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Definitions of Franchise Terms

What are the definitions of franchise terms that you should know before investing in a franchise?  Here are the definitions of the franchise terms that we believe are essential to know before you move forward in the franchise world.

DEFINITIONS OF KEY FRANCHISE TERMS:

FRANCHISOR

The franchisor is the company that will be licensing their brand or trademark and their established system to others to operate a business under their trademark or brand utilizing the products or services that they require and in the methods or systems that they establish. Under federal law, the definition requires that there is a fee charged (for anything, including training or products), a trademark licensed and control exercised by the franchisor.

FRANCHISEE

The franchisee is the individual or company that invests or buys a franchise opportunity so that he, she or it can run a business under the franchisor’s brand and utilizing the franchisor’s system.

FRANCHISE FEE

This is the fee that the franchisor charges a franchisee to enter the system. In return for the fee paid the franchisor typically provides training and other support services to the franchisee so the franchisee can learn the system and operate the business.

FRANCHISE DISCLOSURE DOCUMENT (FDD)

The Franchise Disclosure Document, or FDD, is the federally required document that must be provided by a franchisor to a prospective franchisee at least 14 calendar days prior to the franchisee paying any monies to the franchisor or signing any binding agreement.  There are 23 required disclosure items in the FDD that the US Federal Trade Commission (the federal body that governs franchising nationally) requires. These disclosure items must be written in plain English so that anyone is able to read them and learn what they should know before buying a franchise. These 23 items of disclosure must be carefully written by experienced franchise attorneys and should be carefully evaluated before someone invests in or buys a franchise. You may want to review this article for further information: What Is The Difference Between the FDD and the Franchise Agreement.

FRANCHISE AGREEMENT

The franchise agreement is the contract between the franchisor and franchisee.  It is the legally binding agreement/contract that defines the legal relationship of the parties. It is an important document to be carefully evaluated by experienced legal counsel as it binds the franchisee for years.  The franchise agreement will define all the fees that must be paid to the franchisor, the term of the franchise, territory, rights to transfer (for example on the sale of the business), personal guarantees, and many other terms. You may want to review these other articles for more information: What You Should Consider Before Buying A Franchise.

AREA OR MULTI-UNIT DEVELOPER

An area developer is someone who has decided to buy multiple units of a franchise system and develop them over a specified period of time.  Typically the area developer or multi-unit developer (these terms are synonymous) is required to sign a separate development agreement that specifies the time for developing each of the units.

AREA REPRESENTATIVE

An area representative is someone who has bought the right to sell franchises on behalf of the franchisor in a specified territory.  This person does not enter into agreements with the franchisees to whom he or she has sold a franchise; the franchise agreement is entered into between the franchisor and franchisee. However, this individual may do training on behalf of the franchisor and other franchisee support functions. This person typically receives a portion of the franchise fee and on-going royalties for each franchise territory  sold by him or her.

MASTER FRANCHISEE OR SUB-FRANCHISOR

A master franchisee or sub-franchisor (these terms are synonymous) is someone who sells franchises on behalf of the franchisor and in a specified territory, similar to the Area Representative, but, the master franchisee or sub-franchisor enters into franchise agreements directly with the sub-franchisees to whom he or she has sold. A master franchisee or sub-franchisor acts in all ways as the franchisor to those franchisee that are in his or her territory. The master franchisee or sub-franchisor must have his or her own FDD to present to the potential sub-franchisees.