Defining Key Franchise Terminology Part I

AllBusiness:

Acknowledgement of Receipt: This document states that you received the legal franchise documents on a certain date.

Advertising Fee/Fund: A fee or fund
paid by franchisees for advertising expenditures. The fee usually is less then 3% of the franchisee’s annual sales and is in addition to royalty fees.

Arbitration: An alternative to a lawsuit in which a neutral 3rd party hears both sides to a dispute and renders a decision.

Area Development Rights: Optional right to develop multiple individual franchises in a specific geographic area.

Assets: Owned property that can be used for payment of debt.

Balloon Payment: A final payment due at the end of a loan.

Bid Letter: The initial letter sent to a borrower defining the terms of the transaction.

Business Plan: A detailed document that defines a business’s development goals and plots how and where the resources needed to accomplish the objectives will be obtained and used.

Collateral: Assets used as security for a loan in the event of default.

Company-owned: An outlet owned directly by the corporation.

DBA: DBA stands for ‘doing business as.’ For example, if the name of your corporation is XYZ Co. but is known to the public as ABC Co., your business would be classified as XYZ Co. d/b/a ABC Co.

Default: Failure to meet terms of an agreement.

Designated Supplier: Exclusive suppliers of products and/or services used in the franchisee business.

Distributorship: A business authorized to sell the products or services of a parent company. This is usually a manufacturer/reseller relationship, not necessarily a franchise.

EBITDA: This stands for ‘Earnings Before Interest, Taxes, Depreciation and Amortization.’ It measures cash flow available to meet debt payments.

Earnings Claims: Statements of sales, profit or other financial information made by the franchisor regarding their franchisees.

Exclusive Territory: A specifically defined geographic area in which franchisees retain the sole right to operate.

Federal Trade Commission (FTC): Federal agency regulating trade practices, commerce and franchises.

Franchise: A legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business.

Franchise Agreement: The franchise contract.

Franchisee: A franchise owner.

Franchise Fee: The amount of money you need to pay the franchisor to purchase a franchise concept.

Franchising: A method of conducting business in an industry that involves a franchisor (parent company) and franchisee (someone who pays for the right to sell the parent company’s products and use their trademark/name).