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Franchising 101: Common terms explained

Bryan and Andrea McGinness are CEO and COO of WineStyles Tasting Station and write quarterly about the world of franchising for IowaBiz.com.

If you’re new to the world of franchising, all of the industry terminology probably sounds like a foreign language to you. That was the case for us when we first decided to join the nation’s largest wine and craft beer boutique franchise. We recently shared some top items to consider before becoming a franchisee and thought it would be beneficial to go over some of the key industry terms for those who may be exploring the idea of franchise ownership.  

Franchisor

A franchisor is the company that grants the franchisee the right to use its business model and brand under the terms of the franchise agreement.

Franchisee

A franchisee is a person or group that obtains the rights from the franchisor to do business under the franchisor’s trademark or business name. 

Area Developer

In essence, an area developer is a “mini-franchisor.” This is a special relationship where the developer can recruit and train other franchisees who open units in their territory. They can act as mentors to new franchise owners and assist them with building their own successful franchise business. The developer would receive a percentage of the franchise fee for each new unit sold, as well as a percentage of the ongoing royalty stream. Every franchisor sets the terms for these types of relationships, which can vary contractually.

Franchise Disclosure Document

The Franchise Disclosure Document (FDD) is a legal document that outlines the franchisee’s obligations to the franchisor and the costs and fees associated with committing to a franchise system, as well as the company’s history and other contractual obligations. The U.S. Federal Trade Commission requires all franchisors to provide this document to prospective franchisees during the pre-sales process. Reading the FDD is an essential step in the evaluation process, and we highly suggest studying the entire document before signing on the dotted line.

Initial Investment

Located on line item 7 on any FDD, the franchisor will provide an overview of the initial costs associated with the opening of its particular franchise. It is important to note that these costs will vary greatly depending on a number of variables, such as the industry, brand and the specific location where the business will operate.

Royalty and Marketing Fees

Costs and fees associated with being a franchisee of any system include paying ongoing royalty and national marketing fees to the franchisor. These fees give franchise owners the privilege of using the franchisor’s brand and are typically based on a percentage of the franchisee’s gross sales. In addition, franchisees benefit from access to marketing plans, business strategies and ongoing operational training and support.

Profit & Loss (P&L) Statement

A P&L statement predicts the amount of profit or loss a business can expect to generate over a period of time. This document is beneficial for monitoring the business and identifying areas where it is thriving and where it may be failing.

As you do your franchise research, remember to keep this cheat sheet of common franchise terms handy. You can thank us later. 

Cheers!

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