Like any area of endeavour, the franchise sector has its own particular
terminology that new franchisees need to understand.
ACCREDITATION: a banking loan scheme that provides franchisees with some of the finance they may need when buying the franchise. It is based on a bank’s understanding of the brand and its business methods. While this funding option is popular, it is not common across the sector.
ASSIGNMENT: when a franchisee sells their business to a new franchisee, it is referred to as assignment. It is common for the franchisor to retain the right to interview and accept or reject any proposed buyer.
The franchisor may also have the right to buy back the franchise. The vendor franchisee can set the value of the franchise.
BUSINESS-FORMAT FRANCHISE: a business model with four criteria
– a franchise agreement, a trademark or symbol, payment of a f ee, and a system or marketing plan. A franchise business f alls under t he jurisdiction of t he Franchising Code of Conduct and franchisors have certain obligations to fulfil.
COMPANY-OWNED UNITS: locations run by the franchisor rather than a franchisee.
CONVERSION: an existing independent business that joins a franchise network.
DISCLOSURE DOCUMENT: this document provides information about a franchise system, the franchisor and the franchised business. It must be supplied to a prospective franchisee in accordance with the Franchising Code of Conduct.
DUE DILIGENCE: the process of conducting in-depth research on a business before purchase.
FIELD MANAGER: an individual tasked with managing a group of franchisees, with a focus on relationships, brand alignment, and sales and profit. This role might also be called business development manager or area manager.
FIXED SERVICE FEE: franchisees may pay their franchisor a weekly or monthly fixed-amount payment, or a service fee calculated as a percentage of turnover
(above a minimum payment).
FRANCHISE AGREEMENT: this is the legally binding business between the franchisor and the franchisee.
FRANCHISEE: an individual who runs a franchised business using the intellectual property of the franchisor.
FRANCHISEE ADVISORY COUNCIL: a structure for franchisors to seek and receive feedback from their franchisees. Participating franchisees may be elected or chosen by the franchisor.
FRANCHISE FEE: an up-front cost paid to the franchisor. It covers the use of the brand name and business system.
FRANCHISING CODE OF CONDUCT: a mandatory code that governs franchising in Australia. It is designed to guide the behaviour of franchisors and provide certain protections to franchisees. It is administered through the Australian Competition and Consumer Commission (ACCC).
FRANCHISE TERM: this
is the period granted for trading under the franchise agreement. Most franchise terms are on a renewable three or five year term but they can vary from one year to perpetuity. Franchisors often refer to a term with two options to renew as
5+5+5, for instance.
FRANCHISOR: the franchisor grants permission to the franchisee to conduct business using its intellectual property, brand name, working methods and marketing.
GREENFIELD SITE: a brand new site.
GOODWILL: this is a calculation of the value of trade in an existing business that is likely to continue and benefit the incoming business owner.
INFORMATION STATEMENT: this is a two-page standard document that outlines what franchise buyers need to know about franchising.
INTELLECTUAL PROPERTY: this term refers to the trademarks, copyright, know-how, trade secrets, designs, patents, branding, operational manuals, methodologies and/ or recipes franchisors license to franchisees.
LICENSE: the right to use intellectual property in business, such as sales rights in a territory, manufacturing technology or access to a trademark. A license is not
the same as a franchise.
LOCAL AREA MARKETING: often abbreviated to LAM, this is marketing the franchisee is responsible in their territory or designated marketing area.
MARKETING & ADVERTISING LEVY: a regular flat or percentage-based-fee paid into a centralised advertising or marketing fund.
MASTER FRANCHISEE: a franchisee who is responsible for a large territory, appointing other franchisees within the territory with direct agreements, and ensuring that the franchisor’s systems and methods are applied.
MULTI-UNIT FRANCHISEE: a franchisee who has been granted the rights to run more than one franchise outlet. Not every franchise system allows for franchisees to be multiple operators.
OPERATIONS MANUAL: the franchisee’s guide to operating the franchise business. The franchisor may produce several manuals for different areas of the business, and should regularly update the information.
REGIONAL FRANCHISEE: similar to master franchisees, regional franchisees operate a large territory and appoints franchisees within the area.
RENEWAL: once a franchise term nears its end, franchisees may or may not be given a right to renew their agreement for a further term. This process is bound by the Franchising Code of Conduct. There is no automatic right of renewal.
ROYALTY: fee paid by the franchisee to the franchisor for the ongoing use of the brand and systems, management and technical support.
It may be a flat fee or a percentage of sales or profit.
TERMINATION: the ending of the franchise contract between franchisee and franchisor, usually for breach of contract. Some franchise agreements allow the franchisor to terminate the agreement even if the franchisee has not breached the agreement.
TERRITORY: is the area assigned to franchisees for their business. Territories can be exclusive or nonexclusive.
TOTAL INVESTMENT: the total amount of money a franchisee requires to set up in business. This includes the franchise fee, working capital and any equipment purchases required.
TURNKEY FRANCHISE: a franchise package that includes all the equipment, information and systems required for a franchisee to open up the business and start trading.
WORKING CAPITAL: the funds required by any business to pay its costs before it starts making a profit, and as ongoing cash flow to counter any dips in business activity.