The Most Common Franchise Terms and What They Mean

Searching for the right franchise opportunity can seem overwhelming, but having a good understanding of the phraseology will make the task that much easier.

To help you begin the investigation process, here is a list of the most common franchise terms you will hear and what they mean for you.

Advertising Fee: A contribution paid by the franchisee into the franchise system’s advertising fund for regional/national advertising campaigns. May be a flat fee or percentage of franchise sales typically paid on a monthly basis.

Area Developer: Rights granted to open a designated number of franchise units in a specific geographic area within a designated time frame.

Broker: A third-party salesperson who receives a fee or commission for the sale of a franchise on behalf of the franchisor.

Disclosure Document: Also known as the Franchise Disclosure Document (FDD), a legal document all franchisors are required to provide to prospective franchisees by the Federal Trade Commission (FTC) outlining the franchisor’s history, financials, investment costs, contract obligations, and more.

Exclusive Territory: A designated geographic area provided for a franchisee to have the sole right to operate.

Franchise Agreement:  The document signed by both the franchisor and franchisee that legally binds the two parties and defines their relationship.  Different from the Franchise Disclosure Document.

Franchise Consultant: A business coach who may help franchisees select a franchise business to buy or help a business become a franchise.

Franchise Fee: The initial fee a franchisee pays the franchisor for the rights to use the trademark and business system typically paid at the signing of the franchise agreement.

Franchisee: A person or entity who purchases the right to use and do business under a franchise system’s trademark.

Franchisor: The owner of a franchise system’s trademark who grants usage rights to a franchisee.

Initial Investment: Includes all start-up costs for opening a franchise unit including the franchise fee, real estate, equipment, and inventory, working capital and more.

Master Franchisee: Rights given to sub-franchise within a designated area for a portion of franchise and royalty fees.

Net Worth: Total assets after liabilities.

Royalty Fee: Monthly payments made by the franchisee to the franchisor, typically a percentage of sales.