9 terms you need to know in franchising

Whether you’re just starting to explore franchising or have been at it for a while, you’ve probably come across some franchising jargon that’s difficult to make sense of. Never fear, here’s a handy list of franchising terms that you’re sure to encounter.

Franchisee

An individual or company that becomes the owner of one or more franchise units. The franchisee purchases the right to operate in a specified territory, using franchise trademarks, associated brands, and other proprietary knowledge to market and sell the franchisor’s products and/or services.

Franchisor

A franchisor is an individual or company that grants a license to another individual or company (the “franchisee”) to conduct business under their brand name. The role of the franchisor is to support its franchisees in operating successfully while maintaining consistency and brand integrity.

FDD

Franchisors are legally required to give a Franchise Disclosure Document (FDD) to prospective franchisees prior to the sale of a franchise. The FDD contains 23 important disclosures about the franchisor, fees involved, the franchisor/franchisee relationship, and the franchise being sold. The FDD is designed to help you make an informed decision about your purchase.

Item 19 / FPR (Financial Performance Representation)

Item 19 is an optional section of the FDD in which a franchisor discloses the earnings of existing franchise units and corporate locations. Note that this data is not mandatory and may represent only a specified group of franchisees and/or corporate-owned franchises. Always read the fine print to understand where the numbers come from, especially when comparing Item 19 claims from several brands.

Validation

Part of the “due diligence” process when buying a franchise, validation is when a prospective franchisee speaks with existing franchise owners in order to validate the virtues of the franchise opportunity. This includes determining overall franchisee satisfaction and financial performance of the franchise. Typically, the prospective franchisee will contact several franchisees from the list included in the company’s FDD. When speaking with existing franchisees, you’re getting their perspective on owning the business, but keep in mind that your ultimate goal is to determine if the opportunity is the right fit for you, not for them.

Discovery Day (aka Meet the Team Day)

Franchisors hold these events for promising franchisee candidates who have already shown they meet the company’s basic requirements. It offers an opportunity for you and the franchisor to learn more about each other and evaluate fit. This is often one of the final steps before you make your final decision on whether to invest in the franchise.

Franchise Fee

A franchisee makes this one-time payment to the franchisor for the right (or “license”) to use the company's brand, products, and intellectual property. Important: Don’t confuse the franchise fee with the total upfront cost (or “initial investment”) required to purchase the franchise.

Initial Investment

This is the total estimated cost to get the business up and running. Usually shown as a range, it can be found in Item 7 of a franchisor’s FDD. The initial investment includes the franchise, costs of equipment, initial inventory, rent, signage, security deposit, initial training, and working capital required during the initial start-up period (about three months).

Royalty Fee

A royalty fee is typically a percentage of gross sales paid by the franchisee to the franchisor on a regular basis, designed to cover ongoing use of the brand and intellectual property, as well as support from the franchisor. This means that as gross sales go up, the amount you pay will increase.

These terms can be daunting, especially if they’re new to you. But I’ll be here as your guide through each step of the process. I’ll make sure you’re asking all the right questions and getting the information you need in order to make an educated decision. Just as you’d consult a realtor to help you find the right house and a financial planner to advise you on investments, you’ll want the benefit of my expertise in franchising to make sure you’re making smart and informed decisions. Schedule a quick call with me and let’s get started.