When exploring franchise opportunities, you’ll hear some words that may not be familiar to you. Don’t worry. You’ll catch on fast and here’s a list of terms to give you a head start:
Franchisor. The individual or entity that owns the rights to the franchise brand/logo and intellectual property. The franchisor grants licenses to franchisees to operate a franchise unit(s). The franchisor is responsible for developing the franchise operating system and teaching franchisees how to succeed as business operators.
Franchisee. That could be you! It’s the individual or entity that is granted a franchise license to operate franchise unit(s).
Franchise Disclosure Document. In the USA, franchisors are required by federal law to disclose key points of information to prospective franchisees. If you want to buy a franchise, you can’t do it until you have received the Franchise Disclosure Document (FDD), and hopefully read it. The FDD includes 20 some points of information that franchisors must explain upfront. Want to know if the franchisor has been sued? Read the FDD. Want to know what the franchisor requires of franchisees? Read the FDD.
Franchise Agreement. When you agree to buy a franchise, you will be asked to sign the franchise agreement. This is a legally binding document, so read it carefully and don’t sign it until you fully understand the contents of this document. A franchise agreement licenses you to operate a franchise unit/s for a specific period of time, in a specific location, and in a specific manner. The Franchise Agreement is a companion document to the FDD, so you can review it carefully. (see above).
Franchise Fee. To gain access to the franchisor’s knowledge, including the franchise operating system, training, support, etc., franchisees pay a franchise fee. The fee ranges from a low of a few thousand dollars to as much as $50,000 or more. It’s paid in advance, or at the time of signing the franchise agreement.
Royalty. This is the ongoing fee franchisees pay to franchisors. It’s usually paid monthly and almost always it’s expressed as a percentage of gross sales. Typically the royalty is in the 5% to 15% range. Royalties provide funds for the franchisor to develop systems, provide training and support, hire quality people, produce franchisee meetings, etc. Of course, royalties also include the franchisor’s profit! Don’t forget, you WANT to franchisor to profit – they are your lifeline to ongoing support and operational updates.
Earnings Claim. It was formally called a Financial Performance Representation (FPR) and now we call it the Item 19. Every prospective franchisee wants to know, “How much money will I make if I buy this franchise?”, but franchisors are prohibited by law from answering that question unless they file an Item 19 in their disclosure documents. Some don’t. Why not? Well, that’s a question to ask the franchisors. If a franchisor tells you how much money you can make if you buy their franchise, ask to see their FDD. Meanwhile, if you want to know how much money you can realistically make, start by asking existing franchisees! The more you know!