FRANCHISE GLOSSARY

 

Acknowledgement Of Receipt: The last page of an Offering Circular.  It is signed by prospective franchisees and returned to the franchisor as proof that the franchisor delivered the FDD on a certain date. There are usually two receipts in a franchise offering circular. One is for the applicant and the other is to be kept as a record by the franchisor.

Advertising Fee: A periodic fee charged by some franchisors to fund advertising and other marketing programs for the franchised business.  It may be based on a percentage of the franchisees’ revenues (typically less than 3%) or a flat fee.  It may be due weekly, monthly, quarterly or annually. There are two types of advertising fee’s. One is Local Advertising which is to be spent by the franchisee in their own DMA (Designated Market Area) or with any other franchisee’s in their DMA. The other is a national advertising fee that is usually spent under the auspices of the franchisor on a national basis covering many different DMA’s.

Affiliate: An entity that is controlled by the franchisor, or that controls the franchisor, or that is under common control with the franchisor. The franchisor’s original operating company could be deemed an affiliate.

Approved Supplier: A supplier of products and services is approved by the franchisor to provide products or services to its franchisees.  A franchisor may designate itself or its affiliates as approved suppliers.  Franchisee may be required to purchase certain products or services only from approved suppliers.

Company-Owned Unit: A business location that is owned and operated by the franchisor or its affiliate, that is similar to the franchised units. This would also include any franchises purchased by the franchisor from an established franchisee.

Conversion Franchise: A franchise that is sold to an existing business to allow that business to convert to a franchised business. An example of this is Century 21 Real Estate or ERA Real Estate.

Co-branding: When one or more franchisees operate two or more franchises at the same location. An example of co-branding is a gas station that includes a fast food restaurant inside. Because of the fact that certain areas, equipment, employees, supplies and responsibilities may be shared among the multiple franchises, co-branding arrangements are more complicated than ordinary franchises. Subway does a lot of Co-branding as does Togo with Dunkin Donuts.

Default: The failure of the franchisor or franchisee to perform according to its obligations under the franchise agreement. There are two kinds of Default. They are Curable and Non-Curable default.

Designated Supplier: Same as Approved Supplier which is a supplier of  products and services to a franchisee.

Development Agreement: An agreement between a franchisor and a developer in which the developer is given the right to open more than one franchised location in a specified territory or territories. This takes on many forms including the developer becoming a sub-franchisor.

Disclosure Document: see “FDD.”

Disclosure Laws: State and federal laws that require franchisors to provide certain information to prospective franchisees before the sale of a franchise. These laws will vary from state to state with some states charging fees for registration or filing.

Disclosure Statement: see “UFOC.”

Earnings Claim: Any information that a franchisor gives to a prospective franchisee from which a specific level or range of actual or potential sales, costs, income or profit can be easily ascertained relating to franchised units or company-owned units. An earnings claim document must be made part of the UFOC and included in state registrations.

Encroachment:  When a franchisor opens a company-owned unit or allows a franchisee to open a franchised unit near another franchisee’s unit. If the franchisee with the first unit suffers economic harm as a result of the opening of the new unit, that franchisee may have a claim against the franchisor for encroachment. Encroachment can also be caused by a franchisor selling goods or services in a franchisee’s territory through non-franchised channels of distribution.

Exclusive Territory: A specified geographic area in which the franchisee is given the right to operate, and in which the franchisor is restricted from establishing any other units.

Expiration: The time when a franchise agreement ends by the natural expiration of its term.

FDD (Franchise Disclosure Document) In summary, what the FTC's new Franchise Disclosure Document or FDD format does is take the prior Uniform Franchise Offering Circular disclosures, modify them in certain respects and rename the document. It’s now called a Franchise Disclosure Document or FDD. There are still 23 individual Items (chapters) and although the revisions are not that substantive, they are numerous. The FDD requires 14 days (including holidays and weekends) as a cooling off period for the Franchise Applicant before they can enter into any binding agreement or make any payments.

Federal Trade Commission (FTC): The federal agency in Washington, DC that regulates franchises. www.ftc.gov

Filing State: A state which requires a filing of the franchise offering but does not require approval of the UFOC document.

Franchise: The legal rights a franchisee obtains whether from a franchisor or by transfer from another franchisee under a franchise agreement.

Franchise Agreement: A contract between a franchisor and a franchisee in which the franchisor grants the franchisee certain rights to use the franchisor’s marks and system in connection with a business to be independently owned and operated by the franchisee.

Franchisee: The party to a franchise agreement who pays the franchisor for the right to own and operate a business using the franchisor’s marks and system.

Franchise Fee: see “Initial Franchise Fee.”

Franchisor: The party to a franchise agreement who grants to franchisees the right to use the franchisor’s marks and system.

FTC: see “Federal Trade Commission.”

FTC Franchise Rule 436: The rule adopted by the Federal Trade Commission that regulates the franchise industry.

Initial Franchise Fee: The one-time fee that a franchisee pays to the franchisor for the right to use the franchisor’s marks and system, and for certain products and services the franchisor will provide.

Initial Investment: The minimum amount of money generally required to begin operating a franchise.  This amount typically includes the initial franchise fee, any required purchases from the franchisor, and all other common costs and expenses involved in starting up a franchised unit.

Initial Training: The initial instruction the franchisor offers to franchisees about how to set up and run the franchised unit. This training is usually included in the initial franchise fee.

Marketing Fee: see “Advertising Fee.”

Marks: The trademarks, services marks, logo, trade dress, and other commercial symbols the franchisor grants the franchisee the right to use.

Master Franchisee: The person to whom the franchisor grants exclusive rights to offer and sell franchises within a particular territory using the franchisor’s marks and system.  Sometimes called a “master franchisor.” 

NASAA: The North American Securities Administrators Association, which prepared the UFOC Guidelines to facilitate compliance with state franchise registration and disclosure laws.

Offer: A verbal or written proposal to sell a franchise to a prospective franchisee upon understood general terms and conditions. The offer of a Franchise is made with the issuing of the UFOC documents.

Offering Circular – see “FDD”

Opening: The time when a franchised unit first opens for business or upon the transfer of the franchise to a new franchisee creating a re-opening.

Operations Manual: The information a franchisor provides to its franchisees in printed or electronic form about the operation of the franchised business.

Owners: The individual owners of a franchisee that is a legal entity such as a corporation, general partnership, limited partnership, or limited liability company.

Predecessor: Any person or company from whom the franchisor obtained most of its assets.

Public Figure. Any celebrity or well-known figure who endorses a franchise or whose name or image appears in the franchise name or symbol.

Registration: The process of officially filing with state franchise regulators certain specific information and forms required by state law.  In many states with franchise registration laws, registration is not effective until the franchisor’s application is approved by the state franchise regulators.

Registration Laws: State laws that require franchisors to register the franchise with the state before making any offer or sale of a franchise in the state.

Relationship Laws: State laws that govern the relationship between franchisors and franchisees, such as laws that limit the grounds for which a franchise can be terminated.

Renewal: The extension of the term of an expiring franchise, or the granting of a new franchise upon the expiration of the old one.

Royalty Fee: An ongoing fee the franchisee pays to the franchisor for ongoing services, typically based on a percentage of the franchisee’s revenues, and paid weekly or monthly.

Service Mark: A distinctive name or symbol used to identify the franchisor’s services and to distinguish them from the services of others.

Start Up Costs: see “Initial Investment.”

Term: The time period during which the franchise agreement will be in effect.

Termination: The premature ending of the term of a franchise agreement by one of the parties to the agreement.

Trademark: A distinctive name or symbol used to identify the franchisor’s products and to distinguish them from the products of others.

Transfer: The sale or other transfer of the ownership of the franchise agreement, the franchised unit, or assets of the franchised unit from the franchisee to another person.