Franchising 101: The 10 Franchising Terms that Matter Most

L.jpg

Looking to open your own franchise. Our Franchising 101 guide walks you through the 10 most important franchising terms you need to know to get started.

1. FRANCHISOR

A franchisor is the person(s) or corporation that owns the trademarks and business model of a particular brand. The franchisor licenses the use of said trademarks, business model, and operational guidelines to the franchisee in exchange for payment.

Great franchisors have all learned from their mistakes and can share lessons with their franchisees. As opposed to opening your own independent business, through a franchise you can benefit from the knowledge and well-earned expertise of a proven system that has weathered storms and developed strategies for success.

2. FRANCHISEE

The “franchisee” is the person(s) or corporation that owns and operates a third-party outlet of a franchise as a small business owner, using the trademark, business model system, and other proprietary knowledge licensed from the franchisor. One of the great advantages of becoming a franchise owner is the knowledge that you will be going into business for yourself, but never be alone. The right franchise will provide its franchisees with the freedom but also the support needed to succeed. The franchisee will receive continuous training and support from their franchisor.

3. FRANCHISE DISCLOSURE DOCUMENT (FDD)

The FDD is a legal document that the franchisor will provide every prospective franchisee. Mandated by the Federal Trade Commission, the FDD contains details pertaining to the franchisor’s financial history, contract obligations, investment costs, ongoing fees, and more.

The FDD should provide a clear picture of how the relationship between the franchisor and its franchisees will be conducted and is a critical source of information when considering buying a franchise.

4. FRANCHISE AGREEMENT

The Franchise Agreement (FA) is a legal agreement that creates an ongoing franchise relationship between franchisor and franchisee. Within the FA, the franchisee is granted the legal right to establish a franchised outlet and operation wherein they obtain the license and ability to utilize the franchisor’s trademarks, business systems, operation manuals, and other supplies and resources required to help them run their business within the brand.

For franchisors, the FA serves as the most important legal document that governs and defines the relationship with franchisees, wherein they are granted the legal right to establish and develop their locations while remaining obligated to upholding operations in accordance with the mandates of the franchise system. This includes the initial investment and any ongoing fees.

5. FRANCHISE FEE & 6. INITIAL INVESTMENT

Franchise fee refers to the fee paid from franchisee to franchisor directly upon signing of the franchise agreement to secure the business relationship. The cost of this fee may vary widely depending on the industry and franchise system, but most franchisor’s clearly outline their franchise fees and other initial investment costs plainly on their websites.

7. ROYALTY FEE

The royalty fee is a regular payment made from franchisee to franchisor which is usually a percentage of sales that covers everything from the ongoing use of the franchise system, marketing support, training, and more.

8. TERMS OF AGREEMENT

The Terms of Agreement outlines the duration of a franchise agreement and typically range from 5 to 20 years. Once the initial term is up, it is up to both parties to choose whether or not to renew the agreement, generally based upon performance and agreed upon satisfaction within the relationship.

9. SINGLE & MULTI-UNIT FRANCHISEE

A single-unit franchisee has purchased one franchise location. Multi-unit franchisees sign on with the purchase of two or more franchise locations.

10. AREA DEVELOPER

Similar to a multi-unit franchisee, an Area Developer is a franchisee who has purchased the rights to open multiple franchise units within a certain area and time frame, thereby securing the opportunities within a select territory.

FRANCHISING 101 PUT INTO ACTION

Now that you’ve learned some of the basic franchising terms, it’s time to apply what you know to finding the best franchise opportunity for you.

As North America’s preeminent home organization franchise, Tailored Living has built a franchising empire with nearly 200 territories across the US and Canada with a commitment to franchisees and homeowners, alike.

To learn more about franchising opportunities with Tailored Living, take the next steps.