What is a Franchise?
A franchise, as a business concept, is defined as an authorization granted by a company to an individual, company or group enabling them to carry out specified commercial activities within certain territory.
Franchising, therefore, is a business model or marketing concept which can be adopted by an organization as a strategy for business expansion by granting to a franchisee specific right to develop the business. Where implemented, a franchisor licenses its know-how, operational procedures, intellectual property, use of its business model, brand, and rights to sell its branded products and services to a franchisee.
In other words, a franchise is a business model that allows an entrepreneur to start a business by legally using someone else’s expertise, ideas, knowledge, prestige, and business processes.
Here are some definitions of the most used terminology in the franchise industry. It’s important to a prospective investor or entrepreneur to understand standard terminology when reading or speaking about franchise-related topics.
Brief Franchise Glossary
Advertising fee – This is certain amount of money paid by the franchisee as contribution to the whole franchise advertising budget, directly or indirectly benefiting the individual franchisee territory.
Broker: An outside salesperson or firm that undertakes, for a fee or commission, the sale of franchises for a franchisor.
Capital Required: The initial investment required or necessary to conduct the business.
Disclosure Document: Also known as the Franchise Disclosure Document (FDD). Formerly known as the Uniform Franchise Offering Circular (UFOC). The format of the FDD is specified by the FTC and NASAA (Federal and State regulators) and provides information about the franchisor, the obligations of the franchisor and the franchisee, fees, start-up costs, and other required information about the franchise system.
Franchise Agreement: The agreement between the franchisor and franchisee which specifies the obligations of each party to the other during and following the franchise relationship.
Franchise Fee – Virtually every franchise opportunity requires the business owner to pay a one-time, upfront franchise fee.
Franchisee: The person or company granted the rights (license) to do business under the trademark and trade name by the franchisor.
Initial Investment – The initial investment covers the materials, labor, and resources you’ll need to launch. In our ranking below, the initial investment amount includes the franchise fee.
Master Franchisee: A franchise relationship which is granted for the development of a specified area, and which allows the master franchisee to sub-franchise to other franchisees within the specified territory.
Royalty Fee: This is a percentage of gross sales paid by the franchisee to the franchisor on a regular basis. A royalty fee may also be a fixed amount.
Ongoing Investment – This is the money you’ll need to run the franchise on an ongoing basis.
Personal Finances – A few franchises require the owner to have a minimum net worth before they’re eligible to purchase a franchise. Others have liquidity requirements.
Turnkey: A term used to describe a location which is provided to a franchisee fully equipped and ready to operate.