Franchising, Business Ownership, Franchise Information Glossary of Terms

Acknowledgement of Receipt

Included in the Franchise Disclosure Document (FDD), it is the last page that you sign and return. It provides proof of the date that you received the FDD.

Advertising Fee

An annual fee paid by the franchisee to the franchisor for corporate advertising expenditures; usually less then three percent of the franchisee"s annual sales and usually paid in addition to the royalty fee. Not all franchisors charge advertising fees.

Agent

An individual who can act on the behalf of another. An individual who acts on the behalf of a corporation and can legally bind the corporation.

Agreement

Also called the Franchise Agreement. It is the contract that you sign with a franchisor.

Anchor Tenant

Typically a type of tenant in a shopping center. In shopping malls this is Usually a national chain store or regional department store strategically placed in a shopping center so as to generate the most amount of customers for all of the stores located in the shopping center. In other centers the anchor tenant may be a supermarket or drug store, home improvement store, convenience store, national coffee brand such as Starbucks.

Approved Products

Proprietary products that a franchisee must purchase from the franchisor. Also, products that must be purchased from approved suppliers. The goal is to achieve uniform quality assurance among all franchisees.

Arbitration

A process in which a neutral third party hears both sides to a dispute and renders a decision. It is an alternative to using the legal process, which can be costly, and time consuming.

Area Development Franchise
(a.k.a. Development Agreement, Master Franchise)

A type of multi-unit franchise, whereby franchise has no resale rights, but are rather are themselves directly responsible for meeting a mandatory development schedule for their given region.

Area Development Rights

The rights granted to a franchisee to develop a certain number of franchises within a specified geographic area, usually within a certain time frame.

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Broker

An intermediary who manages a sale and purchase. Brokers can represent either sellers or buyers. Different brokers can represent both a seller and a buyer.

Business Format Franchising

The franchisor licenses the franchisee to use the franchisor"s product, service and trademark. The franchisor also teaches the franchisee the entire business format including marketing, selling, inventory, accounting and personnel procedures. Furthermore, the franchisor provides support via training and communications for the duration of their business relationship. Restaurants, retail and many service businesses are business format franchisors.

Business Plan

A plan that provides the objectives of a business and the steps necessary to achieve those objectives.

Buy-Sell Agreement

A legal document that details the provisions under which a business may be sold.

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Capital

Capital is cash in checking and savings accounts, insurance policy cash values, non-IRA stocks and bonds, and loan receivables due within 30 days.

CMSA - Consolidated Metropolitan Statistical Area

MSA (see glossary) that also has a population of 1 Million or more, of parts are recognized PMSA's (see glossary).

Company-owned Outlet

Some franchisors establish company-owned stores or offices that, in appearance, are identical to the franchised outlets.

Conversion Franchise

This is a franchise that permits existing businesses to join a national franchise system to use its recognized name and trademark and operating system.

Copyright

The exclusive right of a person to use, and to license others to use, an intellectual property such as a book, pamphlet, or other published material.

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Default

A failure to perform as required by a contract.

Designated Supplier

A supplier designated by the franchisor as the source for purchasing approved products. The use of a designated supplier for certain products guarantees the franchisor that each franchisee is providing the same product to its customers.

Disclosure

Revealing facts to others. In the sense used herein, these facts may be complimentary to the franchisor or may be uncomplimentary, such as disclosing a prior bankruptcy or litigation involving the franchisor or key persons as defendants.

Disclosure Document

All franchisor companies are required by the Federal Trade Commission (FTC) to provide this document to prospective franchisees at the first personal meeting to discuss the sale of the franchise and at least ten business days prior to the prospective franchisee signing a franchise agreement or paying the franchisor money to buy the franchise. The document aids the prospective franchisee"s evaluation of the franchisor company.

Distributorship

A right granted by a manufacturer or wholesaler to sell a product to others. A distributorship is normally not a franchise. However, certain distributorship arrangements may qualify as a franchise, may be licensed or be adjudged a business opportunity requiring disclosure.

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Earnings Claims

Claims made by the franchisor as to the past performance of franchisees or to the potential financial performance of a franchisee. If given, they must be disclosed in section 19 of the FDD.

Exclusive Continent

An exclusive continent right gives you as the franchisee the right to that continent. The franchisor cannot sell other franchises within that continent.

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Federal Trade Commission

The U.S. government agency that regulates franchising. Located in Washington, D.C.

Franchise

An agreement, whether written or oral, for consideration, by which a person permits the distribution of goods or services under his trademark, service mark or tradename, during which time the grantor retains control over others or renders significant assistance to others. (This definition is substantially that of the Federal Trade Commission. See the Final Interpretive Guides, Federal Register, Vol. 44, No 166, Friday, August 24, 1979, p. 49.966 et.seg.) Counsel should also research definitions in controlled jurisdictions, applicable case law and formal and informal opinions rendered by State and Federal regulatory authorities.

Franchise Agreement

Sets forth the expectations and requirements of the franchisor. Describes the franchisor?s commitment to the franchisee. Includes information about territorial rights of the franchisee, location requirements, training schedule, fees, general obligations of the franchisee, general obligations of the franchisor, etc.

Franchise Disclosure Document (FDD)

This is the disclosure document that the franchisor must give you prior to selling you a franchise. A form of disclosure document containing required information to be supplied by the franchisor to the franchisee. Initially promulgated by the Midwestern Securities Commissioners to provide a uniform method of disclosure for the benefit of franchisor and franchisee, its use is permitted in non-regulated states by FTC Rule 436.

Franchise Feasibility Studies

Franchising can be a highly effective method of financing expansion through the acquisition of outside capital. The objective of a franchise feasibility study is to determine the degree to which a company, whether a well-established concern, a small operation of one or two units, or simply a concept that bears the characteristics of a successful franchisor, may be successful as a franchisor.

Franchise Fee

A one-time fee paid by the franchisee to the franchisor to "buy into" the franchise. Generally, the fee reimburses the franchisor for the costs of initial training and support for new franchisees.

Franchisee

A person or entity to whom the right to conduct a business is granted by the franchisor or licensor.

Franchising

Neither an industry nor a business, but a method of doing business within a given industry. At least two parties are involved in franchising\: the franchisor and the franchisee. Technically, the contract binding the two parties is the franchise.

Franchisor

A person or entity issuing or granting a franchise or license.

Furniture, Fixtures and Equipment

Also abbreviated as FF&E. Movable personal property used in the operation of a business.

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Gross Sales

The revenue before any expenses are deducted. It is the sum of all money generated prior to deducting wages, product cost, taxes, interest, etc.

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Housemark

A trademark used to identify the commercial operations of a company. The housemark may also be the company name (as in Dupont). This trademark may be used to identify one or more products and may be used in combination with other trademarks or trade names.

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Identify Items

Items that display the registered trademarks of the franchisor. These items (such as paper products, uniforms, point of sale materials or exterior signs) are usually required to be used in a franchisee"s business.

Initial Investment

Usually includes the franchise fee and the total investment amount including working capital required to commence operating a franchise.

International Franchise Association (IFA)

Trade association for franchisors. Based in Washington, D.C., the IFA requires its members to follow a rigid code of ethics.

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Licensing (see Franchising)

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Marketing Plan

A technique by which franchises are to be sold. Includes the number of sales anticipated within a series of time periods (first year, second year, etc.), to whom those sales are to be made (profile of the individual, area franchising, sub-franchising), and the anticipated geographical expansion of the franchise system.

Master Franchisee

Describes an individual or company owning the exclusive rights to develop a particular continent for the franchising company.

Master Region

The region that a master franchisee acquires.

MBE

An acronym standing for Minority Owned Business. A minority owned business must be certified as such and can receive certain advantages in government contracts from that certification.

MSA - Metropolitan Statistical Area

One or more counties that contain a city of 50,000 plus inhabitants, or contain a Census Bureau-defined urbanized area (UA)and has a total population of at least 100,000 (75,000 in New England). MSA components include counties containing principal concentration of population - the largest city and surrounding densely populated areas. Additional counties qualify to be included by meeting a specified level of commuting to the counties containing the population concentration and by meeting certain other requirements of metropolitan character, such as specified minimum population density or percentge of population that is urban.

Multi Level Marketing (MLM)

A form of distributorship in which you receive commission on your own sales and on the sales of others whom you sign up as distributors. Some MLMs are considered pyramid schemes and illegal in some states. Some are legitimate business opportunities. Any business of this nature should be investigated closely.

Multi-Unit Franchise

Franchise agreement providing franchisee with the rights to develop more than a single unit. Refer to Area Development Franchisee and Subfranchisor.

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National Alliance of Franchisees (NAF)

A national coalition organized in 1977 to represent and protect the interests and rights of franchisees. National headquarters are in Washington, D.C.

Neighborhood Shopping Center

A shopping center designed to accommodate the anticipated commerce from those living nearby. Such centers usually are comprised of a supermarket, drug/variety store, and in-line shops for such services and commodities as personal grooming, banking, medical offices, travel agencies, food service, and specialty shops.

Non-compete Clause

A clause in a contract that prohibits you from entering into the same line of business for a specified time and within a specified area after you leave employment or after you terminate, sell, or otherwise leave a franchise.

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Offer

An oral or written proposal to sell a franchise to a prospective franchisee upon understood general terms and conditions. Note\: Under state and federal regulations, the term "offer" is broader than the common law contract law definition.

Operating Manual

Comprehensive guidelines advising a franchisee on how to operate the franchised business. It covers all aspects of the business, including general business procedures not necessarily peculiar to the franchised business. It may be separated into different manuals addressing such subjects as accounting, personnel, advertising, promotion and maintenance.

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Person (by definition in franchise context)

An individual, partnership or corporation.

Personal Guaranty

Usually the owner(s) of a corporation cannot be held personally responsible for a corporation"s debt. If a loan requires a personal guaranty it means that the lender is asking the owner to personally guarantee the debt should the corporation default.

PMSA - Primary Metropolitan Statistical Area

A largely urbanized county or cluster of counties with a population of 1 Million or more that meets the requirements of being a MSA (see glossary). Area demonstrates strong economic and social links plus in addition to close ties with central core of larger area.

Pro Forma

A balance sheet, profit and loss or cash flow statement that estimates income and expense sources. Assets, liabilities and net worth are forecast on the balance sheet. Pro forma statements issued by the franchisor to the franchisee should be based on actual operating results of the franchisor"s units or franchise establishments.

Product Format Franchise

The ability to sell a particular companies product that does not constitute all that you sell. For example you may have a service station that sells a brand of gasoline, but you are not restricted on the other products or services that you can sell. Many times these are not true franchises, but can be considered distributorships.

Protected Continent

A designated area or geographic boundary granted to the franchisee by the terms of a franchise agreement. The franchisor covenants not to open another franchised or company owned business of a like or exact nature within the franchisees protected (assigned) continent.

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Qualification Questionnaire

A document prepared by the franchisor to be completed by the prospective franchise, which provides initial information to the franchisor in order to assist him in determining whether or not the prospect is capable and motivated. Often a financial statement is included in the questionnaire format.

Quality Control

The method by which the franchisor enforces the rules of operation set forth in the operating manuals. Quality control involves regional coordinators visiting each franchisee.

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Real Property

Land and anything permanently affixed to the land. If an item can be removed from real property without significant effort or damage, it is considered personal property.

Regional Development Agreement
(a.k.a. Regional Franchisee, Regional Coordinator

A franchise granted to develop or sell a person?s franchise rights to a third party in a defined geographical area. A portion of the franchise fee is normally paid in advance for a certain minimum number of franchise outlets which may be activated by the Regional Franchisee or sold at a disclosed fee to an individual franchise buyer. This agreement normally awards a share of the initial full franchise fee and a percentage of the royalty payment.

Registration

A requirement in several states that specific information be submitted and approved by state regulatory authorities before franchises may be offered in that state. As compared to "disclosure" (see above), material contained in the registration is more extensive. For example\: a bond, fingerprints and pictures of principal officers may be required in a certain jurisdiction. Note\: the Federal Trade Commission has no provision for registration, thus the franchisor need only prepare an accurate and complete disclosure document conforming to the regulations.

Renewal

You are granted a particular time frame in which to conduct business as a franchisee in your initial Franchise Agreement. The franchise agreement should also state the terms and conditions to renew that business relationship. Renewal is the resigning of a Franchise Agreement after the initial or subsequent terms of the franchise expires.

Royalty

A royalty refers to a percentage of gross sales that you pay to the franchisor monthly.

Rules of Operation (see Operations Manual)

Specific mandatory rules with which every franchisee and company outlet must comply. This document will change from time to time. By incorporation by reference in the franchise agreement, violation of the rules of operations allows the franchisor to cancel a franchise agreement.

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SBC

SBC is an acronym for Small Business Centers. They are General Services Administration (GSA) offices that assist small businesses in acquiring federal contracts for goods and services.

Service Mark

The specific statutory definition (15 U.S.C. Sec. 1127) states "a mark used in the sale of advertising of services of one person and distinguishes them from the services of others." The word "trademark" is specifically associated with goods or products such as toothpaste or automobiles, whereas service marks relate to employment agencies, real estate chains and the like. Both are of equal stature and afforded the same protection under the law. (See Trademark)

Sherman Antitrust Act

15 U.S.C., Sec. 107, as amended (1976), provides in general, that it is illegal to conspire by contract or otherwise, to restrain trade. Franchisee associations must be carefully monitored and franchise agreements drafted (except under certain case law exceptions), to avoid exclusive allocation of continents or fixing prices. As it affects franchising, the Sherman Act is applied to activities within a single state, whereas the Robinson-Patman Act can apply only to matters involved in two or more states (interstate commerce). The basic antitrust statutes have evolved since 1890 and each body of law has been enlarged and modified by the subsequent acts; some of which you will find in this directory. There are other anti-trust acts, notably the Federal Trade Commission Act, the Clayton Act and the state antitrust laws and "Little" FTC acts. In order to avoid antitrust problems, seek adequate legal counsel.

Shopping Center 0 - Pad Site

An individual freestanding site for a retailer, often adjacent to a larger shopping center. Same as Outlot. Gas stations, convenience stores, restaurants and some specialty stores and services are built on pad sites.

Shopping Center 1 - Strip Center

USA - The smallest of centers whose tenants provide a narrow mix of goods and personal services to a very limited trade area. A typical anchor would be a convenience store like a mini-mart such as 7-Eleven.

Shopping Center 2 - Neighborhood Center

USA - Typically 30,000-150,000 sq. ft. on 3-5 Acres with at least one anchor tenant typically being a grocery store and/or drug store. Anchor occupancy ratio 30-50%. Trade area 3 miles. Designed to provide convenience shopping for the day-to-day needs of consumers in the immediate neighborhood.

Shopping Center 3 - Lifestyle Center

USA - Typically 50,000 sq. ft. with one or more upscale national chain specialty stores. Usually located near affluent residential neighborhoods, the center type caters to the retail needs and lifestyle pursuits of consumers in its trade area. Design ambiance and amenities are conducive to casual browsing.

Shopping Center 4 - Outlet Center

USA - Typically 50,000-400,000 sq. ft. on 10-50 Acres. Manufacturer outlet stores. Trade area 25-75 miles.

Shopping Center 5 - Theme Center

USA - Typically 80,000-250,000 sq. ft. on 5-20 Acres. Leisure, tourist-oriented, retail and service. Anchors are restaurants and entertainment.

Shopping Center 6 - Community Center

USA - Typically 100,000-350,000 sq. ft. on 10-40 Acres with 1-2 anchor tenants being supermarket and/or drug store, discount department store, home improvement store, or large specialty or discount apparel store. Anchor ratio 40-60 %. Trade area 3-6 miles.

Shopping Center 7 - Power Center

USA - Typically 250,000-600,000 sq. ft. on 25-80 Acres with 3 or more anchor tenants of limited assortment. Anchor ratio 75-90 %. Trade area 5-10 miles.

Shopping Center 8 - Regional Mall

USA - Typically 400,000-800,000 sq. ft. on 40-100 Acres with 2 or more anchor tenants being full line department stores, discount apparel store, mass merchant, fashion stores. Anchor ratio 50-70 %. Trade area 5-15 miles.

Shopping Center 9 - Super Regional

USA - Typically 800,000 sq. ft. plus on 60-120 Acres with 3 or more anchor tenants being similar to Regional Mall but having more variety. Anchor ratio 50-70 %. Trade area 5-25 miles.

Slick

A pre-prepared piece of advertising material usually composed by the franchisor for the franchisee for use in local print media. It is "camera ready," meaning that newspapers or other media can use it without significant additional cost to franchisees for composition and makeup.

Strip Center

A retail center comprised of several small stores arranged in a lineal design. Usually does not have a large anchor tenant.

Subfranchisor

A type of multi-unit franchise, whereby franchisees act as independent selling organizations that are responsible for the recruitment and ongoing support of franchisees within their given region. Subfranchisor will have their own FDD, which is sometimes incorporated into their franchisor's FDD.

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Total Investment

The amount of money estimated for complete set up of a franchisee?s business, including the initial investment, the working capital, and subsequent additions to inventory and equipment deemed necessary for a fully operational and profitable enterprise.

Trade Area

For shopping centers the geographical area from which 60-80% of a center's sales originate.

Trade Secret

(a.k.a. Proprietary product or service) Knowledge in the possession of the franchisor that is revealed to the franchisee by the franchise transaction. Trade secrets may take the form of construction or operating procedures, a formula for the mixing of ingredients to prepare food or the classical customer list. Appropriate legal provisions written into the franchise agreement, such as a covenant not to compete, are important in protecting these trade secrets.

Trademark

The name associated with a product (see Service Mark). Prior to federal registration, the symbol "TM" or "SM" may be affixed near the word or words constituting the mark or symbol to inform the public that it is intended that the name be protected.

Turnkey

The franchisor is responsible for fully developing a "turnkey" franchise until or after, the doors are open for business.

Tying

Forcing a franchisee to purchase one product as a condition to the sale of another. Tying may be illegal if the products used in the franchise operation can be acquired from other sources at a more competitive price. The product must, however, be judged "equal to - or better than" the products specified by the franchisor in terms of quality.

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Variable Cost

Any costs that vary with the level of production. For example, materials directly used to produce a product are variable costs. The more product produced, the more materials needed to produce the product.

Vertical and Horizontal Competition

Applicable principally to price fixing or tying arrangements. Vertical connection deals with a buyer-seller relationship, as in franchisor-franchisee. (See Tying) Horizontal restraints of trade in franchising usually are concerned with potential price fixing arrangements among a group of franchisees (sometimes including company owned outlets) in a defined and homogeneous geographical area. Also in franchising, horizontal competitors are those offering a franchise or franchise product similar in price, whereas vertical competitors are similar in product or service but not in price. Price fixing is illegal at any level of an organization.

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WBE

An acronym for Women Owned Business. In order to be a WBE, you must go through a strict certification process to ensure that the business is truly owned and controlled by a woman. Only 51% ownership and control need normally be demonstrated. The advantages to certification include certain federal government contract advantages and potential low interest loans.

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