Basic Franchise Terms

Here are some basic terms you will encounter
Capital Required:The amount of money a Franchisee will need to ramp up their franchise business during the start-up phase (average 3 to 15 months) to the point of producing a profit.
Exclusive Territory: This is the region or area a Franchisee will have exclusive rights to operate within. It is generally defined and mapped in terms of targeted households or population.
FDD: An acronym for “Franchise Disclosure Document” -- an extensive legal document that provides you with “all you need to know” about a particular franchise. Regulated by the FTC, the FDD contents must be disclosed to potential buyers before purchase.
Franchise: The legal rights (the surrounding trademarks, copyrights, franchise operating system, support, training, product or service) a Franchisee obtains from a Franchisor under a franchise agreement to operate within a designated contract period as their business.
Franchisee: The person, partnership or company who pays the Franchisor for the right to own and operate a business using the Franchisor’s marks and system. 
Franchisor: The creator of a franchise system. The party to a franchise agreement who grants prospective Franchisees the right to use the Franchisor’s marks and system.
Franchise Agreement: A contract between a franchisor and a franchisee in which the franchisor grants the franchisee certain rights to use the franchisor’s marks and system in connection with a business to be independently owned and operated by the franchisee.
Franchise Fee: Often referred to as “initial franchise fee.” This is a one-time, up-front payment by the Franchisee to the Franchisor for the rights to a franchise. This fee is due and paid once the Franchise Agreement is signed, is generally non-refundable, and precedes final payments.
Initial Investment:The minimum amount of money generally required to begin operating a franchise. This amount typically includes the initial franchise fee, any required purchases from the franchisor, and all other common costs and expenses involved in starting up a franchised unit. Most Franchise Agreements provide an estimated range of investment costs, taking geographic variances into account.
Liquidity: The total cash available to a franchise owner for business operation or living expenses

Net Worth:Your assets (i.e., the cash value of all you own) minus your liabilities (i.e., what you owe). Most franchise companies have minimum net worth requirements to prohibit buyers from overextending.

Royalty Fee: An ongoing fee paid to your Franchisor for support services received through the life of your contract – usually a percentage of gross income or a flat monthly fee.


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