Franchise Dictionary: Most Common Franchising Key Terms Defined

Alice Tuffery, writer

Published at 04/12/2017, Updated on 04/05/2022 , Reading time: 6 min

Franchise Dictionary: Most Common Franchising Key Terms Defined — Photo © franchise-directory.jpg

Like many industries, the franchise world has its fair share of technical terms, phrases and acronyms. When you’re first exploring the possibility of running your own business, they can be tricky to get your head around, so we’ve created a handy franchise dictionary.

Use this franchise dictionary as your first port of call when you come across franchise key terms, and you’ll soon know how to speak the language of franchising.

Franchising key terms

Advertising fee

This is a fee paid by franchisees to contribute towards the brand’s advertising expenditures across the entire business network. The promotional activity covered by this fee benefits all franchisees, so it’s usually good value for money. The cost varies from franchise to franchise, but is often calculated as a percentage of gross sales and paid in addition to royalty fees.

Break-even point

Franchisees are unlikely to be able to start earning money immediately; they’ll need to pay off business loans and other costs before they begin taking an income. The break-even point describes the moment at which a business begins to turn a profit.

Business plan

This is a detailed document written by the franchisee to define their business goals and how they’ll reach them. It should be regularly updated to track the business’s progress and performance compared to the plan. While some franchisors don’t ask their investors to develop a business plan, the document is essential for securing finance from a third party.

British Franchise Association (BFA)

The British Franchise Association is the regulatory body for the UK franchise industry. Its main objective is to offer impartial advice and guidance for people looking to enter the world of franchising.

The organisation has been up and running since 1977, developing and applying consistent criteria and assessment methods across the industry. Essentially, the BFA has set a benchmark for best practice in franchising.

Discovery Day

Franchisors organise Discovery Days to give prospective investors the chance to learn more about their franchise opportunity as part of the due diligence process. Usually, the franchisor welcomes entrepreneurs into the brand’s headquarters so they can get a feel for the company’s culture, values and ambitions, and decide if they’re happy to invest.

Due diligence

Due diligence is essential in all business transactions, whether or not they’re to do with franchising. As a franchise key term, it describes the thorough research completed by would-be franchisees to make sure an opportunity is right for them. They’ll review the franchise’s history, operations and financial performance, and check the validity of the franchisor’s claims.

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Exclusive territory

Many franchisors offer franchisees an exclusive territory as part of the investment package. This means they won’t sell another franchise licence within the investor’s allocated geographical area, so they can rest assured they won’t ever compete with another branch of the same company.

However, most franchisors reserve the right to withdraw the exclusivity of territory if they feel it’s necessary.

Franchise agreement

This key document is the written contract between franchisee and franchisor. It outlines in legal terms the rights, obligations and responsibilities of both parties and should not be signed before the franchisee has consulted a solicitor with specialist franchising knowledge.

The franchise agreement includes the provision of goods and services from the franchisor to the franchisee, payment terms, the length of the contract period and any renewal provisions.

Franchise Disclosure Document (FDD)

Franchisors give prospective investors an FDD in the early stages of the franchising process to help them gain a basic understanding of their business. It includes all the key information about the franchise so the candidate can make an informed decision about whether they want to continue discussions about investment.

Franchise fee

Franchisees pay their franchisor a franchise fee when they invest in a franchise. It gives them the right to start using the brand name and trademarks within their agreed territory, and take part in a training scheme.

The franchise fee can vary from between £500 and £300,000 depending on the franchise’s size, sector and success. Generally, the payment is usually between five and 10 percent of the total investment, but it can be as much as 40 or 50 percent.

Read our guide to franchise costs and fees to find out more.

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Franchise term

This is the length of time a franchisee is allowed to operate under the franchise’s branding and trademarks. Usually, the franchise term sits at around five years with the chance for renewal, but it can be much longer. Either way, it’ll be specified in the franchise agreement.

Franchisee

A person who buys the right to operate a business as part of a franchise is called a franchisee. Read our franchisee guide to find out what running a franchise unit is like.

Franchisor

This is the person or company inviting franchisees to invest in their business model and use its brand identity in exchange for a franchise fee. Read our franchisor guide to find out more.

International Franchise Association (IFA)

The International Franchise Association is the largest organisation representing franchising across the world. Its objective is to protect, improve and promote franchising through awareness campaigns.

Master franchisee

Sometimes, a franchisor wants to expand their business in a given geographical region rapidly. They’ll appoint a master franchisee to oversee the launch and operations of the multiple branches across the location. As a result, the master franchisee effectively becomes a mini-franchisor in their territory, hiring their own franchisees to set up the individual units.

Operations manual

The operations manual is the franchisee’s guide for running their business. It includes all the franchisor’s regulations and strategies and instructions on best practices within the company. This key document gives franchisees the tools to develop their unit in line with all the others already in operation and helps franchisors achieve consistency across the network.

Renewal

A franchise agreement runs for a specified length of time. At the end of the franchisee’s allocated period, they usually have the option to renew their contract for an agreed fee. Sometimes, the franchisor may wish to change some of the terms and conditions, and increase fees, for example.

Royalty fee

Most franchisees pay royalties as a monthly or quarterly fee. Usually, they’re calculated as a percentage of their sales income, but they can also be a fixed payment. The fees cover the services and support provided by the franchisor, including any ongoing training schemes, advice and events.

Start-up cost

The start-up cost isn’t a fixed fee; it’s the term used to describe the total amount of money it’ll take for a franchisee to set up their unit and run it for at least three months. This cost includes the franchise fee, along with other expenses, such as rent, equipment, stock and working capital.

Trademark

A franchisor refers to any word, name or symbol used to identify their goods and services as a trademark. The franchise agreement will explain in detail how franchisees can use these key pieces of intellectual property.

Working capital

Working capital describes the amount of money needed to cover business expenses until the franchisee reaches their break-even point.

Master the franchising basics

For more definitions of the most common franchising key terms, take a look at Point Franchise’s comprehensive franchise dictionary.

You can also learn more about franchising basics by reading our daily business guides. Or take your first step on the road to running your own business under a franchise by browsing our current investment opportunities from the menu.