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By Jessica Socheski
20 October, 2014
Before undertaking a franchise opportunity, it is important to be aware of the industry lingo in order to ensure you are entirely aware of what you are getting yourself (and your money) into.
Do your due diligence of research and check out websites like FranchiseExpo.com to see what types of franchises are available, and take the time to brush up on these top 10 important franchise industry terms:
A franchisee is the individual who has purchased the right to operate a business under the franchisor’s system. The franchisor is the parent company of the franchisee. It allows the franchisee to run a business under its umbrella, using its trademarks, products, and processes.
2. Franchise Fee
This is the initial fee a franchisee pays to the franchisor to own their piece of the franchise. In the Franchise Disclosure Document, otherwise known as the FDD, the franchise fee specifics are outlined in Item 5. However, different franchises vary when it comes to the fee. While some yield a flat rate fee, other companies have different fees depending upon territory size, experience level, and location, among other things.
3. Franchise Disclosure Document
As mentioned above, the Franchise Disclosure Document is a legal document all franchisors are required, by the U.S. Federal Trade Commission, to provide to potential franchisees. Each year, the FDD is updated in order to stay current on different codes, fees, and contract-binding obligations. There are 23 sections, which are known as items, and they explain company history, franchise costs, unit data, etc. Before purchasing a franchise, be sure to read through the FDD carefully.
4. Startup Cost/Initial Investment
Outlined in Item 7 of the FDD, the initial investment is the total amount required to open the franchise. This is supposed to include all fees such as start up costs, business licenses, and working capital.
5. Royalty Fee
When you purchase a franchise, you will have to pay a weekly, monthly, or yearly royalty fee to the franchisor. It is either a flat fee, or it’s a percentage from your total sales.
6. Term of Agreement
This details the length of time your franchise contract is valid. It can be anywhere from 5 years to 20 years, and at the end of your time, if your franchise is in good standing, most franchisors will allow you to renew your agreement.
7. Franchise Agreement
This is the written contract between the franchisee and the franchisor that details the responsibilities of both parties.
8. Company-Owned Units
These units are the locations run by the actual parent company.
9. Absentee Ownership:
This option allows a person to own the franchise without having to be involved in the company’s day-to-day operations.
10. In-House Financing
This financing is offered by the franchisor to the franchisee to help with the initial franchise fee and startup costs.
While owning your own franchise offers you the ability to own an already popular business, there are many ins and outs that should be considered carefully before you sign any legal and binding contracts.
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