16 Common Franchise Terms Explained: PART 1

Before you inquire about opening a franchise, your first instinct would probably be to research the business you are interested in to learn more about its products, services and target market. However, in addition to understanding the business itself, it's extremely important that you understand the language that franchises use to ensure that there is no disconnect in any conversations that take place as you begin to work on acquiring one. Thanks to Entrepreneur.com, we've collected 16 common franchise terms and outlined their definitions to help aspiring franchise owners prepare for what lies ahead. See the first 8 below:

  1. Franchisee: A franchisee is any individual who purchases the right to own and operate a business under a particular franchise's name.
  2. Franchisor: The franchisor is the parent company that allows an individual to run a business using its name, products and trademarks.
  3. Franchise Fee: This is the initial fee an individual pays a franchisor in order to obtain the rights to become a franchisee. Depending on the franchise, this may be a flat fee, or, it may vary based on factors such as the location and individual's experience.
  4. Franchise Disclosure Document: A legal document provided to prospective franchisees by the franchisor. These are updated on a yearly basis and outline the company's history, any fees, contractual obligations and more.
  5. Startup Cost / Initial Investment: The startup cost is the total amount required to open the franchise.
  6. Royalty Fee: A royalty fee is a fee that franchisors require franchisees to pay on a regular basis, whether it be weekly, monthly or yearly.
  7. Franchise Agreement: This is the written contract included in your franchise disclosure document that outlines both the franchisor and the franchisee's responsibilities.
  8. Terms of Agreement: The terms of agreement outline the length of time that the franchise agreement is valid. At the end of your term, the franchisor may allow you to renew your agreement for a percentage of the current franchise fee.

Stay tuned for our next blog to discover 8 more common franchise terms and their definitions!

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