Franchise Glossary

Franchise: A type of license agreement that describes the relationship between a franchisor and franchisee including use of brand name and trademarks, fees, training, assistance and guidelines.

Federal Trade Commission (FTC): The US government agency that regulates the sale of franchises in the United States.

Franchisor: A company that grants to an individual or entity the right to use its name, trademark, and operating systems for distribution of a product or service, in return for a fee and other considerations.

The Pie Hole  - Los Angeles

The Pie Hole - Los Angeles

Franchisee: An individual or entity who holds a contract to conduct one or more businesses using the name, trademark and operating system of a franchise company.

Single Unit Franchise: A franchisee owner who operates one unit of a franchise brand.

Multi-Unit Franchise: A franchisee owner or entity who operates multiple units of a franchise brand within a protected territory.

Master Franchise or Area Developer: A franchisee owner or entity who acquires the franchise rights to a large territory with the intent to both open locations and resell sub-franchise locations. Master franchisees share a portion of the franchisee fee and the royalty from their sub-franchisees with the franchisor. Learn more about master franchising here.

Conversion Franchise: The opportunity to convert an existing business to a franchise brand. Conversion opportunities may allow for lower start up costs.

Franchise Disclosure Document (or FDD): The Franchise Disclosure Document provides information about the franchisor and franchise system, and full details on start-up and ongoing fees. The FDD allows prospective franchisees to make an informed investment decision.

Acknowledgement of Receipt: The last page of an FDD (Franchise Disclosure Document), which once signed, indicates your receipt of documents on a specific date.

Franchise Fee: The initial fee paid to a franchisor, usually due at the signing of the contract, for the right to use the franchisor's name, trademark and business system.

Royalty: The ongoing regular payment made by the franchisee to the franchisor, usually based on a percentage of the franchisee’s gross sale.

Earnings Claims or Item 19 or Financial Performance Representations: The FTC’s Franchise Rule permits a franchisor to provide information about the actual or potential financial performance of its franchised and/or franchisor-owned outlets, if there is a reasonable basis for the information, and if the information is included in the disclosure document.

Advertising/Marketing Fee: An ongoing fee paid by franchisees, usually a percentage of gross revenues, enabling franchisors to create and execute national marketing and advertising programs.

Agreement: A Franchise Agreement is the legal, written document that governs the relationship between franchisor and franchisee, and specifies the terms of the franchise purchase including use of the franchise system and trademarks, territory, rights and obligations of the parties, payments and term (duration) of agreement.

Capital Requirement: The total amount of liquid assets a franchise candidate must possess for the start up and initial operation costs of a franchise business.

Initial Investment: An estimate of the initial cash investment required to buy and open a franchise business. This estimate includes the franchise fee and other initial start-up costs, but not necessarily the total cost of operating the business.

Liquid Capital: Cash assets or other assets that can be readily converted to cash.

Net Worth: Sum of all assets minus total liabilities.

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