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10 Common Franchise Industry Terms you Need To Know

A guide for using common franchise industry terms.

For those thinking about entering into the world of franchise ownership, there are some key terms you should know. Every niche industry seems to have its own kind of language, and the franchise industry is no different. In order to help you succeed and save you a bit of time asking what each term means, here are the most common phrases along with their definitions. 

1. Franchisee: This is the term used for an individual who owns the rights to open a business under the brand’s image and likeness. Typically franchisees operate as an independent local business owner and then work with the brand’s corporate team to ensure they’re upholding brand standards as it relates to products and services.

2. Franchisor: The company behind the brand that allows individual franchisees to operate units for a predetermined upfront and reoccurring annual fee. 

3. Franchise Fee: This is the one-time upfront fee paid by the franchisee to the franchisor as a part of the ownership deal. Franchise fees vary across brands, but they’re typically either a flat rate or a sum that can be paid over time. 

4. Royalty Fee: This is a reoccurring payment issued by the franchisee to the franchisor for the ongoing right to license and profit off of the brand. These fees are typically a percentage of a unit’s yearly gross revenue to be paid annually, though in some cases, monthly. 

5. Franchise Disclosure Document: Colloquially knows as the FDD, this 23-Item document is designed to be uniform across all franchise brands to the benefit of the franchisee. It outlines everything there is to know about a given opportunity, from how much it costs, to how much you can make, to the overall state of the business.

6. Franchise Agreement: The written contract found at the tail end of the FDD that outlines the responsibilities for the franchisor and franchisee. 

7. Term of agreement: This aspect of the franchise agreement tells franchisees how long their period of franchise ownership lasts and typically ranges anywhere from five to 20 years. 

8. Conversion: When a franchisee converts their independently-owned business into a franchise. 

9. Transfer: When an existing franchised or corporate-owned unit is sold to another owner.

10. Absentee ownership: An option offered by certain franchisors where they allow a person to own a franchise without being actively involved in the oversight of its day-to-day operations. 

All of these terms are used on a regular basis in the world of franchising, so it’s important for those considering a career in the industry have a good understanding of what they mean before diving in.