The Top 20 Franchise Terms You Should Know
As you research business entities and the franchising process, you’re bound to come across a range of terms and acronyms you don’t recognize. Understanding these concepts is critical to building a strong foundation for your franchising journey. Check out this list of 20 franchising concepts you need to know before you open up your very own franchise business.
Franchisee: An individual or entity that buys the right to operate a business using the franchisor’s brand, system and support. A franchisee is also called a “franchise owner.”
Franchisor: The company or individual that grants a franchisee the right to operate a business using its brand, system and support.
Franchise fee: The franchise fee is an upfront payment made by a new franchisee to the franchisor. It gives the franchisee the right to operate under the franchise system.
Franchise system: The franchise system includes the overall structure and framework established by a franchise business. This includes standardized processes, brand guidelines, training programs and ongoing support mechanisms.
Territory: A territory is a defined geographical area where a franchisee has exclusive rights to operate and develop their business.
Franchise resale: A franchise resale occurs when an existing franchisee sells their operational business to another party.
Multi-unit franchising: In a multi-unit franchising arrangement, a franchise owner has the right to open and operate multiple locations within a specific territory.
Key Performance Indicators (KPIs): KPIs are quantifiable metrics used to evaluate the success and performance of a franchise over time.
Non-Disclosure Agreement (NDA): An NDA is a legal contract that protects confidential information from being disclosed to third parties. In the franchising context, an NDA may be used during early discussions between the franchisor and potential franchisees to protect the franchisor’s intellectual property.
Request for consideration (RFC): A request for consideration includes a formal request made by a potential franchisee to express their interest in joining a specific franchise system. At ARCpoint Labs, the RFC is part of our 8-Step Discovery Process.
Franchise Disclosure Document (FDD): The Franchise Disclosure Document is a detailed legal document franchisors provide to potential owners. It offers in-depth information about the franchise opportunity, including the franchisor’s background, financial performance, fees and other essential items.
Item 19: Found within the FDD, Item 19 data provides prospective franchisees with financial performance information from existing franchise units.
Initial investment: The initial investment, also known as the startup cost, estimates the total amount of money a prospective franchisee needs to invest to launch and operate a franchise. This usually includes the franchise fee, equipment and other foundational expenses.
EBITDA: EBITDA stands for “earnings before interest, taxes, depreciation and amortization.” It’s a financial metric used to gauge a franchise’s operational performance, excluding certain expenses. This measure provides a clearer picture of the business’s profitability, focusing solely on its ability to generate operating income.
Owner’s discretionary profit (ODP): ODP represents the profit available to the franchise owner after deducting business expenses but before factoring in interest, taxes, depreciation and amortization. This is often similar to EBITDA, but usually includes the owner’s compensation/salary.
Break-even point: The break-even point marks the point at which a franchise’s total revenue equals total expenses.
Advertising and promotion fee (A&P): Also known as a marketing fee, the A&P is a fee paid by franchise owners to contribute to advertising and promotional activities for the entire franchise system.
Royalty fee: Royalty fees are ongoing payments, usually monthly, made by franchisees to the franchisor. This fee supports the ongoing use of the franchisor’s brand, system and support services.
Discovery Day: A franchise Discovery Day is when potential franchisees visit the franchisor’s headquarters to learn more about the franchise system.
Franchise Agreement (FA): The Franchise Agreement is a comprehensive legal document outlining the terms and conditions between the franchisor and franchisee. It outlines the rights, responsibilities and obligations of both parties, covering things like territory, fees, duration and operational guidelines.
Understanding the fundamentals of franchise terminology is important to making informed decisions. But you’re not in it alone! The ARCpoint Development Team is here to answer any questions and guide you through your business exploration. Contact us by completing the form on this page today!