, if you are a franchisee in good standing, franchisors allow you to renew your agreement for a small percentage of the then-current franchise fee.
Retail Franchise Location – A retail franchise requires a retail location. Franchisors define an optimum “retail location” based on various demographic, traffic, and geographical criteria. It can take 6-18 months to get a retail location open.
Territory Franchise Location – A territory franchise does not require a retail location. Franchisors define an optimum “territory” based on demographic, geographic, and other important criteria relevant to the success of a franchise (i.e., population, number of households, income). Territories are typically defined by contiguous zip codes
Types of Franchise Agreements:
- Master License/ Area Development – agreement that involves a large geographic area where you “act” like a franchisor. These agreements include substantial responsibilities and include minimum development numbers. The revenue from franchise fees and royalties are split with the franchisor. Examples: Country Master License for Canada, Area Developer for Texas.
- Regional Multi-Unit Development – agreement with a schedule to develop a certain number of units in a defined geographic area.
- Single Unit – agreement to start a franchise is a specific territory.
Corporate-Owned or Company-Owned Units: These are locations that are owned and run by the franchisor, rather than by franchisees.
Owner Involvement – each franchisor sets requirements for ownership involvement.
- Semi-Absentee Model – You are the GM from day 1 and do not work in the unit. Manage the manager model. Time commitment varies from 5-20 hours a week. This allows an owner to keep their main job and scale the business on the side.
- Executive Model – You are the daily manager. In the beginning, you wear many hats and do a little of everything to build the business. You grow an organization over 3-5 years and assume the general manager role. After 3-5 years of fulltime work, your involvement can become semi-absentee.
- You Are the Key Employee – You provide the key manpower. The business has few to any employees other than yourself.
Net Worth: An individual’s total assets minus their total liabilities.
Liquid Capital: All assets that can easily be turned into cash.
Discovery Day: An event set up by the franchisor so that potential franchisees may learn more about becoming a franchisee. A discovery day typically takes place at the franchisors headquarters and is often the final step in the due diligence process. It provides the opportunity to meet the management team, support team, and trainers face-to-face. Occasionally called “Meet The Team Day” or “Open House.”