Franchising Terms

Acknowledgement Of Receipt:
The last page of an Offering Circular, signed to indicate you received the documents on a certain date.

Advertising Fee:
An annual fee paid by the franchisee to the franchisor for corporate advertising expenditures; It is often less then three percent of the franchisee’s annual sales and typically paid in addition to the royalty fee.

Capital Required:
The amount of cash you are required to have available.

Earnings Claims:
Representations made by franchise companies that their franchisees have achieved specific levels of sales or profitability.

Exclusive Territory:
The “territory” granted to you by a franchise company, which restricts the franchisor from establishing any other location within your area.

FDD – Franchise Disclosure Document:
Provides background information in over 20 categories as well as a copy of the proposed franchise agreement. Also know as, the “Circular”, “Offering Circular” and “Disclosure Document”.

Federal Trade Commission (FTC):
The FTC is a federal agency in Washington, DC that regulates various trade practices including the franchise industry.

Franchise Agreement:
An official document that sets forth the expectations and requirements of the franchisor. It describes the franchisor’s commitment to the franchisee, and includes information about territorial rights of the franchisee, location requirements, training schedule, fees, general obligations of the franchisee, and general obligations of the franchisor.

Franchisee:
The owner of one or more franchises.

Franchise Fee:
The initial fee you pay to a franchisor to acquire a franchise.

Franchising:
Neither an industry nor a business, but a method of doing business within a given industry. At least two parties are involved in franchising: the franchisor and the franchisee.

Franchisor:
The person or company that owns or controls the right to grant franchises for a specific “brand”.

FTC Rule 436:
The law passed in 1979 that regulates the franchise industry. It set forth “disclosure” requirements and prohibited franchisors from making undocumented earnings claims.

Initial Investment:
Generally, the initial cash investment required of you to buy and open a franchise. This can include the franchise fee and other initial start-up costs and expenses you may incur, but may not be reflective of your total investment.

Liquid Capital:
Also known as, liquid assets, quick assets, and realizable assets. Assets held in cash or in something that can be readily turned into cash.

Net Worth:
Total assets, once you’ve subtracted your total liabilities.

Non-Compete Clause:
Upon termination, non-renewal, or other sale or transfer, some franchise agreements prohibit you from competing in any way with the franchised company.

Offer:
An oral or written proposal to sell a franchise to a prospective franchisee upon understood general terms and conditions.

Protected Territory:
A designated area or geographic boundary granted to the franchisee by the terms of a franchise agreement. The franchisor promises not to open another franchised or company-owned business of a similar nature within the franchisee’s protected territory.

Qualification Questionnaire:
A document prepared by the franchisor to be completed by the prospective franchisee, which provides initial information to the franchisor in order to assist in determining whether or not the prospect is capable and motivated enough to own a franchise. Often a financial statement is included in the questionnaire format.

Registration:
A requirement in several states that specific information be submitted and approved by state regulatory authorities before franchises may be offered in that state. It is quite extensive in the information required and may ask for: a bond, fingerprints and pictures.

Start Up Costs:
The required amount of money the franchisor will request that a new franchisee have to invest in the new franchise unit in its earliest stages of development.Total Investment: The amount of money estimated for complete set up of a franchisee’s business, including the initial investment, the working capital, and any additions to inventory and equipment deemed necessary for a fully operational and profitable business.