BlogFranchiseesGlossary of Terms New Franchisees Need to Know

Glossary of Terms New Franchisees Need to Know

When you’re new to the franchise world, it can feel like you’ve stumbled into a conversation where everyone knows what they’re talking about — except you. So if you’re thinking about purchasing your first franchise, we recommend getting to know some basic terms that will help you confidently navigate the process.

If you want professional guidance, we’ll be happy to connect you with one of the many franchise consultants in our network. Just schedule time with one of our team members to get started.

A national chain store or regional brand strategically placed in a shopping center to generate the most customers for the center. The anchor tenant is often a department store, supermarket, drug store, or home improvement store.

A person or entity who sells franchises and supports franchisees on behalf of a franchisor. The area developer typically as the right to sell a specified number of locations in a geographic area within a defined period

Payments made by a franchisee to the franchisor to support regional and national advertising on behalf of all franchisees.

Sometimes referred to as a franchisee advisory board or similar name. An advisory council is a select group of franchisees who give advice to the franchisor and make recommendations on things such as advertising, operations, and new products.

Transferring a franchisee’s interest in the franchise agreement to another party who becomes the franchisee under the contract.

An event where a prospective franchisee can learn about a franchise system. Prospects can expect to meet company executives and other current or prospective franchisees at these events, which are often held at a franchisor’s headquarters.

Determines if an area (or person) can support a business.

An agency of the United States government with the purpose of protecting consumers and competition by preventing anticompetitive, deceptive, and unfair business practices.

A franchise is a contract between a franchisor and a franchisee. The franchisor is the original business, which sells the franchisee the right to use its name and concept. In addition, the franchise agreement gives the franchisee the right to sell the franchisor’s goods or services under an existing business model and trademark.

As referenced above, a franchise agreement is a legal document governing the relationship between the franchisor and franchisee.

A franchisor’s FDD lists all the franchisees in a system and outlines turnover rates, terminations, fees, rules, restrictions, and numerous aspects of that franchise system. The FDD was once known as the Uniform Franchise Offering Circular (UFOC),

This is the “entry fee” for getting into a franchise system, it usually covers the initial right to use the franchisor’s system (including trademarks and proprietary operating system), and services the franchisor provides to franchisees such as help finding a location, training materials, etc.

Each individual outlet or location, whether company-owned or franchised.

Commonly thought of as the “local operator,” the franchisee is the individual, partnership, or company purchasing rights to conduct business under a franchisor system.

Often referred to as the “brand” or “concept,” the franchisor is an entity that grants an investor (the franchisee) the right to conduct business under its trade name and to implement its methods and systems.

Generally accepted accounting principles, or GAAP, are standards that encompass the details, complexities, and legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting methods and practices.

A person or company with exclusive rights from a franchisor to sell franchises in a defined territory.

An MSA consists of one or more counties with a city of 50,000 or more inhabitants or a Census Bureau-defined urbanized area (UA) with a total population of at least 100,000 (75,000 in New England). Counties containing the principal concentration of people—the largest city and surrounding densely settled area—are components of the MSA. Additional counties qualify to be included by meeting a specified level of commuting to the counties containing the population concentration and by meeting certain other requirements of metropolitan character.

Owner and operator of more than one franchise unit.

A personal guarantee for a commercial lease allows a landlord to use your personal assets to cover costs if you fail to pay rent, maintenance fees, or other related costs. In plain language, it means you are personally liable for rent if the business cannot pay. In addition, your savings and other personal assets may be seized to cover rental payments for the leased commercial property. In some states, your primary residence could even be at risk.

POS is the combination of hardware, software, and services used by retailers to accept customer payments. This includes printing receipts and tracking sales.

A largely urbanized county or cluster of counties with a population of one million or more that demonstrates strong economic and social links in addition to close ties with a central core of the larger area.

Presentation of financial statements relying on historical data to make projections about future sales.

Continuous payments the franchisee gives the franchisor to remain a part of the franchise system.

Authorized individual or company approved by the franchisor to supply products or services to its franchisees.

A specific area in which the franchisee has rights to conduct or solicit business.

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