Franchise Glossary

Advertising levy

The advertising levy covers the franchise system’s advertising and promotional activities.

Agreement

The franchise agreement is the legal written document that governs the relationship between the franchisor and franchisee. It specifies the terms of the franchise contract such as rights and responsibilities of the parties, fees and payments, territory and duration of agreement.

The advertising levy covers the franchise system’s advertising and promotional activities. It is usually calculated as a percentage of the franchisee’s total revenue. Compared to a 5% average levy in the USA, where advertising is highly credited in the market, Ireland has remained constant at an average levy of 2.2%. It can range from a low of 0.5% to a high of 5%. In the UK, according to a recent franchise study by NatWest/BFA, the average advertising levy is 3%.The advertising levy covers the franchise system’s advertising and promotional activities. It is usually calculated as a percentage of the franchisee’s total revenue. Compared to a 5% average levy in the USA, where advertising is highly credited in the market, Ireland has remained constant at an average levy of 2.2%. It can range from a low of 0.5% to a high of 5%. In the UK, according to a recent franchise study by NatWest/BFA, the average advertising levy is 3%.

Approved Site

The approved site is the location that the franchisor chooses, for the franchisee’s set-up, which meets the criteria of the franchise unit.

Area Franchisee

An area franchisee purchases the right to open and operate a specified number of franchise locations, in a defined geographical area, during a defined period.

Business Format Franchise

A business format franchise is where the franchisor grants a business format, operating system, and trade mark to a franchisee.

A business format franchise is where the franchisor grants a business format, operating system, and trade mark to a franchisee. This type of franchising is found in automobile services, catering and hotel services, business services, home services, and educational services.

Business Plan

A business plan is a document prepared by a franchisee, which summarises its operational and financial goals and objectives for the franchise, and contains detailed plans and budgets showing how these objectives are to be achieved.

This document is central to any application for finance, and should be considered carefully before submitting to a financial institution. Bank managers look first and foremost at the characteristics of the potential business owner, assessing ability, experience and cash-generating criteria of the business itself.

In this respect, a well thought out and structured business plan is central for the approval of a financial loan.

Capital

Capital is the wealth required by a franchisee. Human capital consists of the franchisees experience, leadership, and knowledge he will bring to the franchise.

Capital is the wealth required by a franchisee. Human capital consists of the franchisees experience, leadership, and knowledge he will bring to the franchise. The financial capital needed for the initial investment, includes the licensing fee and the initial working capital of the franchise.

Working capital is the money needed for the running and operation of the franchise until it becomes profitable. This includes legal costs, salaries, insurance, advertising costs, leasing costs, and living expenses. The franchisee also needs to consider raising capital to secure financing for future investment.

Collateral

Collateral is a form of security that the borrower may offer the lender to guarantee a loan or other credit. Collateral can be resources, belongings, or something of wealth and value to the borrower.

Collateral is a form of security that the borrower may offer the lender to guarantee a loan or other credit. Collateral can be resources, belongings, or something of wealth and value to the borrower. If the borrower fails to pay back the credit, the asset acting as collateral may become subject to seizure. The lender can then sell this to comply with the original contract. This ensures payment or performance of the obligations stated in the lending agreement.

Many borrowers take out a loan of the same value as the asset being purchased. This option is generally used when purchasing equipment. When taking out a mortgage, the borrower can offer the house as collateral. Borrowers who offer a personal residence or real estate as collateral are usually requesting a long-term loan of significant size.

A business may use its inventory as security, including all the assets that could be liquidated to repay the loan, such as merchandise, equipment, stocks and bonds owned by the borrowing business.

A borrower can also secure a loan by using another person as an endorser of the contract. This person signs a note promising to back up the obligations of the borrower. If the borrower defaults, the endorser is liable for the contract, and must pay the funds to the bank.

Copyright

Copyright is the exclusive right of a person to use, and to license others to use, works of art, music, or literature, and to protect these works from the unauthorised use. This statutory right prevents others from copying or exploiting a person;s work without permission.

Copyright is the exclusive right of a person to use, and to license others to use, works of art, music, or literature, and to protect these works from any unauthorised use. This statutory right prevents others from copying or exploiting a person’s work without permission.

A copyright, or aspects of it, may be transferred from one party to another. The original copyright holder can sign an agreement with another party, granting rights to the work, in exchange for royalties and other considerations. In this way the original copyright holder may benefit from the exchange. The author may also grant a non-exclusive license to the work, on specified terms in relation to a particular region or for a definite period of time.

Copyrights expire after a set period of time, usually lasting for the duration of the holder’s life plus 70 years thereafter, or 120 years from the date of creation.

Copyright in Franchising relates to operations manuals, franchise manuals, promotional and advertising material pertaining to the particular franchise brand name and logo.

The symbol for copyright is ©.

Disclosure Document

Under the European Code of Ethics, Section 3.3, the following guidelines must be applied by franchisors offering a franchise opportunity for sale to potential franchisees.

According to Section 3.3 “In order to allow prospective individual franchisees to enter into a binding document with full knowledge, they shall be given a copy of the present Code of Ethics as well as full and accurate written disclosure of all information material to the franchise relationship, within a reasonable time prior to the execution of these binding documents.” This ensures a potential franchisee is made aware of the financial implications and legal requirements of any franchise agreement, before signing on the dotted line.

Earnings Claims

Earnings claims are the actual or forecasted franchise sales, profits, or earnings stated by the franchisors. If a franchisor is a member of the BFA (British Franchise Association) they are required by law to state their financial earnings within the European Code of Ethics. If a franchisor is not a member of the BFA, then you should insist upon a written substantiation for any earnings projections or suggestions about the franchisor’s potential income or sales. Although franchisors are not required to make earnings claims, but if they do, they have a better chance of making their franchise network a success, and increasing effective communication and internal links with its existing and potential franchisees. Another effective means of finding out the financial credibility of a franchisor in question is to approach past franchisees of the franchise network and to ask them questions about their experiences as a franchisee etc.

Equity

Equity is the total value or worth of an asset. It is an individual’s or company’s shares and ownership rights of an asset, and does not represent an obligation to pay in the future.

Equity is the total value or worth of an asset. It is an individual’s or company’s shares and ownership rights of an asset, and does not represent an obligation to pay in the future. The ownership of a company also includes the retained earnings or losses of the company. In this way, equity is the ownership of an asset after all debts associated with that asset have been paid, and the asset liquidated.

On a balance sheet, equity is calculated as the total assets minus the total liabilities. In real estate, the owner’s equity is the value of the house minus the remaining mortgage or loan amount due. In a company, the ownership interest takes the form of stocks or shares in the company.

Feasibility Study

A company that is thinking about becoming a franchisor carries out a feasibility study.

A "feasibility study" is essentially the study of market factors and business issues that can or may influence your business or franchise opportunity in the future.

A potential franchisor expanding their business must conduct a feasibility study in order to:
(a) assess current and emerging competitors,
(b) analyse current business conditions,
(c) the acknowledgement of legal or licensure prerequisites for conducting business,
(d) an analysis of current consumer demands,
(e) and any other crucial developments in the franchise industry that may help or hinder the success of an individuals franchise opportunity.

The purpose of the feasibility study is to uncover any hidden material not yet discovered by the potential franchisor, and enables a franchisor to critically assess the future success of their business expansion.

Franchise

A franchise is an agreement in which a firm (franchisor) enters into a contract with other businesses (franchisees), granting them the authorisation to operate in the distribution of goods and services, under the franchisor's trade name and guidance, in exchange for a fee.

A franchise is an agreement in which a firm (franchisor) enters into a contract with other businesses (franchisees), granting them the authorization to operate in the distribution of goods and services, under the franchisor's trade name and guidance, in exchange for a fee. The franchisor has a method of doing business, including knowledge, experience, logos, secret formulae, trade secrets, business styles, and house marks, which will be licensed to the franchisee.

The franchisee can purchase the right to either a single-unit franchise or a multi-unit franchise.

A single-unit franchise is an agreement where the franchisor grants the franchisee the rights to operate one franchise unit. This is the simplest and most common type of franchise.

A multi-unit franchise is an agreement where the franchisor grants the franchisee the right to operate multiple units. This can be either an area development franchise or a master franchise. If granted the rights to an area development franchise, the franchisee can operate multiple units during a specific period of time, within a specific territory.

A master franchise agreement is similar to the area development franchise, with the additional right to sell franchises to other franchisees within the territory, known as sub-franchises. In this way the master franchisee takes over the role of the franchisor, and providing support and training to the new franchisees, and receiving fees and royalties for their duties.

Franchise Attorney

A lawyer who specialises in franchising law is known as a franchising attorney.

A lawyer who specialises in franchising law is known as a franchising attorney.

An attorney with expertise in franchising, can alert a potential franchisee to unfair or problematic provisions outlined within the franchise agreement. It is advisable to have a franchise attorney look over all franchise documents, before deciding to sign a franchise agreement

Franchise Consultant

A franchise consultant is a business guide with expertise in the franchising industry. They give advice on topics such as franchising operations, companies, and relationships.

A reputable franchise consultant will have year's experience in advising potential franchisor's and franchisee's on the best options available when expanding a business as a franchise opportunity, or in deciding on buying into a franchise industry.

Therefore, franchise consultants can help individuals select and evaluate a franchise opportunity and also help individuals negotiate the franchise agreement. While a franchise consultant's skills are deemed invaluable, it is also wise to consult a franchise attorney when it comes to reviewing the franchise agreement.

Franchise System

A franchise system refers to the different franchises operating in the UK.

A franchise system refers to the different types of franchises operating within the UK, Ireland and the rest of Europe. For example, Subway would be considered a franchise system. The term also involves the administrative centre of the franchise and franchised units, much like a company’s head office administration center.

A franchisee must research the franchise industry in order to assess what franchise system best suits their individual requirements.

Franchise Unit

A franchise unit refers to each individual outlet, whether company owned or franchised.

A franchise unit is where a franchisor grants rights to a franchisee to operate a single franchise unit.

This system enables a franchisor to maintain a franchise agreement for each individual franchise unit they sell to new franchisees.

Franchisor

A franchisor is an individual, partnership, or corporation who grants an investor (the franchisee), the right to conduct business under their trade name, using their operational methods and organisational systems. The franchisor has developed their own business methods, and aims to expand the business by offering franchisees the right to use these business methods. The franchisor provides rights and support to the franchisee, by advising, training, and assisting in advertising, marketing, and financing roles.

The Franchisor's Company

Is the franchisor soundly financed? Ask to see audited financial records for three years.
What is the franchisor's credit rating?
Who are the franchisor's accountants, bankers and lawyers?
Is the franchisor a subsidiary of another company and if so whom? Is the parent company soundly financed? Ask to see their accounts as well.
Does the franchisor have associate companies? If yes, who are they and what is the relationship between them and the franchisor?
Does either the parent company or any associate operate franchises? If so, would they be in competition with you?
The company's history and experience

How long has the franchisor been in this type of business?
What business experience and qualifications have the franchise's directors and managers?
Have any of the directors or managers ever gone bankrupt?
Have they or the company been involved in any litigation or court judgments?
The franchise system

Is the franchise operation a success?
Does the franchisor still run any units him/herself? If so, how many?
Are they buy-backs or failed franchises or is the franchisor keeping prime site for him/her?
How many franchise outlets does the franchisor currently have? How many are in your country or state? What has the trend been in recent years?
Past and future of the franchise system

When did the franchisor start franchising?
How long has his/her pilot operation been running?
Has he/she had any franchise failures or franchisee departures? If so, how many, and why did they fail?
How many franchise owner-operated outlets does he/she intend having in the future? Where will they be and over what timeframe will they be developed?
What innovations has the franchisor introduced since starting franchising? What plans does he/she have for the future?
Other questions

How particular is the franchisor when selecting his/her franchisees? What selection criteria does he/she use?
Can you interview some of the existing franchisees?
Too many people rush into franchise agreements without carrying out a thorough investigation into the financial status of the franchisor. Many franchisees trading successfully in their local area find themselves in difficulty if/when the franchisor goes into liquidation. Be wary of franchisors who are not forthcoming with up-to-date financial information.

Franchisee

A franchisee is an individual, partnership, or corporation who purchases the right from the franchisor to conduct business under their trade name.

A franchisee is an individual, partnership, or corporation who purchases the right from the franchisor, to conduct business under their trade name. The franchisee pays upfront and ongoing fees to the franchisor, in return for the license to market their product or service using their operating methods. The franchisee has the obligation to keep any commercial secrets confidential. With the support, guidance, and experience of the franchisor, the franchisee helps to expand the business.

Initial Investment

The total investment is the capital required to start the franchised business.

The total investment is the capital required to start the franchised business. It includes the initial fee, and other costs such as property, inventory, equipment, personnel, and the working capital required for the operation of the franchise until it becomes profitable.

Initial Franchise Fee

The initial fee is a once off lump sum, paid by the franchisee to the franchisor, upon signing the franchise agreement.

The initial fee is a once off lump sum, paid by the franchisee to the franchisor, upon signing the franchise agreement. This payment acts as compensation for the experience, training, recruiting, and the right to use the brand name of the franchise.

International Franchise Association (IFA)

The International Franchise Association (IFA) is a non-profit trade association of franchisors, franchisees, and suppliers. Founded in 1960, the IFA’s office is based in Washington, D.C.

As a membership organization, it promotes good franchising practice by ensuring all members follow a rigid code of ethics. The IFA helps to support and develop the franchising industry by organizing events and meetings, publishing articles and books, and by its online database. It offers a range of educational programs for those interested in the franchise field. The association’s website is an important franchise resource centre, and supplies a full directory of franchises. It provides information on buying and selling franchises for both franchisors and potential franchisees alike.

The IFA organizes the Franchise Appreciation Day, an annual march that brings all aspects of the franchise industry together.

In 2001, The IFA conducted a research project on Franchising in the US economy, with the consulting firm Price Waterhouse Coopers. This included the latest statistics on franchising in the US and the impact it has on society.

Licensing

Licensing is the legal act of one party granting rights to another party to a legally protected property in exchange for a fee or royalty.

Licensing is the legal act of the franchisor granting rights to a franchisee, to a legally protected property in exchange for a fee or royalty. The franchisor reaches a lease agreement with a franchisee permitting them to produce and market its product, service or trade name. The franchisee uses this right as a marketing tool to associate the franchisors idea, design, or character to his products.

Licensing benefits both the franchisor and the franchisee. It enables the franchisor to profit from the capabilities of the franchisee, such as special technical or sales skills, resources, or the expanding markets and distribution channels. The success and name recognition of the product helps the franchisee to reduce development costs and get a faster start in an industry.

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