It can be a little daunting to enter into untested waters and run your own business. After you step into the franchising space, you will come across a lot of industry-specific jargon when you attend franchise meetings, expos etc. The ad material and brochures may contain certain words that seem alien to you. Here we will take a look at some common franchise lingo you should be aware of:
Franchise Agreement – A contract that defines the rights granted and all the rules and regulations under which individuals that join the network have to operate under.
Franchisor – The person who grants the franchising rights and controls the network. In certain agreements, this individual may be called the “the Company” or “Licensor”.
Franchisee – The recipient of the franchising rights. Sometimes this person may be called “the Distributor”, “the Store Operator”, “the Member”, “the Retailer” or “Licensee”.
Guarantor – The person who commits to the franchisor/licensor that the franchisee will always honour the franchise agreement. They agree to accept all liability to the franchisor in case the franchisee doesn’t comply with the terms of the contract.
Cooling off – This is a right that is given to franchisees to withdraw from their franchise purchase within a matter of 7 days of signing their franchise agreement or even making any non-refundable payments under it. Not all of the money paid will get refunded when the franchisee exercised the cooling-off right. The franchisor can hold back some money to cover their costs.
Territory – This is a prevalent term in franchise agreements and is the area within which franchisees could be given exclusivity (there won’t be any competing franchises from that same network). Sometimes, this could mean the area that determines where the franchisee can/cannot perform work or market under their franchise agreement.
Operations Manual – Written or electronic material which clearly spells out how the franchisees are required to operate their business. This can run into multiple volumes and can include different forms that the franchisee has to complete at specific times. It contains all the details of the franchise system as well as the processes and policies they have to follow in their day-to-day business operations.
Intellectual Property – This legal term often features in franchise agreements. In a franchising system, the intellectual property, the franchisor owns or controls the IP. They give every franchisee a limited right to use their intellectual property. This includes aspects like logos, trademarks, branding, secret processes, commercial symbols, copyright in written material, designs & colour schemes, confidential information and trade secrets.
Franchise Fee – It’s the upfront component of the franchised business’ purchase price. It is generally payable for them being granted the franchise.
Service Fee / Management Fee / Royalty – It’s the recurring fee that a franchisee pays to the franchisor for the ongoing rights to operate their franchised business. It’s generally calculated as a certain percentage of overall sales. In specific systems, it’s a fixed sum that gets reviewed annually.
Transfer Fee / Assignment Fee – This is the fee that an outgoing franchisee has to pay the franchisor when they sell the business. It could be either a percentage of the total sale price or a fixed dollar amount.
Renewal Fee – This is the fee that a franchisee pays the franchisor when they wish to extend the franchise agreement term, having exercised the option to renew for another term.
This list just scratches the surface of franchise lingo that commonly shows up in print or conversations. If you want to know more, feel free to get in touch with us at The Franchise Institute. You can call us on 1300 855 435 or fill in this contact us form, and one of our experts will contact you as soon as we can.
Thanks for reading, The Franchise Institute Team 1300 855 435