Franchising A-Z of Terms for Beginners
Don’t let industry jargon put you off changing your lifestyle through franchising. Our glossary of common franchising terms definitions is here to demystify, debunk and give you confidence as you begin your franchising journey.
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What is the difference between the franchisor and the franchisee?
The words franchisor and franchisee look and sound similar, so it’s no surprise that sometimes people mix them up.
A franchisor is a business owner who licences others to operate businesses and sell products and services using their brand identity and name. This usually includes rights to use specified expertise and intellectual property.
A franchisee is a business owner licensed to operate a business using the brand identity, business name, expertise, and agreed intellectual property, such as the franchisor’s systems.
What are the 4 types of franchising?
Franchising doesn’t always work in the same way. Different franchise types may have varying legal considerations or rights and licenses granted. Another point of difference can be the operating area where you sell products or services.
The four most common types of franchising you are likely to come across are:
Single unit franchise
As a single-unit franchisee, you operate the franchise for one unit or area. For example, a shop, store or centre. However, it doesn’t need to be a physical unit; it could also be a town or area.
Distribution Franchise
As a distribution franchisee, you are granted the right to sell the franchisor’s products/services, usually in an agreed-upon area.
Multiple franchise
As a multiple franchise or franchisee, you would be responsible for operating multiple franchise units. A unit might be a physical store, shop, centre or specified geographical area like a town.
Management franchise
As a management franchisee, you would develop and manage a franchise team that provides products and services.
Terms and Definitions
Let’s delve into popular franchise terms and definitions you might come across in the franchising industry.
Area Franchisee
An area franchisee is a business owner with a designated territory. As an area franchisee, you would be responsible for operating and developing franchises within a defined area.
Business Format Franchise
A package where the original business owner supplies the franchisee with the necessary elements to run a franchise. For example, intellectual property rights, branding, procedures and processes, training and marketing.
Business Plan
As a would-be franchisee, you’re likely to need a business plan for your franchise. Particularly if you are applying for finance and planning things like structure, direction, and growth. As a franchisor, XplorerGroup has template documents that can be tailored to your ambitions.
British Franchise Association
The British Franchise Association (BFA) is the largest trade association for franchising in the UK. The BFA was set up in 1977 and is a non-profit organisation. Our brands are registered with the BFA, including ComputerXplorers and Kall Kwik and we’ll often be found at their events.
Copyright
Copyright is an area of intellectual property. Therefore, ownership and permission to use copyright are essential to franchising.
Franchise assets such as manuals and marketing materials are subject to copyright. Typically, franchisees are granted permission to use them under the terms of the franchising agreement.
Franchise Business
An operational or established business sells the rights to someone else to trade under their name to sell their products or services.
Franchise Consultant
A franchise consultant is an intermediary who helps to match potential franchisees with franchise brands. Their role is to help determine what the franchisee is looking for and find opportunities that fit. Criteria for this might include their client’s experience, investment budget and circumstances. Franchise consultants usually charge a fee for their services. However, XplorerGroup can offer a free chat with the team to see if an XplorerGroup brand might work for you or connect you with our friends at the BFA to find the franchise fit for you.
Franchise Disclosure Document – U.S Only
A franchise disclosure document is also sometimes called an FDD, this is a common part of the franchising process in the US. An FDD can help you make an informed decision about taking on a franchise because it outlines important information such as:
- Costs
- Business Operations
- Legal Obligations.
The FDD should make clear the roles of the franchisor and franchisee. You should receive an FDD before you sign a contract/franchise agreement to ensure transparency in the process.
Franchise locations
Franchise locations can be physical, e.g., geographical locations such as counties, towns, or cities, or in the case of international franchises, they could be a whole country. Locations can also exist online.
Franchise Opportunity
A franchise opportunity is a chance to purchase a franchise. You can find franchise opportunities on our website or get in touch with the team who will be happy to discuss the right fit for you.
Franchise Owners
Franchise owners use a franchisor’s brand to sell goods, services or products as agreed. The franchise agreement will outline the terms for how the franchise owner operates their business.
Franchise System
The franchise system is another term for the business model whereby a franchisor grants a franchisee the rights/license to operate under their brand name to sell their services or goods and use their IP in exchange for payment
Franchising
The process of licensing the right to operate under a business’s brand name to sell their products, goods or services or the agreement between the franchisor and franchisee.
Franchise Terms Of Agreement
The franchise terms of agreement or franchising agreement is the legally binding document/contract that outlines the terms between the franchisor and franchisee. Within the contract, you will find the terms and conditions for using intellectual property such as brand name or copyright. The document should also include details like fees, territory and operational standards that both parties agree to abide by. In this way, the franchise agreement defines the relationship between the franchisor and the franchisee.
Franchise Unit
A franchise unit is a single unit within a wider franchise. It can be a physical shop, centre, store or other operating location.
Initial Investment
The initial investment in franchising is the upfront payment paid by the franchisee to the franchisor to start their franchise. Each brand’s investment will differ according to the franchise terms of agreement
Initial Franchise Fee
The initial franchise fee is a one-off cost paid at the start of the franchising agreement granting rights to operate under the franchised brand.
Prospective Franchisees
A prospective franchisee is someone or some people who are actively seeking franchise opportunities. As a prospective franchisee, you might approach a franchise seller, consultant, or broker while researching your potential franchise journey.
Master Franchisee
A master franchisee can recruit, train and develop other franchisees within a defined geographical territory under the rules of a franchising agreement.
Royalty Fee
A royalty fee in franchising is a recurring payment from the franchisee to the franchisor. You pay the fee, usually annually, to continue to operate under the franchised brand according to the terms of their agreement. As a franchisee, it’s essential to consider this ongoing cost when weighing up potential franchise investment opportunities.
Trademark
Trademarks can be key in franchise agreements as they help consumers identify brands, goods, and services. As a franchisee, you are granted the right to use specific trademarks to operate and market your business under the terms of your franchise agreement.
Unit Franchisee
If you are a unit franchisee, you will run a single franchise, which could be from a physical single-unit location such as a store, centre or shop. You could also be a multi-unit franchisee responsible for running more than one franchise unit.
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