Key Franchise Terms You Need to Know

If you’re looking into becoming a franchisee, then you’re going to encounter some terms that you may be unfamiliar with. Understanding these terms will be vital to understanding the different franchise relationships you may be presented with, and will help you to make the best decision possible, should you ultimately elect to become a franchisee. Here are the terms that you’ll need to know:

Absentee Ownership: In some instances, a franchisor may allow a franchisee to open a franchise in which the franchisee will not be directly involved.

Area Developer: Some franchisors employ these individuals. They have an agreement with the franchisor to open a certain number of franchises in a given area within a certain length of time. The area developer, then, has the responsibility of recruiting franchisees for these locations.


Company-Owned Units: These are franchises that are actually owned and operated by the franchisor itself.

Franchise Agreement: This document is the contract that a franchisor and a franchisee sign in order to enter into a relationship. It will be provided along with the Franchise Disclosure Document.

Franchise Disclosure Document (FDD): This is the single most important document in any franchise relationship. The law requires that a franchisor provide this to a franchisee, and it outlines everything from the history of the franchise to what a franchisee’s obligations will be.

Franchise Fee: In order to enter into a franchise relationship with a franchisor, this one-time fee will have to be paid up front. It is separate from the royalty fee, which will be paid weekly, monthly or yearly.

Franchisee: This is you, namely the person that enters into a franchise relationship with a parent company (franchisor).

Franchisor: This is a company that recruits franchisees, providing them with their business model, advertising, marketing, and other things of that nature.


In-House Financing: In some instances, a franchisor may offer assistance with financing to a would-be franchisee, which can help them with everything from startup costs to the franchise fee.

Master Franchise: In some areas, you may find that a particular franchisee is responsible for recruiting other franchisees for that area. This person is the master franchise.

Royalty Fee: This is the fee that a franchisee will pay to the franchisor for the privilege of owning a franchise. Different franchises will have different fees, some of them flat, and others as a percentage of sales. These can be paid weekly, monthly or yearly.

Term Of Agreement: This is the length of time that the Franchise Agreement is valid for. At the conclusion of this term, a new agreement will have to be signed.

Third-Party Financing: This is financing that a franchisee secures in order to start up their franchise. In many instances, a franchisor may be able to connect a franchisee with preferred third-party lenders.

Research Is Your Ally

With an understanding of the terms surrounding franchise arrangements, you should be able to thoroughly examine any proposition that is made to you. Be sure to thoroughly review the FDD and to conduct your own research into the franchisor’s history. Also, you should speak with other franchisees in order to understand their feelings about their businesses.

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