Franchise Jargon Buster

Are you confused with franchising terminology? Our Franchise Jargon Buster explains some of the more commonly used franchising terms.

Area Developer – A franchisee that has the rights to expand in a designated region by either hiring sub-franchisees or multiple managed outlets.

The BFA – The British Franchise Association was set up by Business Format Franchisors in an attempt to regulate the industry on an ethical basis. The BFA grant memberships to those franchisors it considers to meet the requirements of its Code of Ethics and procedures.

Block Exemption – The European Union (EU) gives special consideration to franchising as franchising bypasses the normal EU anti-restrictive trade practices legislation seeking to protect competition. For example ‘exclusive areas’ can be in breach of this legislation.

Business Format Franchise – The franchisee buys into a franchise business model, brand, experience, training and support.

Business Plan – a document to outline the expectations of a prospective franchisee. It should document and demonstrate a franchisee’s understanding of the franchise model, their confidence in replicating the model in their chosen location, how they plan to finance the initial investment and required working capital and finally, financial projections, including a forecast trading account, profit and loss account, balance sheet and cash flow projection. The figures are represented by twelve month columnar summaries usually covering a three year period. Its purpose is: to ensure a prospective franchisee has properly considered their investment; to assist in obtaining any finance from a bank and to monitor actual financial performance against the plan on an ongoing basis.

Buyback – Where the franchisor agrees to buy-back the franchise from the franchisee if the franchisee no longer wishes to continue.

Disclosure – The practice of revealing detailed information about the franchisor’s business performance and package. It’s a legal obligation in the US however it’s only voluntary in the UK.

Exclusive Area – A territory licensed out to the franchisee, which is defined by the franchise contract. Beware of contracts that do not exclude the franchisor from setting up outlets in the designated ‘exclusive area’.

Franchise Agreement – It documents the legal relationship of obligations between franchisor and franchisee.

Franchise Owner – Also referred to as a ‘franchisee’, an individual who purchases a licence to replicate a business model.

Franchising – A method of marketing goods or services via replicating a proven business model.

Franchisor – The owner of the original franchise. The franchisor ultimately decides who can buy into their business model.

Franchise Package – The sum total of the franchised model licensed to the franchisee, including branding, experience, training and support for which the franchisee pays an initial fee.

Intellectual Property Rights – The franchisors secrets of doing business, trademarks, branding, manuals, etc. These should be legally protected before the sale of the franchise package.

Job Franchise – A franchise type where the franchisee is hands-on rather than a manager, for example van based services.

Joint Venture – A co-operation between franchises where the franchisor also takes a financial stake in the project.

Know-How – Also known as ‘intellectual property’ – the sum of the franchisor’s secrets in doing business.

Management Option – A franchise where the owner manages the business and co-ordinates their employees to do the work.

Master Franchise – Known as the ‘Master Franchisee’ of a large territory licence – a country/region/city. Often used in global situations.

Master Franchisor – The entity that grants the ‘Master Franchise’ to others – usually international.

MSF – Management Service Fees is another term meaning Royalties (in the form of a fixed fee or percentage)

Operations Manual – A detailed document of the business model and work procedures.

Pilot Operation – An independent operation to test the franchise model that incorporates actual financial, organisational and logistical pressures to be faced by franchisees in different areas.

Regional Franchise – Another term for Area Developer and 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.

Resale – This refers to the sale of a franchised area by the franchisee. These are more expensive than starting from a franchise scratch however you benefit from ongoing customer base, referrals, goodwill and income from day one.

ROI – Return on Investment refers to expectations that franchisees work on to assess whether they can make a profit on their initial investment.

Sub-franchise – A subordinate to a Regional Franchisee usually appointed after the Regional Franchisee has set up a solid infrastructure.

Term – Refers to the number of years a franchisee is granted through the Franchise Agreement.

Termination – Refers to the legal previsions by which either the franchisee or franchisor can terminate the contract due to a breach of contract.

Territory – An exclusive area that is allocated to a franchisee.

Tie-ins – Covered in the Franchise Agreement stating the franchisee buys the product from the franchisor.