Top 20 Most Common Franchise Terms Explained

Before you consider making a franchise investment, you should understand all the lingo. You’ll need to know the franchise definition for lots of terms so that you can make an informed decision about the best franchise opportunity for you.

Here’s a list of the most common franchise terms that you’ll come across on your journey to becoming the boss.

Our franchise glossary

Area developer

An area developer is a franchisee that agrees to open a specified number of franchise units in a large territory within a specified period. The number of units and time frame is agreed at the time of making the franchise investment.

British Franchise Association

The British Franchise Association (bfa) was founded in 1977 with the aim to promote ethical franchising practice in the UK. The voluntary self-accrediting body offers advice and information to franchisees and franchisors alike.

The bfa also sets standards by using membership criteria for franchisors including an assessment of the business model; a review of the training and support provided; and proof that franchisees can sustain profitable businesses.

Discovery Day

An event organised by the franchisor so that prospective franchisees can find out more about the franchise opportunity. A Discovery Day typically takes place at the franchisors’ headquarters and is a chance for franchisees to meet the management team, support team, and trainers face‐to‐face.

Franchise agreement

The written contract details the responsibilities of both the franchisor and the franchisee.

Franchise Disclosure Document (FDD)

An FDD is a detailed document that provides franchisees with extensive information about the franchisor and the franchise business. This disclosure is mandated in the US under the FTC Franchise Rule. However, there is currently no legal obligation for UK franchisors to provide an FDD, or equivalent document, before the franchise agreement is signed.

Increasingly good franchisors are producing documentation similar to an FDD so that potential investors can make a fully informed decision before they commit to buying the franchise.

Franchisee

An individual who invests in a business and is granted the right to operate it under the franchisor’s name and system. Upon making a franchise investment, franchisees are usually granted the rights to:

• use the franchisor's trademarks
• sell the franchisor's products, or services
• receive training on how to operate the business
• receive ongoing support from the franchisor.

Franchise fee

A sum of money paid by the franchisee to the franchisor once the franchise agreement has been signed. The amount of the franchise fee can vary hugely from franchise to franchise but typically covers recruitment and training costs. The franchise fee is also known as the ‘initial fee’.

Franchise package

The goods and services that the franchisor provides in return for the franchisee’s investment. As well as training, it can consist of a considerable range of benefits including branded uniforms, personalised pages on the franchise website, marketing material, and advice and guidance from a support team.

Franchisor

An individual or company that owns the business system and associated trademarks and allows individuals to own and operate a business using these in return for a fee. They support their franchisees to start up their business and then continue to offer advice and guidance throughout the franchise term.

Liquid capital

The amount needed in available cash to invest in a franchise. Most banks will fund up to 70% of the total investment for established franchises and 50% for new franchises, but the franchisee will be required to pay the rest.

Marketing fee

A contribution paid by the franchisee towards a centralised marketing fund for regional or national advertising campaigns. The fee is usually calculated as a percentage of franchise sales and settled monthly.

Master franchisee

A master franchisee serves as a sub-franchisor within their appointed territory. Master franchisees can recruit other franchisees, provide support and receive an income from their franchisee’s royalty fees.

Multi-unit franchisee

Similar to an area developer in that the franchisee operates more than one outlet of the same franchise. However, rather than agreeing on the number of units up front, a multi-unit franchisee tends to demonstrate their success in one area before investing in another.

Operations manual

This document details how to run the franchise operation. It includes information on quality control requirements; hours of operation; the correct use of trademarks; approved suppliers; and much more.

Resale

A franchise that’s being sold because the existing franchisee wants to move on or retire. A franchise resale usually requires a higher initial investment but has the benefit of having an established customer base enabling a profit to be made straight away.

Royalty fee

Most franchisors require franchisees to pay a regular fee to cover the use of a trademark and services provided by the franchisor including ongoing training and support. The fee tends to be calculated as a percentage of franchise sales but can also be charged as a flat fee.

Term of agreement

The length of time that your franchise agreement is valid. The most common franchise term is five years but can go up to 20 years. At the end of your term, it’s likely that you’ll be invited to renew your contract in exchange for a percentage of the franchise fee.

Territory

A designated geographic area where the franchisee is given the right to operate free from competition from other franchisees from within the same network.

Total investment

The franchise definition of total Investment is the full cost of purchasing a franchise and getting it up and running. It includes the franchise fee, working capital, and other expenses that are necessary to run a fully operational and profitable business.

Working capital

The money needed to be able to cover business and personal expenses until the franchise returns enough to do so. The length of time this takes will vary from franchise to franchise.