Franchise Terms & Definitions
New to franchising or need a refresher on key terms? Our glossary covers the most commonly used language in the franchise industry to help you navigate the process with confidence.
Looking for a franchise that aligns with your goals and investment level? Franchise Reports provides expert guidance and tools to help you discover top-performing brands. It’s free to get started.
A
Absentee Ownership
Absentee ownership in franchising allows you to invest in a business without handling daily operations.
Advertising Fund
An advertising fund in franchising is a shared resource used to market the brand across all locations.
Area Developer
An area developer signs on to open and operate multiple franchise locations within a defined territory.
Area Representative
Area representatives help expand a franchise by recruiting and supporting franchisees in a specific region.
Assignment Clause
The assignment clause in a franchise agreement outlines how and when ownership can be transferred.
B
Brand Standards
Brand standards ensure consistency across all franchise locations, from signage to customer service.
Business Format Franchise
A business format franchise provides a complete system for operating the business, not just a product or service.
C
Capital Requirements
Capital requirements represent the financial resources needed to open and operate a franchise.
Conversion Franchise
A conversion franchise involves turning an existing independent business into a franchise unit.
Corporate Location
A corporate location is a franchise unit owned and operated directly by the franchisor.
D
Development Agreement
A development agreement grants rights to open multiple franchise units within a set time and area.
Dispute Resolution
Dispute resolution outlines how conflicts between franchisors and franchisees are settled.
Due Diligence
Due diligence is the research and investigation done before investing in a franchise.
Default Clause
The default clause outlines the conditions under which a franchisee is considered in breach of agreement.
Disclosure Document
The disclosure document provides key legal and financial information about a franchise system.
E
Earnings Claim
An earnings claim refers to any statement about the potential financial performance of a franchise.
Encroachment
Encroachment occurs when a franchisor allows another location too close to an existing franchisee’s territory.
Exclusive Territory
An exclusive territory gives a franchisee the sole right to operate in a defined area.
Exit Strategy
An exit strategy outlines how a franchisee plans to leave or sell their business.
Estimated Initial Investment
The estimated initial investment covers all expected startup costs for a franchise.
F
Franchise Agreement
The franchise agreement is the legal contract that outlines the relationship between the franchisor and franchisee.
Franchise Consultant
A franchise consultant helps individuals find and evaluate franchise opportunities based on their goals.
Franchisee
A franchisee is an individual or entity licensed to operate a business using the franchisor’s brand and system.
Franchisor
The franchisor is the company that owns the brand and grants the right to franchisees to operate using its system.
Franchise Validation
Franchise validation is the process of speaking with current franchisees to learn about their experience.
Franchise Territory
Franchise territory refers to the geographic area where a franchisee has the right to operate.
Franchise Training
Franchise training equips new franchisees with the knowledge and tools to operate their business.
Franchise Support
Franchise support includes the tools, guidance, and resources franchisors provide to help franchisees succeed.
Franchise Resale
A franchise resale is the sale of an existing franchise unit by the current owner to a new buyer.
Field Support
Field support refers to in-person guidance and assistance provided by franchisor representatives.
Franchise Fee
An upfront, one-time payment made by a franchisee to join and operate under a franchise brand.
Franchise Disclosure Document (FDD)
A legal document franchisors must provide to prospective franchisees, outlining key details of the franchise offering.
G
Grand Opening
A grand opening is a planned event to launch a new franchise location and attract initial customers.
Gross Sales
Gross sales refer to the total revenue generated before any deductions or expenses.
Guaranty Agreement
A guaranty agreement is a legal commitment by an individual to be personally liable for a franchise’s obligations.
Growth Market
A growth market is a territory with high demand and potential for franchise expansion.
Guerilla Marketing
Guerilla marketing refers to creative, low-cost strategies to promote a franchise locally.
H
Home-Based Franchise
A home-based franchise allows you to operate your business from home without a physical storefront.
Hybrid Franchise Model
A hybrid franchise model blends physical and digital elements to serve customers through multiple channels.
Hiring Support
Hiring support is the assistance franchisors offer to help franchisees recruit and onboard staff.
Hands-On Ownership
Hands-on ownership means the franchisee is actively involved in the daily operations of the business.
Health and Wellness Franchise
Health and wellness franchises offer services or products that promote physical and mental well-being.
I
Initial Investment
The initial investment includes all startup costs required to open a franchise.
Item 7
Item 7 of the FDD provides a breakdown of the estimated initial investment to open a franchise.
Item 19
Item 19 of the FDD may include financial performance representations from the franchisor.
Item 23
Item 23 of the FDD includes the receipt page, which must be signed before purchasing a franchise.
Independent Contractor
An independent contractor is someone hired for services but not considered an employee of the franchisee.
J
Joint Employer
Joint employer refers to when two or more entities share responsibility over employment conditions.
Judgment
A judgment is a legal decision that may impact a franchisor’s litigation history.
Just-in-Time Inventory
Just-in-time inventory is a strategy that minimizes stock by receiving goods only when needed.
K
Key Performance Indicators (KPIs)
KPIs are measurable metrics used to evaluate the success of a franchise business.
Key Territory
A key territory is a high-value, strategically important market for franchise development.
L
Lead Generation
Lead generation refers to the process of attracting and capturing potential franchise buyers.
Liquid Capital
Liquid capital refers to the amount of cash a franchisee must have available to invest immediately.
Location Approval
Location approval is the process by which a franchisor evaluates and approves a franchise site.
Local Marketing
Local marketing involves strategies executed at the community level to promote a franchise location.
Licensing vs. Franchising
Licensing and franchising are two different business models with key legal and operational differences.
M
Master Franchise
A master franchisee holds the rights to sub-franchise and expand the brand in a specific territory.
Marketing Fund
A marketing fund is a pool of money collected from franchisees to support national or regional advertising efforts.
Minimum Liquid Capital
Minimum liquid capital is the amount of cash a franchisee needs to have available to start a franchise.
Multi-Unit Franchise
A multi-unit franchise allows franchisees to own and operate multiple franchise locations simultaneously.
Mobile Franchise
A mobile franchise is a franchise that operates from a vehicle or trailer rather than a fixed location.
N
Non-Compete Clause
A non-compete clause prevents a franchisee from opening a competing business within a specified area.
Negotiation Rights
Negotiation rights allow the franchisee to renegotiate certain terms of their franchise agreement.
National Marketing Fund
A national marketing fund is a shared pool used for advertising and marketing across all franchise locations.
Non-Disclosure Agreement (NDA)
A non-disclosure agreement (NDA) ensures that confidential business information is protected between parties.
O
Operations Manual
The operations manual is a comprehensive guide outlining the procedures and systems for running a franchise.
Owner-Operator
An owner-operator is a franchisee who directly manages their franchise, as opposed to being absentee.
Ongoing Royalties
Ongoing royalties are payments made by the franchisee to the franchisor based on a percentage of sales.
Onboarding
Onboarding is the process of training and integrating a new franchisee into the system.
Owner’s Equity
Owner’s equity represents the ownership stake that franchisees have in their business after liabilities are subtracted.
P
Master Franchise
A master franchisee holds the rights to sub-franchise and expand the brand in a specific territory.
Marketing Fund
A marketing fund is a pool of money collected from franchisees to support national or regional advertising efforts.
Minimum Liquid Capital
Minimum liquid capital is the amount of cash a franchisee needs to have available to start a franchise.
Multi-Unit Franchise
A multi-unit franchise allows franchisees to own and operate multiple franchise locations simultaneously.
Mobile Franchise
A mobile franchise is a franchise that operates from a vehicle or trailer rather than a fixed location.
Q
Qualifying Franchisee
A qualifying franchisee is an individual who meets the criteria to become a franchisee based on financial and operational qualifications.
Quality Control
Quality control ensures that franchise units maintain consistent standards in products and services.
R
Royalty Fees
Royalty fees are ongoing payments made by the franchisee to the franchisor based on sales.
Renewal Clause
The renewal clause outlines the terms for renewing a franchise agreement after its initial term.
Reputation Management
Reputation management involves monitoring and improving how a franchise brand is perceived by customers.
Resale Franchise
A resale franchise involves purchasing an existing franchise unit from a current franchisee.
Royalty Audit
A royalty audit is an examination of a franchisee’s financial records to ensure proper royalty payments.
S
Site Selection
Site selection is the process of choosing a location for a franchise unit based on specific criteria.
Semi-Absentee Ownership
Semi-absentee ownership allows a franchisee to own a business while only being involved in major decisions.
Sub-Franchise
A sub-franchise is a franchisee who is granted the rights to sell franchises within a specific region.
Standard Operating Procedures (SOPs)
Standard Operating Procedures are detailed instructions for performing tasks and maintaining quality across all franchises.
Social Media Marketing
Social media marketing involves using platforms like Facebook and Instagram to promote a franchise and engage with customers.
Semi-Absentee Ownership
A business ownership model where the franchisee does not manage day-to-day operations but still oversees performance and strategy.
T
Territory Rights
Territory rights define the geographic area where a franchisee can operate.
Training and Support
Training and support are the resources franchisors provide to help franchisees succeed.
Trademark
A trademark is a legally protected symbol, word, or phrase that distinguishes a brand from others.
Turnkey Franchise
A turnkey franchise provides franchisees with a fully operational business that is ready to run.
Territorial Exclusivity
Territorial exclusivity grants a franchisee the exclusive right to operate within a defined area.
U
Unit Franchise
A unit franchise allows a franchisee to operate a single location of the franchise business.
Unilateral Contract
A unilateral contract involves one party offering something in exchange for the other party’s performance.
Uniform Franchise Offering Circular (UFOC)
The UFOC is a document that provides essential details about the franchise opportunity to potential franchisees.
Understanding Franchise Law
Franchise law governs the legal aspects of franchising, including contracts, disputes, and regulatory compliance.
U.S. Franchise Registry
The U.S. Franchise Registry is an online platform that helps franchise systems comply with state registration requirements.
V
Validation
Validation is the process where a prospective franchisee speaks with existing franchisees to assess a franchise opportunity.
Vendor Agreements
Vendor agreements are contracts between the franchisor and third-party suppliers to provide goods and services.
Virtual Franchise
A virtual franchise operates primarily through online platforms, offering services without a physical location.
Value Proposition
A value proposition is the unique benefit that a franchise offers to customers and franchisees.
Vested Interest
A vested interest is a stake or ownership in a business that provides the holder with financial benefits.
W
Working Capital
Working capital is the amount of funds available to cover day-to-day operational expenses.
Wellness Franchise
A wellness franchise offers services or products that promote health and well-being.
Workforce Management
Workforce management refers to the strategies and tools used to recruit, manage, and retain employees.
Wholesaler
A wholesaler supplies goods in bulk to franchisees or retailers at discounted prices.
Whole Territory Rights
Whole territory rights give the franchisee exclusive access to an entire geographic region.
X
Y
Year-over-Year (YoY)
Year-over-year (YoY) compares a franchise’s performance from one year to the same period in the previous year.
Yield
Yield refers to the return on investment (ROI) a franchisee receives from their franchise over a specific period.
Z
Find the Right Franchise For You
- Connect with a Franchise Advisor
- Get a Personalized Plan
- Learn Where to Start
