Jargon buster: 10 common franchising terms explained

21/05/2018 08:00 | Start a business

Franchising jargon buster

Over the years, those involved in franchising have developed their own specific terminology to describe different types of processes, roles, agreements, and concepts. Though this occurs in all specialist areas to some degree, franchising jargon can be particularly impenetrable. Here, we take 10 of the most common terms you'll hear when talking about franchising and provide an easy to understand the definition. By the time you're finished reading, you'll have no problem speaking fluent franchising.

1. Franchising

A method for business expansion. It takes a single, proven business model and attempts to replicate the model by applying it in various locations around a defined geographical area. The original owners of the business sell the rights to operate under the company name and image to multiple individuals, who then run and manage that business as if it were their own.

2. Franchisor and Franchisee

These are two different terms, but theyre included together because you cant have one without the other. The franchisor is the individual or organisation that allows other people to start a business using its name, identity, branding, trademarks, products, and processes, in return for a fee or a percentage of profits. On the other hand, the franchisee is the individual or organisation that purchases the rights to open and operate a business under the franchisors name and brand identity. The franchisor/franchisee relationship is one of the most critical parts of the franchising model.

3. Franchise agreement

The franchise agreement, sometimes known as the franchise contract, is the legal document that defines the relationship between the franchisor and franchisee. Typically drawn up by the franchisor, it sets out in writing the roles and responsibilities attributed to each of the parties. This means it covers issues like minimum standards of service, financial payments, and how the business should be run. It is the most critical document in the entire franchising process.

4. Franchise fee

The franchise fee is the initial payment made by the franchisee to the franchisor, to allow them to open a new franchise unit. This can be a set amount, vary according to the size of the territory for sale, or depend on the amount of experience a franchisee brings to the table. Typically, the franchise fee will be more substantial for more established, better-known businesses or companies with high startup costs. The franchise fee traditionally covers the cost of the franchise package and the rights to an exclusive territory two terms youll find defined below for a pre-agreed period.

5. Exclusive territory

An exclusive territory is a geographical area in which the franchisee is allowed to operate and grow their business. Usually, franchisees are given exclusive rights to a particular territory, ensuring they're the only franchisee that can sell their products or services there. This prevents unnecessary competition between franchise units and allows each franchisee to focus on developing their operations in the territory. The way in which a larger geographical area is drawn up and divided into territories can be incredibly complex, and franchises often employ the services of mapping specialists to ensure that every territory contains sufficient potential customers to be sustainable.

6. Franchise package

Everything that is provided by the franchisor to the franchisee, upon the franchise fee being paid. This includes the rights to trade under the franchises name, equipment, products, training, digital systems, an exclusive territory, and marketing materials, amongst other things.

7. Royalty fee or Management Service Fee (MSF)

While the franchise fee is an upfront, one-time investment that allows you to operate a franchise unit for a specified period, most franchises also charge franchisees a Management Service Fee (MSF). This is also known as a royalty fee. The MSF can be payable on a weekly, monthly, or annual basis, and can be calculated as a percentage of turnover or set at a fixed rate. Some franchises also charge an additional marketing fee to cover advertising costs.

8. Master franchise

A master franchise is an individual or organisation who assumes the role of the franchisor for a given region, area, or country. A master franchise is responsible for expanding the business, bringing on board new franchisees, and providing support. In return, they take a cut of the MSF. Master franchising is a particularly popular means of facilitating international expansion because it allows a franchise to delegate the responsibility of growing the business in a new country to someone who understands the local culture, language, and markets.

9. Area development agreement

An area development agreement is a deal between a franchisor and franchisee that stipulates the franchisee is responsible for opening a certain number of new franchise units in a given territory. It usually dictates that all of the scheduled units must be setup within a predetermined period. Typically, area development franchisees have the option of opening the new units themselves or signing up new franchisees to do it. In most cases, an area development agreement covers a smaller area than a master franchising arrangement.

10. Turnkey franchise

A turnkey franchise is a business thats designed to be ready to operate as soon as a new owner takes over. This means that the franchisor provides everything the franchisee needs to begin selling the moment they step into the position. It can include shop fittings, stock, digital systems, and staff training, amongst other things. A turnkey franchise can be extremely beneficial if the franchise model is proven to work, though it does offer franchisees less creative freedom in the setup process.

Having read through our ten most common examples of franchising jargon, you should now be a little better equipped to deal with the world of franchising in all its complex forms. Though this brief guide only touches on some of the most fundamental terminologies in use, theres plenty more to discover. If youd like to receive more information about franchising or have a franchise that youre particularly interested in learning more about, get in touch today or explore our website, blog posts, and franchise listings.

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