The franchising industry is full of terminology that is important to understand, as it can help ensure that each step of the franchise process is made with confidence. Familiarizing yourself with these key industry-specific terms and concepts will help make them easier to comprehend when you come across them in franchise documents or even in everyday conversations, as it can help you speak the “language of franchising” more effectively.
Below are some common franchising terms that you will likely come across. While each franchise is different, there are universal terms that can be helpful for you to understand.
1. Franchisor / Franchisee
These are by far the most common, re-occurring terms you will find in franchising. A franchisor is an individual or company that grants rights to a franchisee to use the brand name and/or trademarks of the company. A franchisee is an individual or business that acquires the rights to operate their business using the name and trademark of the company and agrees to follow the business model that is established by the franchisor.
2. Franchise Disclosure Document
A Franchise Disclosure Document (FDD) is a detailed document that a franchisor provides the franchisee during the initial stages of purchasing a franchise. It is designed to provide franchisees with vital information that they need in order to make an informed decision prior to investing in a franchise opportunity. Prospective franchisees in Canada are given a minimum of 14 days to review the document prior to signing on with the franchise. And good thing too, as there can be a lot of information to digest!
A typical disclosure document will include things such as the history of the company, the products or services it offers, how the franchise is operated, and how many units or franchises it has. It will include information on key decision makers in the company, including its directors and officers. It will outline the costs and fees required to start and run the business, and will include financial statements and other fiscal information. It will also include a summary of the trademarks and intellectual property licensed by the franchise agreement and it will outline the training and assistance provided by the franchisor. In sum, it covers most of the details a potential investor would need to know before moving forward.
3. Franchise Agreement
Another document you will need to know about is the Franchise Agreement which, while similar to the FDD in its amount of detail, covers more of the legal and logistical components of the franchise system. This legally binding document is between the franchisor and the franchisee, and it outlines the rights and responsibilities of both parties, as well as factors like intellectual property, territory, the term of the agreement, etc.
4. Term of Agreement
Within the Franchise Agreement, you will find the length of time in which the franchise agreement is valid (how long the franchise relationship will run) referred to as the term of the agreement. This length of time will differ for each franchise but typically runs between five and 15+ years. Typically there are renewal options at the end of a term, and that would be outlined in your Franchise Agreement.
5. Initial Franchise Fee
The initial franchise fee is the investment that a franchisee must pay to the franchisor as soon as the Franchise Agreement is signed. The payment of this fee is what helps solidify the franchisor/franchisee relationship, and after it is paid, the franchisee can access materials such as branding, training, and more. The initial franchise fee can range depending on the franchise.
6. Renewal and Transfer Fees
Beyond the initial franchise fee, is important to keep in mind that other franchising fees come later in the process. After the time period covered by the franchise agreement has lapsed, the franchisor may charge a renewal fee to renew the agreement. If the franchisee decides to sell their business, the franchisor may charge a transfer fee for them to transfer their franchise rights to another party.
7. Royalty Fees
Royalty fees, or royalties, are payments that are made on a regular, ongoing basis from the franchisee to the franchisor. This can be weekly, monthly, or annually, depending on the franchise.
Types of royalty fees include:
- Fixed: A flat fee that remains at the same set number from the beginning to the end of the franchise agreement.
- Fixed Percentage: Rather than a set number, the franchisor will determine a set percentage based on the gross sales that the franchise location acquires. It will always remain at this percentage for the entire length of the franchise agreement.
- Variable Percentage: This percentage can either increase or decrease depending on several factors. An increasing percentage means the franchisee will pay a higher percentage the more gross sales they obtain, while a decreasing percentage means the franchisee pays a lower percentage as their gross sales increase.
Franchising with The UPS Store
If you are interested in franchising with us, please check out our detailed FAQ page that can help answer some of your initial questions. You can also use our free online form to request more franchise information.
