Common Franchise Terms

2. BUSINESS FORMAT FRANCHISE
•this type of franchise includes not only a
product, service and trademark, but also the
complete method to conduct the business
itself, such as the marketing plan and
operations manuals

3. DISCLOSURE STATEMENT
•also known as the FDD, or franchise
disclosure document, the disclosure
document provides information about the
franchisor and franchise system

4. FDD
•the franchise disclosure document, FDD, is
the format for the disclosure document
which provides information about the
franchisor and franchise system to the
franchisee

5. FRANCHISE
•a license that describes the relationship
between the franchisor and franchisee
including use of trademarks, fees, support
and control

6. FRANCHISE AGREEMENT
•the legal, written contract between the
franchisor and franchisee which tells each
party what each is supposed to do

7. FRANCHISEE
•the person or company that gets the right
from the franchisor to do business under
the franchisor’s trademark or trade name

8. FRANCHISOR
•the person or company that grants the
franchisee the right to do business under
their trademark or trade name

9. FRANCHISING
•a method of business expansion characterized
by a trademark license, payment of fees, and
significant assistance and/or control

10. FRANCHISE OPPORTUNITY
•a business opportunity that involves the
sale of good and services that enable a
novice entrepreneur to begin a franchise
business

11. MASTER FRANCHISING
• a model of multi-level franchising wherein the master franchisor
sells the development rights in a particular geographic market to a
master franchisee, who, in turn, sells individual or single-unit
franchises within the territory
• in return for a front-end master franchise fee, the master
franchisee has the sole responsibility of developing that area or
market under a mutually agreed upon schedule
• the master franchisee is rewarded by sharing in the franchise fee
and ongoing royalties paid by the franchisees within the territory to
the master or parent franchisor

12. AREA DEVELOPMENT AGREEMENT
•this is another variation of multi-level franchising where
the franchisor grants exclusive development rights for a
particular geographic area to an area development
investment group or an area developer
•in return for the rights to an exclusive territory, the area
developer pays the franchisor a front-end development fee
and commits to develop a certain number of units within a
specified period of time

13. PRODUCT DISTRIBUTION FRANCHISEE
•a franchise where the franchisee simply
sells the franchisor’s products without
using the franchisor’s method of conducting
business

14. INITIAL INVESTMENT
•the total capital required to start a franchise
business
•this typically includes franchise fee, renovation,
equipment & fixtures, rent deposits, and initial
inventory

15. FRANCHISE FEE
•the initial fee paid to the franchisor
•the franchise fee usually includes training,
site selection and evaluation assistance,
and the rights to use the franchisor’s
trademark and business system

16. ROYALTY
•the regular payment made by the franchisee
to the franchisor, usually based on a
percentage of the franchisee’s gross sales

17. ADVERTISING FEE
•fee paid to the franchisor as the franchisee’s
contribution to the marketing effort
•this is usually a percentage of the franchisee
sales and is often paid on a monthly basis

18. TRADEMARK
•the marks, brand name and logo that
identify a franchisor which is licensed to
the franchisee