People involved in franchising have developed a specific language. The language describes processes, roles, agreements, and concepts. We want to share franchise terminology to help you become familiar with the common language used by all franchising companies. It will help broaden your knowledge as you explore the possibilities of owning your franchise. After all, we are FDM, created to equip you with the knowledge of all things franchise! Before you know it, you’ll be speaking fluent franchising.
Franchise terminologies to become familiar with:
Franchising
A franchise (or franchising) is a method of business expansion. It requires an initial business (franchisor) that has established the brand’s trademark or trade name and a business system, that then begins distributing products or services to a franchisee. The franchisee typically pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system. The original business owners may sell the rights to operate to multiple individuals, who then run and manage that business as their own.
Franchisor and Franchisee
The franchisor/franchisee relationship is one of the most critical parts of the franchising model. These are two different terms, but they’re together because you can’t have one without the other. The franchisor (also known as a Zor) is the individual or organization that allows other people to start a business using its name, identity, branding, trademarks, products and processes, in return for a fee or a percentage of profits. The franchisee (also known as a Zee) is the individual or organization that purchases the rights to open and operate a business under the franchisor’s name and brand identity.
Franchise Disclosure Document
Franchise Disclosure DocumentThe Franchise Disclosure Document (FDD) is a document that provides background information about the franchise. An FDD can be overwhelming at first, at 100 pages or more. However, it is written in “plain English.” It contains 23 separate category items and while the item categories are universal, the content itself differs greatly and is based on each individual franchise brand. The FDD also contains the proposed franchise agreement, a legal document usually written in “legalese.” It lists the specific roles and responsibilities attributed to both the franchisor and the franchisee.
Franchise Fee
The franchise fee is the initial payment from the franchisee to the franchisor, allowing them to open a new franchise unit. It may be a set amount, it may vary according to the size of the territory for sale or it may depend on the amount of experience a franchisee brings to the table. Typically, the franchise fee will be more substantial for more established, better-known businesses or companies with high startup costs. The franchise fee traditionally covers the cost of the franchise package and the rights to an exclusive territory for a pre-agreed period.
Exclusive Territory
A large geographical area is drawn up and divided into territories. An exclusive territory is a geographical area where the franchisee can operate and grow their business. Usually, franchisees are allotted proprietary rights to a particular region, ensuring they’re the only franchisee who can sell their products or services there. These territory plans prevent unnecessary competition between franchise units and allow each franchisee to focus on developing their operations. Franchises often employ mapping specialists to ensure that every territory contains a sufficient amount of potential customers to safeguard sustainability.
Discovery Day
A franchise discovery day usually is a last step in the due diligence process. The franchisor extends an invitation to the candidate. It is a wonderful opportunity for both the franchisor and the candidate to meet in person and spend face-to-face time with each other. The meeting typically occurs at the franchise company’s corporate headquarters, and its purpose is for the parties to learn more about each other. If both parties agree to move forward, the franchisor will award a franchise to the candidate, and the exciting world of franchise ownership begins for the new franchisee!