The franchising industry is vast, and so is its glossary of terms. Keeping track of which acronyms mean what and using the correct “lingo” may take a bit of time to get used to, but familiarizing yourself with key terms can be a great way to understand how the franchising industry works and help you feel confident when starting your franchising journey.
Here’s a list of foundational terms to help expand your franchising knowledge.
FRANCHISOR VS. FRANCHISEE
If you’ve been researching franchising, you have more than likely come across these terms, as they are very common. Nonetheless, it’s important to clarify the difference.
When you refer to someone as a franchisor, it can represent either a person or a company that owns the rights to a franchise. These rights are then sold to individuals who become franchisees, who own and operate locations under the name, concept, and trademarks that they invested in. It is important to note that franchisees do not own the franchise in the same way a franchisor would. They own and operate individual businesses under the license that the franchisor has granted. However, the franchisor still owns the overall brand and all aspects that make up the business.
A franchisor has developed a proven business plan that they require their franchisee network to follow. They also facilitate the training and ongoing support for their franchisees so they can effectively operate under this business plan. One way to visualize it is by thinking of a tree—the trunk is the franchisor, and the branches are all the franchisees. There can be several branches, but they are all connected to one trunk, and that trunk is what provides the stable foundation.
Also known as royalties, this is the fee that you are required to pay the franchisor on an ongoing basis throughout your time as a franchisee. The amount and frequency will depend on the franchise, but you’ll often find this fee as a set percentage that’s applied to your gross sales amount and is required of you to pay to the franchisor. This type of royalty is called a fixed percentage, but there is also a variable percentage where this number can increase or decrease depending on different factors. A fixed royalty fee swaps out a percentage for a flat fee that says the same number for a set timeframe.
OWNER/OPERATOR VS. ABSENTEE VS. SEMI-ABSENTEE FRANCHISE TYPES
Many franchise systems will offer their franchisees the option to pick a type of ownership model they would like to proceed with, which determines their level of involvement in the business. Some franchisors will only offer one type, so confirming with the franchise before proceeding is important.
An owner/operator franchisee is hands-on and actively involved in the business operations for their location(s). Aptly named, they own their location, and they operate within it. A franchisee under this ownership type is likely to lead a team, perform daily responsibilities, handle the financial aspects, be involved in customer service, and so on. Compared to the other two types, more time is invested, especially in the beginning when getting the location off the ground.
An absentee franchisee is what it sounds like—they are absent from the role. Rather than getting involved in daily operations, this type of franchisee keeps a distance and has a manager and team to run their location(s). This type of ownership model would be best for those looking to strictly invest in a franchise rather than switch careers or who are looking to invest in multiple locations at once.
A semi-absentee franchisee combines the two types. It allows franchisees to remain somewhat involved in business operations and decisions but still requires a manager and team to run daily tasks, as their time investment is lessened.
SINGLE-UNIT VS. MULTI-UNIT FRANCHISEES
Single-unit franchisees own a single unit (aka one location), and multi-unit franchisees own multiple units. Multi-unit franchisees can own a significant number of locations or they can own only two—the range differs. Multi-unit franchisees do need to balance the multiple locations in their roster, so in the instance where they own five locations, for example, the majority will need to be run via a semi-absentee or absentee ownership type.
There are also MUMBOs (multi-unit, multi-brand operators). This type of franchisee runs more than one franchise among different brands. By building their portfolio across different brands, they can diversify their investment into different industries.
FRANCHISE DISCLOSURE DOCUMENT (FDD)
The franchise disclosure document is typically provided to the prospective franchisee in the initial stages after certain screenings have been performed. The FDD typically includes 23 sections (aka items) with critical details that a prospective franchisee should know, especially before they make their investment. It essentially acts as a snapshot of the business and opportunity so prospective franchisees can make informed decisions before they proceed.
As a required element by the Federal Trade Commission (FTC), the FDD must be provided to the prospective franchisee at least 14 days before they sign any binding agreements or make any monetary investments.
The franchise agreement, which is a legal and binding contract, comes after the FDD is issued and includes more of the legal aspects of becoming a franchisee and outlines the obligations of the franchisee, including the investment and fees required.
Additionally, you will typically find details regarding the trademark, training and support, certain conditions and requirements, information on marketing, and so on. There is a lot of vital information in the franchise agreement, and it must be thoroughly reviewed before signing—many seek legal assistance to understand all aspects of it fully.
INITIAL FRANCHISE FEE
The initial franchisee fee is a one-time payment to the franchisor that is required after the franchisee signs the franchise agreement. This allows the franchisee the rights to the franchise and officially authorizes them into the franchise network. Often, this initial franchising fee will cover some initial costs, such as training, which is the important (and necessary) next step of the process. You will typically find the amount of the initial franchisee fee in the franchise disclosure document.
Aptly named, a discovery day is a day for prospective franchisees to “discover” more about the franchise. The franchisor will send an invite to prospective franchisees to meet the franchising team, which can include anyone from the CEO to the support team—exactly who will be there is up to the franchise. This day is also a great way for those interested in the franchise to learn more about the products/services and gain a greater understanding of their potential investment. Typically, from this point, both the franchisor and the prospective franchisee will decide whether to proceed to the next steps.
A territory is a geographical region/area where a franchisee is allowed to operate their location. The franchisor grants this, and you will typically find information regarding which territories are available as you learn more about the franchise.
You may also come across the term exclusive territory, which allows only a single franchisee to operate in the area. The franchisor protects the region/area so no other franchisee within the network can operate. Offering exclusive territories is not required by all franchises.
TERM OF AGREEMENT AND RENEWAL
The term of agreement is the window of time the franchise agreement is binding. This will vary depending on the franchise, and you will find out the duration in the franchise agreement. A renewal occurs when the term of the agreement ends, and the franchise agreement can continue for a certain window of time. Again, details on how this would occur are typically included in the franchise agreement.
FRANCHISING WITH DOGTOPIA
If you are interested in learning more about an investment opportunity with Dogtopia, check out our investment page for further details. Our FAQ page is also filled with details on the pet industry, Dogtopia, and the opportunity.