Franchisee: An individual who purchases the right to operate a business under the franchisor’s name and system.
Franchisor: The parent company that allows individuals to start and run a business using its trademarks, products and processes, usually for a fee.
Franchise fee: The initial fee paid to a franchisor to become a franchisee.For some franchises, this is a flat, one-size-fits-all fee; for others, it varies based on territory size, experience or other factors. Many franchisors offer franchise fee discounts for veterans, minorities or existing franchisees.
Franchise Disclosure Document: FDD is the format for the disclosure document which provides information about the franchisor and franchise system to the franchisee. All franchisors are required to provide this legal document to prospective franchisees. FDDs are updated annually and consist of sections, called items, which explain the company history, the fees and costs, contractual obligations, unit data and more. Don’t make a move without reviewing it.
Startup cost/initial investment: The total amount required to open the franchise, as outlined in the FDD. This includes the franchise fee, along with other startup expenses such as real estate, equipment, supplies, business licenses and working capital.
Royalty fee: Most franchisors require franchisees to pay a fee on a regular basis (weekly, monthly or yearly). Usually, it’s a percentage of sales; sometimes it’s a flat fee. Some franchisors also require a separate royalty fee to cover advertising costs.
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.
Term of agreement: This spells out the length of time that your franchise agreement is valid–usually anywhere from five to 20 years. At the end of your term, if you are a franchisee in good standing, most franchisors will allow you to renew your agreement for a percentage of the then-current franchise fee.
Company-owned units: These are locations that are owned and run by the parent company (the franchisor), rather than by franchisees.
Conversion: Some franchisors offer entrepreneurs the opportunity to convert their existing independent business into a franchise.
Master franchise: A master franchisee serves as a subfranchisor for a certain territory. Master franchisees can issue FDDs, sign up new franchisees, provide logistical support and receive a cut of the territory’s royalties.
Area developer: An area developer agrees to open a certain number of franchise units in a large territory within a specified time period. They may open and operate the units themselves or recruit other franchisees to open them