Franchising

An explanation of phrases and terms commonly associated with business franchising.

Advertising Fee - a feature of some franchise agreements where the franchisee pays a regular fee to their franchisor as a contribution to group advertising expenditures.

Area Franchise - sometimes known as an Area Development Plan. A type of franchise granted to develop a particular location or geographic area.

Business Format Franchising - a type of franchise agreement in which the franchisee receives assistance with all aspects of managing the business. Business Format Franchises are likely to include franchisor assistance with choosing site location, start-up practices, quality control and other training.

Business Plan - a document that sets out the operational and financial objectives of a business. The business plan should also contain detailed plans on how the objectives are to be realised.

Designated Supplier - approved suppliers of a product or service chosen by the franchisor to meet the needs of their business.

Distributorship - occurs when a manufacturer or wholesaler grants to another party the right to sell their products.

Estimated Initial Investment - an estimate of the total costs that the franchisee will incur when starting up their business. The calculation will include fees paid to the franchisor along with the cost of equipment, inventory, insurance and other necessary items.

Exclusive Territory - when a franchisee is given the sole right to operate in a certain location without competition from other franchisees. The franchisor guarantees that no other branches of its franchise will be opened within a defined mile radius.

Franchisee - an individual or group that buys the right to run a business using the trademark, products and operations strategy of the franchising company.

Franchisor - the owner of the franchise who sells the rights to their business idea, process, product and brand to one or more franchisees.

Franchise Agreement - the contract signed by the franchisee and the franchisor setting out the terms of the franchising arrangement. The agreement is usually set up for a fixed period of time.

Franchise Fee - a one-time initial fee paid by the franchisee to the franchisor to 'buy into' the franchise.

Master Franchising - in a master franchise the franchising company allows a franchisee to act as the franchisor in a particular defined area. The master franchisee can choose to open their own branches, sub-franchise or do both.

Multiple Unit Franchising - a type franchise agreement in which a franchisor grants the right for a franchisee to operate more than one unit of the franchise within a specific area.

Non-competition Clause - used to prevent a franchisee from entering into a similar line of business as the franchisor during the term of the franchise agreement or for s set period of time after it.

Operations Manual - a document used to explain to the franchisee how the business should be run. The operations manual will usually cover subjects including employment, accounting, marketing and maintenance.

Royalty - a regular payment made to franchising companies by their franchisees that usually cover commission payments or a share of profits.

Total Investment - the total cost of setting up and running a unit of a franchise. Total investment includes the franchise fee, working capital and inventory and equipment costs.

Trademark - a name, logo, or symbol used to distinguish a product. The trademark generally adds part of the value of the franchise.

Working Capital - the amount of money needed by a business to operate on a day-to-day basis. Working capital includes expenses for wages, rent, utility bills and insurance.