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Testimonials

Terminology

 

The following terms are commonly used in franchising.

Click on the letters below to quickly find the term you’re searching for:

A | B | C | D | F | H | I | J | K | L | M | N | P | S | T | U | W | X | Y | Z

 

A

Advertising Levy

An annual fee paid by the Franchisee to the Franchisor for advertising expenditures. The levy may be a fixed fee or, more normally, a percentage of Franchisee turnover and usually paid in addition to the royalty fee. Not all franchisors charge advertising fees.

Arbitration

Arbitration is a form of dispute resolution in the event of a disagreement between the Franchisee and the Franchisor, and is normally chaired by a nominated individual or body, as determined under the Franchising Code of Conduct.

Assignment

The sale of a franchise by one Franchisee (assignor) to another (assignee) is called an assignment. The Franchisor will normally retain the rights to interview and accept any proposed buyer and may also retain the rights of buying the franchise back themself. The vendor Franchisee has the right to set the value of the franchise. It is normal for an assignment fee to be paid to the Franchisor, who will utilise those funds to train and induct the new Franchisee.

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B

 

Bank Finance Package

A loan scheme by banks to provide the Franchisee with some of the finance required to buy the franchise. This is often restricted to a maximum of two thirds of the total investment.

Business Format Franchising

The Franchisor licenses the Franchisee a complete format (blueprint) for the setting up and operation of the business, hence the name. This is a business format, operating system and trademark to his/her Franchisee. The plan provides step-by-step procedures for major aspects of the business and, anticipating most management problems, provides a complete matrix for management decisions confronted by the Franchisees. The Franchisor also teaches the Franchisee the entire business format and provides support via training and communications to the Franchisee for the duration of their business relationship.

Business Plan

A document that summarises the operational and financial objectives of a business and contains the detailed plans and budgets showing how the objectives are to be realised.

Buy-out Clause

The Franchise Agreement may include a clause giving the Franchisee the option to buy himself out of the franchise and continue to trade at the same site and in the same style of business, but as a totally independent owner. Such a clause is uncommon in Australian practice.

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C

Capital Required

The amount of cash you are required to have available.

Company Owned Units

Units of the franchise which are owned by the Franchisor and operate alongside the Franchisees within the group.

Conversion Franchise

This is a franchise that permits existing businesses to join a national franchise system to use its recognised name and trademark and operating system.

Copyright

The exclusive right of a person to use, and to license others to use, an intellectual property such as a book, pamphlet, or other published material

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D

Demographics

A range of factors that may influence consumer behaviour in a specific trade territory e.g. age, income, house prices, industry, socioeconomic conditions.

Designated Supplier

Approved, chosen suppliers of products and services – all of who meet the requirements of a particular franchise company.

Disclosure

Revealing facts to others. These facts may be complimentary to the Franchisor or may be uncomplimentary, such as disclosing a prior bankruptcy or litigation involving the Franchisor or key persons as defendants. Non disclosure of material facts could have legal implications.

Disclosure Document

All Franchisor companies should provide this document to prospective franchisees at the first personal meeting to discuss the sale of the franchise, and at least ten business days prior to the prospective Franchisee signing a franchise agreement, or paying the Franchisor money to buy the franchise. The document aids the prospective Franchisee’s evaluation of the Franchisor company.

Disenfranchise

The withdrawal of the franchise by the Franchisor from the Franchisee. This is likely to occur when there have been persistent breaches of the Franchise Agreement by the Franchisee and such breaches have not been rectified.

Dispute Resolution

Most franchise agreements written today include a provision for alternative dispute resolution methods because of the expense and delay involved in using the courts. Not all franchise relationships are compatible and disagreements do occur. The two most common methods of handling disputes are by arbitration and mediation. This is a requirement under the Franchising Code of Conduct.

Distributorship

A right granted by a manufacturer or wholesaler to sell a product to others. A distributorship is normally not a franchise. However, certain distributorship arrangements may qualify as a franchise may be licensed or be regarded as being a business opportunity requiring disclosure.

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E

Equity Investment

The amount available to be borrowed against your security property based on a formula calculated by the lending institution.

Earnings Claims

Assertions of specific acquired sales levels or profitability levels declared by franchise companies.

Estimated Initial Investment

A detailed listing of all fees and expenses you can expect to incur in starting your franchised business. This listing represents the total amount that you would need to pay or get financing for, including fees paid to the franchisor; estimates for furniture; fixtures and equipment; opening inventory; real-estate costs; insurance inventory; etc. This estimate should include a provision for working capital through the start-up phase.

Exclusive Territory

When the franchised business is to be operated from a single location the Franchisee may receive exclusivity solely to that site or to a market area (usually a set distance surrounding the location). A franchise system can be impaired by having too many Franchisees in one market where there may not be enough business to support them, but on the other hand a cluster of units where they are not directly competing can take advantage of the synergy that is created by dominating the market, keeping out the competition and benefiting from joint marketing promotions.

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F

Fixed Service Fee

The Franchisor may choose to obtain his continuing income from the Franchisee through a fixed-amount monthly or weekly payment, or through a service fee calculated as a percentage of turnover, but carrying a minimum payment amount.

Franchise

A franchise is a grant by the Franchisor to the Franchisee, entitling the Franchisee to the use of a complete business package containing all the elements necessary to establish a franchised business, enabling them to run it on an ongoing basis, according to guidelines supplied. A business operating under a Franchise Agreement.

Franchise Agreement

The contract entered into by the parties to the franchise which details all the obligations and responsibilities of each party should be clearly defined. The Franchise Agreement is normally signed on the day of settlement, from which time the Franchisee owns the rights. It is usually set up for a fixed period which requires renewal after expiry. Usually a franchise agreement may not be sold, transferred, or otherwise assigned without the Franchisor’s permission.

Franchise Contract

The legal agreement between the parties which sets out the terms under which the Franchisee will operate the business. The terms typically include the following:

  • The right to use the trade name
  • The Franchisee’s obligations
  • The Franchisor’s obligations
  • The premises and the territory
  • Length of Franchise contract
  • Financial aspects such as initial franchisee fee and ongoing royalties
  • Renewal terms
  • Control of standards
  • Rights of sale
  • Performance targets
  • Termination
  • Effects of termination

 

Franchise Council of Australia Ltd

The Franchise Council of Australia Ltd (FCA) is a single organisation comprising of Franchisors, Franchisees, and advisors, with State Chapters meeting regularly in each State of Australia. The FCA has been established since 1982 and has produced a growing range of publications on the various aspects of franchising, as well as coordinating exhibitions and conventions.

Franchise Feasibility Studies

Franchising can be a highly effective method of financing expansion through the acquisition of outside capital. The objective of a franchise feasibility study is to determine the degree to which a company bears the characteristics of a successful franchisor, may be successful as a Franchisor.

Franchise Fee

The up-front payment by the Franchisee to the Franchisor for the granting of the franchise rights. This fee is paid upon the settlement of the franchise to the Franchisee, once the Franchise Agreement is signed.

Franchisee

The person, partnership, or company who buys the rights to a franchise from the Franchisor. Although Franchisees are normally individuals, they are, in some instances, major public companies. The business is run according to the procedures set out in the franchise operating manual and under the terms of The Franchise Agreement.

Franchisee Advisory Council

The Franchise Agreement may provide for the formation of a Franchise Advisory Council with Franchisees assuming the role of assisting the Franchisor with marketing or advertising decisions. Such Agreements may allow for the annual election of Franchisees to this Council.

Franchising

A method of doing business within a given industry. At least two parties are involved in franchising: the Franchisor and the Franchisee. Technically, the contract binding the two parties is the franchise.

Franchisor

The Franchisor owns the business system which sells franchises in its system to Franchisees. The Franchisor then supports their Franchisees both in starting their business and in continuing to make it work.

The Franchisor should:

  • Know every facet of the business and have a hands-on approach to problem solving.
  • Be honest and up-front in all dealings.
  • Have operated the business they wish to franchise for a reasonable period.
  • Have adequate financial resources to develop the concept and make the necessary investment into the brand.
  • Want to grow through others, and be prepared to share the rewards resulting from teamwork with franchisees.
  • Strive for excellence in every facet of the business and determined to grow. 

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G

Goodwill

The value of goodwill in a business is normally only applied once a business is operational. It is calculated on the value of trade already established and which is likely to continue to the benefit of the new business owner.

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H

Head Lease

Locations where the Franchisor has leased the premises and then sublets to the Franchisee. Many times the franchisor finds an ideal site and leases the space before a suitable franchise applicant has been found. If the head lease is not held and the Franchisee negotiates the lease, the Franchisor usually reserves the right to approve any lease, sub-lease or other tenant-landlord relationship which is established.

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I

Identify Items

Those items such as stationery, uniforms, and point of sale materials or exterior signs that are usually required to be used in a franchisee’s business. These items display the registered trademarks of the Franchisor.

Initial Investment

Usually includes the franchise fee and the total investment amount including working capital required to commence operating a franchise.

Intellectual Property Rights

Trade marks, service marks, operations manuals, trade secrets know-how and copyright. These often form an important component of the franchise system.

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J

Job Franchising

The franchisee actually does the work that provides the service to their customers.

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L

Lease Franchise

The Franchisor leases the premises to the Franchisee at a rental, based on turnover, which also covers the Management Services Fee.

Licensee

See Franchisee or Master Licensee.

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M

Management Franchising

The Franchisee recruits, organises and manages a team who provide the services.

Management Service Fee

See Service Fee and Fixed Service Fee.

Marketing Manual

A manual of information often provided to guide a new franchise owner in how to promote and effectively market their products or services into the community. Traditionally, such manuals will provide forms and posters to be used, together with details of how to monitor performance of the promotions conducted.

Marketing Plan

A technique by which franchises are to be sold. It includes the number of sales anticipated within a series of time periods (first year, second year, etc), to whom those sales are to be made (profile of the individual, area franchising, sub-franchising), and the anticipated geographical expansion of the franchise system.

Master Franchisee

Franchisors sell master licences to operate their systems in other countries, regions or States. Thus, an Australian Sydney-based Franchisor may allow his business to expand into Western Australia by the appointment of a Western Australian based Master Licensee, who in turn has the rights to sell franchises in Western Australia, providing it all of the local support services. The primary advantages to the franchisor of master licensing are: limited capital investment; tapping into the master franchisee’s knowledge of the local market and only having to deal with one party.
Master Region

The region that a Master Franchisee acquires.

Multi-Level Marketing (MLM)

A form of direct selling by distributors to the public in their homes. Not a business format franchise. Any business of this nature should be investigated closely.

Multiple Unit Franchise

The Franchisor awards the right to a Franchisee to operate more than one unit within a defined area based on an agreed upon development schedule. Such Franchisees are usually a sign of the successful franchises which have proved their ability to be run under management, for naturally a Franchisee cannot actually operate in more than one place at one time.

This concept is less common in Australia, where many Franchisors see a major component to franchise success being the actual day-to-day involvement of the franchise owner. For that reason, some Australian Franchisors actually prohibit ownership of more than one unit.

Multiple Franchisors

Franchisors offering more than one franchise concept.

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N

Non-Competition Clause

Prevents the Franchisee from entering a similar line of business not only during the term of the agreement and renewal terms, but also for a period of time after the agreement ends unless prior approval has been received from the Franchisor.

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O

Offer

An oral or written proposal to sell a franchise to a prospective Franchisee upon understood general terms and conditions.

Operating Manual or Operations Manual

Manuals supplied by the Franchisor to the Franchisee as part of the franchise package to provide them with comprehensive guidelines on how to set up and operate the franchised business to the correct specification and standard required. The manuals are copyright of the Franchisor and, as they contain the very essence of how to duplicate the business, they have to be treated with the utmost care and confidentiality.

 

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P

Party Plan Selling

A form of direct selling to the public through “parties” in their home. Not a business format franchise.

Pilot Unit

A unit of the franchise run by the Franchisor or under its close supervision during the proving time of system development, to demonstrate that the concept, system and procedures will provide a successful business and that the know-how can be transferred successfully to an inexperienced Franchisee. The pilot unit is the ultimate test for the Franchisor’s training methods and manuals.

Plant and Equipment

The plant and equipment required by the Franchisee to operate the business in the manner laid down by the Franchisor. Normally paid for at settlement or immediately prior to possession of premises.

Product Supply

The Trade Practices Act prohibits the fixing of a line of supply or prices. The Franchise Agreement may provide for the supply of products through a nominated supplier, and set guidelines for the acceptable standards of products to be used in the Franchisee’s business. Should the suppliers nominated not be able to supply the nominated product, a Franchisee would normally have the ability to seek other suppliers, provided that the goods meet the standards set.

Pro Forma

A balance sheet, profit and loss or cash flow statement which estimates income and expense sources. Assets, liabilities and net worth are forecast on the balance sheet. Pro forma statements issued by the Franchisor to the Franchisee should be based on actual operating results of the Franchisor’s units or franchise establishments.

Protected Territory

A designated area or geographic boundary granted to the Franchisee by the terms of a franchise agreement. The Franchisor agrees not to open another franchised or company owned business of a like or exact nature within the Franchisees assigned territory.

 

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Q

Qualification Questionnaire

A document prepared by the Franchisor to be completed by the prospective franchise, which provides initial information to the Franchisor in order to assist him in determining whether or not the prospect is capable and motivated.

Quality Control

The method by which the Franchisor enforces the rules of operation set forth in the operating manuals. Quality control involves Regional Coordinators visiting each Franchisee.

 

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R

Renewal

Franchise Agreements are normally granted by the Franchisor for a specific period. That period is broken down into units of time which point renewal of the franchise is required. If the Franchisee has been in repeated breach of the Agreement then the Franchisor may exercise any rights he may have under the Agreement not to allow such renewal, in which case the franchise will lapse. If the Franchisee has performed to the Agreement, then the right of renewal is granted, subject to any newly written Franchise Agreement being put in place. That new Agreement may be in different wording, but cannot alter substantially from the original Agreement. Royalties, service fees and advertising levies cannot be amended. A renewal fee of $1,000 or more may be applied to cover the Franchisor’s costs at renewal, but again that amount is set in the original Franchise Agreement.

Regional Development Agreement

A franchise granted to develop or sell a person’s franchise rights to a third party in a defined geographical area. A portion of the franchise fee is normally paid in advance for a certain minimum number of franchise outlets which may be activated by the Regional Franchisee or sold at a disclosed fee to an individual franchise buyer. This agreement normally awards a share of the initial full franchise fee and a percentage of the royalty payment.

Royalties

A continuing payment to the Franchisor that is payable on a periodic basis (usually weekly, biweekly, or monthly) throughout the term of the Franchise Agreement.

Rules of Operation

Specific mandatory rules with which every Franchisee and company outlet must comply. This document will change from time to time. By incorporation in the Franchise Agreement, violation of the Rules of Operations allows the Franchisor to cancel a Franchise Agreement.

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S

Service Fee

The Franchisor will obtain his continuing income, required to support the Franchisee, by way of a weekly or monthly fee, normally expressed as a percentage of Franchisee turnover.

Service Marks

Similar to trade marks, but applicable to services rather than actual products. The granting by the Franchisor to the Franchisee of the rights to use its service marks, trade marks and copyright material is a basic element of a franchise package. One important obligation of the Franchisor is to prevent its marks from being used by any unauthorised person in order to protect the interests of its Franchisees, who, in their Franchise Fee, have paid for the right to use those exclusively. There are laws which protect service marks, similar to trade marks.

Sub-Franchises

Sub-franchises are franchises granted within the territory of an existing Franchisee and are usually allowed to be granted when the original Franchisee reaches a point in business development whereby they cannot sustain any further growth from the one unit or outlet. Each agreement will vary, but it is normal for a Franchisee who owns a territory to be allowed to offer the sub-franchise to another and take profit from that offering.

Slick

A pre-prepared piece of advertising material, usually composed by the Franchisor, for the Franchisee for use in local print media. It is “camera ready”, meaning that newspapers or other media can use it without significant additional cost to Franchisees for composition and makeup.

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T

Term

The period of time for which the franchise is granted.

Territory

Most Franchise Agreements will provide an exclusive geographic area or territory in which the Franchisee may operate without fear of competition from within his own group. This may not always be possible, especially when the business is a mobile “instant response” service.

Total Investment

The amount of money estimated for complete set up of a franchisee’s business, including the initial investment, the working capital, and subsequent additions to inventory and equipment deemed necessary for a fully operational and profitable enterprise.

Trademark

A distinctive name or symbol used to distinguish a particular product or service from others. It can be used exclusively by the owner and no one else can use it without the owner’s permission. Part of a franchise’s value is the right to use a recognised trademark.

Trade Secret

Knowledge in the possession of the Franchisor which is revealed to the Franchisee by the franchise transaction. Trade secrets may take the form of construction or operating procedures or a formula for the mixing of ingredients to prepare food. Appropriate legal provisions written into the Franchise Agreement, such as a promise not to compete, are important in protecting these.

Turn-Key Operation

A franchise in which the franchised unit is completely fitted out, equipped and stocked for the Franchisee, ready for opening day. A term taken from the computer industry when you turn the key and the total system starts to operate. This term is often applied to retail franchised operations.

Tying

Forcing a Franchisee to purchase one product as a condition to the sale of another. Tying may be illegal if the products used in the franchise operation can be acquired from other sources at a more competitive price.

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V

Venture Capitalist

A person who invests in a business venture, providing capital for start-up or expansion. Venture capitalists are looking for a higher rate of return than would be given by more traditional investments.

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W

Working Capital

A major cause of business failure is not having enough cash in the bank, trade credit, borrowing capacity or cash flow to meet start-up expenses and see the business through any unusual dips and changes in its daily activity. Initially funds are needed to pay first and last months rent, utility deposits, licences and any number of incidental costs. As it takes time to build up a new business the first months are usually loss months, which need to be financed.

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If you’d like more information or if you would like to discuss a particular Franchising matter, please complete and submit the Express Enquiry form on the top right hand side of this page and we will contact you to discuss your enquiry or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment.