Franchising Terms Explained

AREA DEVELOPER - Effectively a regional-size franchisee who has the rights to expand a region by either appointing sub-franchisees or managed outlets.

BFA - The British Franchise Association. It was set up by Business Format Franchisors in an attempt to regulate the business on an ethical basis, granting membership to those franchisors it considers meet the demands of its Code of Ethics and procedures.

BLOCK EXEMPTION - The European Union concessions to franchising which bypass the normal EU anti-restrictive trade practices legislation seeking to protect competition - which, for example, 'exclusive areas' can be deemed to contravene.

BUSINESS FORMAT - The purest form of a franchise in which the franchisee buys into a total system of brand, know-how, training, methodology and support.

BUYBACK - Where the franchisor agrees to purchase a franchise back from a franchisee if the latter no longer wishes to continue - sometimes in packages for 'peace of mind'.

DISCLOSURE - The practice of revealing detailed information about the franchisor's business track record and franchise package. This is a legal obligation in, for example, the US, but only voluntary in this country.

EXCLUSIVE AREA - That territory licensed out to the franchisee in which to conduct the business. It is exclusive only in the sense that the franchisor contracts not to allocate more franchises there. Beware of contracts which do not exclude the franchisor from setting up company outlets in the designated 'exclusive' area.

FRANCHISE/LICENCE - The total operating package incl. brand, systems, manuals, training etc licensed to the franchisee by the franchisor - for which an Initial Franchise Fee is charged by the franchisor.

FRANCHISE CONTRACT - Also known as the 'Franchise Agreement', it documents the legal relationship of obligations existing between franchisor and franchisee.

FRANCHISEE - The person who buys a licence to replicate a business system.

FRANCHISING - Method of marketing goods and services via a business formula licensed for others to copy.

FRANCHISOR - The person or company that sells a licence to replicate their system.

FRANCHISE PACKAGE - The sum total of franchise system rights licensed to the franchisee, including branding, know-how, systems, territory and initial training - for which an Initial Franchise Fee is charged by the franchisor.

INTELLECTUAL RIGHTS - The franchisor's secrets of doing business and to his various trade marks, branding, manuals etc, which should be legally protected before being sold in a franchise package.

JOB (SERVICE) FRANCHISE - A franchise type in which the franchisee is a hands-on owner-operator rather than a manager, usually linked with van-based services such as cleaning, maintenance and supplies.

JOINT VENTURE - Franchise co-operation where the franchisor also takes a financial stake in the project - often seen in major international collaborations.

KNOW-HOW - The sum of the franchisor's secrets of doing business, also referred to as 'intellectual property'.

MANAGEMENT OPTION - A franchise in which the owner manages the operation and co-ordinates operatives to do the actual work while the franchise owner focuses on business-building.

MASTER FRANCHISE - The systems and brand, owned by a 'Master Franchisee', of a large territory licence - a country, region or city. Mostly used in global situations.

MASTER FRANCHISOR - The entity which grants master franchises to others, usually used in global contexts.

MSF/MANAGEMENT SERVICE FEES - Another term for Royalties, usually in the form of fixed rather than percentage fees.

OPERATIONS MANUAL - The detailed document or 'bible' which describes every item of the business system and work procedures. It is closely linked with pilot experience and training elements and should act as the franchisee's personal one-stop 'owner's guide' to running the business, including troubleshooting.

P&L PROJECTIONS - The calculations, based on the franchisor's, pilot's or franchisees' experiences, which try to predict how soon franchisees can expect a return on their investment.

PILOT OPERATION -Although franchisors often use their own experience as the 'pilot' basis for shaping a franchise package, P&L projections and training programme, it is recommended that a true independent pilot operation is tested out - which incorporates actual financial, organisational and logistical pressures to be faced by franchisees in different areas.

REGIONAL FRANCHISE -Another term for Area Developer or Area Franchisee.

RENEWAL - Refers to the legal provisions in the Franchise Agreement for renewing or not renewing the franchise for a further term of years. Non-renewal could result from breach of contract.

RE-SALE - Refers to a franchised area already developed or 'established' by a franchisee, offered for sale because the original franchisee wants to realise his investment, move on, or simply retire. More expensive to buy than a 'virgin' franchise area, but with the advantages of an ongoing customer base, referrals, goodwill and income from day one.

RETURN ON INVESTMENT - The calculations or expectations which franchisees work on to assess when they can 'break even' on their initial investment in the franchise and start earning profits.

ROYALTIES - Ongoing fees paid to the franchisor by franchisees in respect of ongoing training and support services provided, usually a percentage of turnover.

SUB-FRANCHISEE - A subordinate level of franchisee to a Regional Franchisee or Area Developer, usually appointed after the Regional or Area franchise has set up a training and support infrastructure for the territory.

TERM - Refers to the agreed period of years (eg., 5, 10, 15) for which a franchise is granted through the Agreement.

TERMINATION - Refers to the legal provisions by which either party in the relationship may terminate the contract, eg., for breach of contract.

TERRITORY/AREA - That 'exclusive' portion of land, on a national, regional/area, county, metropolitan or postcode basis, which is allocated to franchisees as part of the franchise package.

TIE-INS - Where part of the Agreement is for the franchisee to buy product from the franchisor - often justified in terms of quality control or cost.

TRADING ACT - Better known as the Trading Schemes Act (1996), this was introduced to combat the excesses of 'pyramid selling' which reached a peak in the 1980s. It is valuable in that it distinguishes franchising from such dubious schemes. Today, the diluted offspring of pyramid selling are often to be found in magazines covering 'network marketing' or 'direct selling', where it is still the norm to earn money chiefly from recruiting subordinate levels.