If you’re interested in becoming a franchisee, comprehensive research should be step one. Before you find the right opportunity and sign a franchise agreement, make sure you’ve busted the jargon and gotten to grips with the most common franchising terms.
The franchising industry is bursting with variety and opportunity, growing every year. If you’d like to own your own business and call your own shots, franchising is a lower risk way of achieving these goals, with a proven business model to fall back on and the support of your franchisor on hand.
As you consider making an investment with a franchise, this article will arm you with a full understanding of all the terms commonly associated with franchising. The more you know, the more likely you are to succeed.
Your glossary of all the most common franchising terms
The franchise business model was created many years ago, and the industry has been expanding ever since, generating a £17.2 billion turnover and employing 710,000 people in 2018 [British Franchise Association]. Put simply, franchising is a method that business owners use to expand their operational parameters. What was once one business becomes many, all operating under the same brand name and business model, all selling the same products and/or services.
Franchisor and franchisee
A franchisor is the business owner that creates and runs the whole franchising operation. A franchisee is someone who makes an investment in the business, and then runs a franchise unit. When a franchisee invests with a company, the franchisor and franchisee both enter into something called a franchise agreement.
This agreement allows a franchisee to use the business’s name, identity, branding, trademarks, products, services and processes. The strength of a franchising operation, and the overall success of a franchise, comes down to the crucial relationship between franchisor and franchisee.
The franchise agreement
As touched on above, the franchise agreement is a document signed by both franchisor and franchisee. A franchise agreement is legally binding, and is typically drawn on by the franchisor. The document will set out the roles and responsibilities of both parties, covering topics like:
- Minimum service standards
- Financial responsibilities
- Operational guidelines for the business
- Training and support provision for the franchisee
The franchise fee
The franchise fee is the initial investment that a franchisee makes, paid to the franchisor for the privilege of being able to start a franchise under the company umbrella. This fee varies hugely, and low investment cost franchises are available, but the average cost of establishing a franchise is £42,200 [British Franchise Association].
Exclusive territory (of operation)
An exclusive territory is a geographical area in which the franchisee is allowed to operate their business. In most franchising arrangements, franchisees will be given exclusive rights to a particular territory, meaning that they’re the only franchisee who’s able to sell their products/services in that location. This tends to work best for everyone, as it prevents unnecessary competition between franchise units.
The way in which an exclusive territory’s location and size is determined is complex, and will differ between franchises, but often, mapping specialists will be employed during the process in order to ensure that each territory provides sufficient potential customers.
For example, if you’re running a children’s franchise that delivers in-school teaching sessions, the number of schools in your territory will be extremely important, and will be the first thing your franchisor accounts for when determining appropriate territories.
The franchise package
A franchise package consists of all the following and more, depending on the franchise you’re looking to invest in:
- Trading rights
- Digital systems
- An operational territory
- Marketing materials
An attractive franchise package is crucial when it comes to drawing in quality franchisees, and as a potential franchisee, you should always determine exactly what will be included in the full franchise packet before you make any legal commitments.
Royalty/management service fees
Some franchisors require franchisees to make ongoing payments in exchange for their supply of training, support, operational guidance and trading rights under the brand name. These fees are known as royalty fees, or management service fees, and they might be paid weekly, monthly or annually, depending on the business. Some franchisors will also charge a similar fee for marketing and advertising costs, usually on a monthly basis.
From the franchisee’s point of view the royalty fee can end up being often the most significant monthly outgoing from the business. For this reason it’s something that both franchisor and franchisee need to give very careful consideration to at the outset.
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A master franchisee is an individual that assumes many of the responsibilities and rights of a franchisor within a certain region or country. Master franchisees are often used when a franchisor is looking to expand overseas. For example, if a UK franchising operation wants to expand into France, the UK franchisor might choose to partner up with a French native and make them a master franchisee for that country.
>> Read more:
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- 4 Things Franchisees Never Have Time for But Are Essential for Running a Successful Business
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Area development agreement
An area development agreement is a deal between a franchisor and a multi-unit franchisee which stipulates how many franchise units a franchisee should open and manage within a determined area. It’s not unusual for the agreement to name a specific month or year by which each unit should be up and running.
A turn-key franchise is a franchise unit that’s ready to operate as soon as the new franchisee is onboarded. Essentially, the franchisee will only need to turn the key and go, skipping the sometimes complex launch process. Franchisees that invest in turn-key franchises will be provided with all they need right away, from stock, to shop fitting, to digital system implementation, to staff training. This will allow them to start selling products or providing services right out of the gate.
Understanding jargon franchising terms is just step one
Getting to grips with the jargon is only the first step in your journey into the world of franchising. Next up, it’s time to find an opportunity for investment that interests you and meets your needs. Browse a huge variety of franchising options via Point Franchise’s UK franchise directory.
Cara Squires, Point Franchise ©