Franchising A to Z: An alphabetical glossary of some common franchise terminology
Below is a list of definitions that you should familiarize yourself with as you begin your franchise journey. As with any investment, it’s always best to solicit the help of professionals, whether they be franchise law experts or franchise consultants, before making the leap into business ownership.
Area Developer: Also referred to as an area franchisee or master franchisee, an area developer is granted the franchise rights to open and operate multiple locations in a defined geographic area. There is usually a set schedule for when and where the locations will be developed.
Business Plan: A business plan is a document created by a prospective franchisee that sets out his or her business goals and the strategy for attaining them. The document may also include background information on the franchisee, the concept, and the market in which they plan to operate. Business plans are also used when approaching financial institutions for loans and other funding for business.
Cash Flow Projections: A part of business planning, cash flow projections capture the movement of money coming into the business, as well as any expenses. Creating month-by-month cash flow projections can help prospective franchisees to better understand how and how well their potential business will be funded, and if they will have sufficient capital. An accountant can assist in creating cash flow projections.
Disclosure Document: A disclosure document is a collection of information on a franchise system, such as information on the franchise and its officers, initial investment and other fees, training and support, and the rights and obligations of both the franchisee and franchisor. It’s provided to prospective franchisees as part of the due diligence process. In some provinces, franchise systems are required by law to provide disclosure documents to franchisees.
Entrepreneur: A person who organizes, operates, and assumes the associated risks and benefits of a business venture. Franchisees are sometimes also referred to as entrepreneurs and small business owners, as they’re operating their own business and are responsible for its success.
Franchise Agreement: The franchise agreement is the main contract in the business relationship between the franchisee and franchisor. It will set forth the rights and obligations of each side, as well as information on territory, training, renewal, and suppliers.
Franchise fee: Also called the initial fee, this is a set, one-time fee that helps cover your training and other preparation costs needed to get you fully prepared to own and operate your business. The franchisor doesn’t make a lot of money off this; instead, it’s used to help support you in finding contractors, financing, a proper location, etc. After all, it takes a village (and a ton of work) to go from signing the agreement to being fully open and operational!
Group Purchasing Power: One of the biggest advantages to joining a franchise system is its strength in numbers. Most franchises have an established supply chain through which franchisees order their stock, supplies, and equipment. As part of a purchasing group, franchisees may receive perks like preferential pricing or special delivery.
Home-Based Business: A growing sector in franchising, home-based businesses are those that can be run from a franchisee’s home or home office. In many cases, the start-up costs for this type of business are minimal, as there is no build-out or leasing of a bricks-and-mortar location, little or no inventory to be purchased, etc.
Initial Investment: Initial investment indicates the amount of money required to open and start to operate a franchise location. This investment total may include initial fees like the franchise fees or could pertain solely to the start-up costs.
Join: Many in the franchise industry use the phrase ‘joining a franchise system’ to indicate someone investing in a franchise. Other phrases that may be used to indicate this include ‘awarding a franchise’ and ‘investing in a franchise.’
Kit: A franchise information kit is a packet of information sent to interested prospective franchisees. Usually requested through an interaction with the brand (i.e.: online, at a tradeshow, etc.), these marketing packages provide further details on the franchise, concept, investments costs, etc. to help prospective franchisees learn more about the franchise opportunity.
Liquid Captial: Liquid capital is the amount of ‘cash on hand’ a potential investor has that is not a loan or tied up in another asset. For example, if your brother gives you $500 for your birthday, that would count toward liquid capital. If he loaned you the $500 and expected it to be paid back, it would not. Similarly, other assets such as houses and cars are not considered liquid capital (though they would be part of your net worth).
Marketing fee: Some franchisors charge a marketing fee, which is also known as an ad fund fee or brand fee, among other terms. It’s a collection of funds that the franchisor gathers from all franchisees and uses to instigate large, often national marketing campaigns. This is of great benefit to every franchisee, as it helps with brand recognition from coast to coast. After all, a single location may not be able to afford a celebrity endorsement, but with a large pool of funds, signing an athlete or movie star is a possibility that the franchisor can explore.
Multi-Unit Franchisee: A franchisee that operates more than one franchise unit or location.
MUMBO: A “multi-unit, multi-brand operator” is abbreviated to the word “MUMBO,” which denotes a multi-unit franchisee who owns units of multiple different brands, in different franchise systems.
Net Worth: Net worth indicates a person’s total assets (things that are owned), minus any liabilities (anything that is owed). A net worth statement indicates the person’s net economic position.
Operations Manual: A manual (or set of manuals) that outlines the operations for a franchise location, as well as systemwide policies. Franchisees must follow the policies and procedures outlined in the operations manual to the letter in order to ensure consistency between locations in their franchise system. The operations manuals will include sections on topics such as quality control, management practices, use of trademarks, fees and royalties, and approved suppliers.
Product Standardization: As consistency is paramount for franchises, most systems employ product standardization and quality control to ensure that the products and/or services offered in each location are uniform.
Quality Control: Along with product standardization, a franchisor will employ quality control to ensure that the products and/or goods at each location in their system meet a uniform standard of quality. Franchisors will usually supervise and regulate their locations through quality control to ensure consistency.
Royalty Fee: An ongoing fee paid by the franchisee to the franchisor as part of the agreement for the franchisee to make use of the franchisor’s brand, trademarks, etc. Royalty fees are usually remitted on a weekly or monthly basis and may be calculated as a flat rate, a percentage of sales, or a combination of the two.
Site Selection: Site selection is the process by which a location is chosen for a franchise unit. Key considerations in site selection include market characteristics, traffic, local demographics, and zoning.
Turnkey: The phrase ‘turnkey franchise’ is used to describe a franchise opportunity that is streamlined and set up for the franchisee in advance so that, in order to start operations of their franchise, all they need to do is ‘turn the key’ and get started.
Unit: A franchise location may also be referred to a franchise unit.
Validation Process: Also known as due diligence, the validation process refers to the research and investigation a prospective franchisee should conduct regarding a franchise opportunity before investing. It’s important to keep in mind that, in general, the franchise system will be conducting its own validation process to ensure new franchisees brought on board are a good fit for the system
Work: Investing in a franchise is not like a GIC. Successful franchise locations require work, and many require the franchisee to take a hands-on role in the operations of their location. While one of the many benefits of joining a franchise is the support of a franchise system, franchisees must be prepared to work hard and take initiative.
eXclusive Territory: An exclusive territory is a defined area in which a franchisee operates and in which the franchisor agrees to not open a competing location or allow another franchisee to do so. Rights regarding exclusive territory will generally be outlined in the franchise agreement, though not all franchises offer exclusive territories.
YTD: YTD stands for year-to-date and indicates the time period between the start of a fiscal and/or calendar year and the present date. YTD is often used in financial reports detailing the ongoing performance of a business, such as a franchise location. It’s important for franchisees to maintain detailed, up-to-date financial reporting so they can stay on top of the day-to-day operation of their location. Many franchise systems provide their franchisees with proprietary or specialized reporting and/or accounting tools to assist with this.
Zees/Zors: The terms ‘zees’ and ‘zors’ are used to refer to franchisees and franchisors, respectively, in a shortened manner