Franchise Jargon Buster
Franchising terminology can be confusing to those new to the industry, so here we try to explain some of the more commonly used franchise terms.
AREA DEVELOPER
Effectively a regional-size franchisee who has the rights to expand a region by either appointing sub-franchisees or managed outlets
BFA
The British Franchise Association, which celebrated its 25th anniversary in 2002. It was set up by Business Format Franchisors in an attempt to regulate the business on an ethical basis, granting membership to those franchisors it considers meet the demands of its Code of Ethics and procedures
BLOCK EXEMPTION
The European Union concessions to franchising which bypass the normal EU anti-restrictive trade practices legislation seeking to protect competition - which, for example, 'exclusive areas' can be deemed to contravene
BUSINESS FORMAT
The purest form of franchise in which the franchisee buys into a total system of brand, know-how, training, methodology and support
BUYBACK
Where the franchisor agrees to purchase a franchise back from a franchisee if the latter no longer wishes to continue - sometimes in packages for 'peace of mind'
DISCLOSURE
The practice of revealing detailed information about the franchisor's business track record and franchise package. This is a legal obligation in, for example, the US, but only voluntary in this country
EXCLUSIVE AREA
That territory licensed out to the franchisee in which to conduct the business. It is exclusive only in the sense that the franchisor contracts not to allocate more franchises there. Beware contracts which do not exclude the franchisor from setting up company outlets in the designated 'exclusive' area
FDS
Established in 1981 by Roy Seaman. Now recognised as one of the world's largest and most comprehensive franchise companies. Offices around Europe and the Middle East, along with representatives around the world, allow us effectively to provide Franchise products and services to everybody interested in Franchising.
FRANCHISE/LICENCE
The operating package licensed to the franchisee by the franchisor - for which an Initial Franchise Fee is charged by the franchisor
FRANCHISE CONTRACT
Also known as the 'Franchise Agreement', it documents the legal relationship of obligations existing between franchisor and franchisee
Franchisee - The person who buys a licence to replicate a business system. The Franchisee pays fees to the Franchisor in exchange for the training and materials required to start up in business and receive ongoing training and support. They become their own boss and run their Franchise themselves.
FRANCHISING
Method of marketing goods and services via a proven business formula licensed for others to copy
Franchisor - The owner of the original operation. The Franchisor decides to allow other people to replicate their system in exchange for a fee.
FRANCHISE PACKAGE
The sum total of franchise system rights licensed to the franchisee, including branding, know-how, systems, territory and initial training - for which an Initial Franchise Fee is charged by the franchisor
INTELLECTUAL RIGHTS
Intellectual property rights refer to the franchisor's secrets of doing business and to his various trade marks, branding, manuals etc which should be legally protected before being sold in a franchise package
JOB FRANCHISE
A franchise type in which the franchisee is a hands-on owner-operator rather than a manager, usually linked with van-based services such as cleaning, maintenance and supplies
JOINT VENTURE
Franchise co-operation where the franchisor also takes a financial stake in the project - often seen in major international collaborations
KNOW-HOW
The sum of the franchisor's secrets of doing business, also referred to as 'intellectual property'
MANAGEMENT OPTION
A franchise in which the owner manages the operation and co-ordinates operatives to do the actual work while he focuses on business-building
MASTER FRANCHISE
The owner, known as the 'Master Franchisee', of a large territory licence - a country, region or city. Mostly used in global situations
MASTER FRANCHISOR
The entity which grants master franchises to others, usually found in an international context
MSF - Management Service Fees
another term for Royalties, usually in the form of a fixed fee or percentage
OPERATIONS MANUAL
The detailed document or 'bible' which describes every item of the business system and work procedures. It is closely linked with pilot experience and training elements and should act as the franchisee's personal one-stop 'owner's guide' to running the business, incl. troubleshooting
P&L PROJECTIONS
The calculations, based on the franchisor's, pilot's or franchisees' experiences, which try to predict how soon franchisees can expect a return on their investment
PILOT OPERATION
Although franchisors often use their own experience as the 'pilot' basis for shaping a franchise package, P&L projections and training programme, it is recommended that a true independent pilot operation is tested out - which incorporates actual financial, organisational and logistical pressures to be faced by franchisees in different areas
REGIONAL FRANCHISE
Another term for Area Developer or Area Franchisee
RENEWAL
Refers to the legal provisions in the Franchise Agreement for renewing or not renewing the franchise for a further term of years. Non-renewal could result from breach of contract
RE-SALE
Refers to a franchised area already developed or 'established' by a franchisee, offered for sale because the original franchisee wants to realise his investment, move on, or simply retire. More expensive to buy than a 'virgin' franchise area, but with the advantages of an ongoing customer base, referrals, goodwill and income from day one - so very attractive indeed
RETURN ON INVESTMENT
The calculations or expectations which franchisees work on to assess when they can 'break even' on their initial investment in the franchise and start earning profits
ROYALTIES
Ongoing fees paid to the franchisor by franchisees in respect of ongoing training and support services provided, usually a % of turnover
SUB-FRANCHISEE
A subordinate level of franchisee to a Regional Franchisee or Area Developer, usually appointed after the Regional or Area franchise has set up a training and support infrastructure for the territory
TERM
Refers to the agreed period of years (eg., 5, 10, 15) for which a franchise is granted through the Agreement.
TERMINATION
Refers to the legal provisions by which either party in the relationship may terminate the contract , eg., for breach of contract
TERRITORY/AREA
That 'exclusive' portion of land, on a national, regional/area, county, metropolitan or postcode basis, which is allocated to franchisees as part of the franchise package
TIE-INS
Where part of the Agreement is for the franchisee to buy product from the franchisor - often justified in terms of quality control or cost
TRADING ACT (UK)
Better known as the Trading Schemes Act (1996), this was introduced to combat the excesses of 'pyramid selling' which reached a peak in the 1980s. It is valuable in that it distinguishes franchising from such dubious schemes. Today, the diluted offspring of pyramid selling are often to be found in magazines covering 'network marketing' or 'direct selling', where it is still the norm to earn money chiefly from recruiting subordinate levels
