Jargon Busters: Franchising Terms You Need to Know
The franchising industry is growing every year and bursting with variety and opportunity. In an industry that’s steeped in opportunity, franchising has its own language. The terminology can be confusing.
If you’re considering making an investment with a franchise, a good first step is to learn the jargon. This article aims to arm you with a deeper understanding of all the terms commonly associated with franchising. For people new to the world of franchising, you’ll be better able to research what’s available to you and to make the best decision for your future.
Terms to know:
That’s you – the franchisee is the person who buys the rights to operate the franchise from the franchisor and you are responsible for the day-to-day operations (running of the business).
Before you buy a franchise, it’s imperative that you review the Disclosure Document. This document gives you all the insight you need to know into whether the franchise is right for you. It uncovers the franchise system and provides detailed information about the franchisor. In South Africa, this document needs to be CPA (Consumer Protection Act) compliant.
When you are ready to invest in a franchise, you will need to review and sign the paperwork and get started. The franchise agreement, or the contract between yourself (the franchisee) and the company (the franchisor), will set out the roles and responsibilities of both parties, covering topics like:
- Minimum service standards
- Financial responsibilities
- Operational guidelines for the business
- Training and support provision for the franchisee
- Particulars pertaining to your franchised business
Upfront Franchise Fee:
Most franchisors will require a fee to start operating under their name and using their trademarks and proprietary information, in other words the franchise fee. This can also be known as the ‘initial fee’.
Set Up Cost (Establishment Cost):
The capital needed to set up the franchise e.g., fixtures and fittings, signage, equipment, shopfitting, rental deposits, start-up stock, systems and software, marketing material, uniforms, etc.
This is the funds required to cover operating expenses until such a time where a franchise business reaches breakeven point and showing a profit.
In addition to the franchise fee, many franchisors require franchisees to pay a regular fee on what they sell and to receive ongoing training and support. This fee is paid at given intervals of time, such as weekly, monthly, or annually. Sometimes it’s a flat fee, other times it’s a percentage of sales.
Some chains are so large that they bring on master franchisors to oversee certain geographic regions. These master franchisors can serve all the functions that the parent franchisor can, but at the local level, providing better customer support and interaction for you as the franchisee.
Term of Agreement:
The term of agreement is the length of time the franchise agreement is good for. Typically, this term lasts 5 years. Once the term is up, the franchisor can renew the agreement if things are going well, or the contract can be terminated or adjusted.
Refurbishment and a franchise fee once the initial 5-year agreement term needs to be renewed.
Franchise fees can be substantial; some franchisors offer in-house financing options for their potential franchisees. Financing options can cover the franchise fee or other expenses, such as inventory and equipment. There is also third-party financing from whatever other source you can tap into. With financing a franchise opportunity in general, the franchisee needs to have 50% of the total investment available in cash before borrowing the remainder.
Territory or Area (of Operation):
An assigned territory is a geographical area in which the franchisee is allowed to operate their business. In most franchising arrangements, franchisees will be given rights to a particular territory, meaning that they’re the only franchisee who’s able to sell their products/services in that location. This tends to work best for everyone, as it prevents unnecessary competition between franchise units.
The Franchise Package:
A franchise package consists of all the following and more, depending on the franchise you’re looking to invest in:
- Trading rights
- Digital systems
- An operational territory
- Marketing materials
An attractive franchise package is crucial when it comes to drawing in quality franchisees, and as a potential franchisee, you should always determine exactly what will be included in the full franchise packet before you make any legal commitments.
A multi-unit franchise is where a franchisee owns and operates more than one unit of the same franchise model or brand, generally in the same region/area. A franchisee usually starts with one franchise unit and grows their business operation as they perform and is then awarded additional franchise units.
A turnkey franchise is a franchise unit that is ready to operate as soon as the new franchisee is onboarded. Essentially, the franchisee will only need to turn the key and go, skipping the sometimes, complex launch process. Franchisees that invest in turnkey franchises will be provided with all they need right away, from stock, to shop fitting, to digital system implementation, to staff training. This will allow them to start selling products or providing services right out of the gate.
Understanding jargon franchising terms is just step one
Getting to grips with the jargon is only the first step in your journey into the world of franchising. Next up, it’s time to find an opportunity for investment that interests you and meets your needs. Browse a huge variety of franchising options via Which Franchising’s franchise directory.