Key Takeaways
- Franchising has its own language. Learning a few common terms makes it easier to follow the process and ask the right questions.
- Not everything you hear about franchising is true. This guide clears up common myths so you can separate facts from fiction.
- Understanding the basics builds confidence. Knowing how franchise relationships work helps you decide if ownership is right for you.
When getting into anything new, understanding industry jargon and debunking myths is part of the process. It's no different in franchising. It's important to familiarize yourself so you can read franchise agreements, ask the franchisor key questions, and recognize anything that might not seem right.
This guide provides the information you need regarding common franchise terms, including the franchise relationship, and clarifies misconceptions about franchise opportunities.
Franchise Terms FAQ
Getting into the world of franchising can be overwhelming, but understanding the key terms helps make the process easier. Here's a breakdown of the most common terms, including multi-unit franchise, to help new franchise owners like yourself navigate confidently.
What Is a Franchise vs. Franchisor?
A franchise is a commercial arrangement where a franchisor grants individuals or entities (franchisees or franchise owners) permission to use its brand name for selling products or services in accordance with specified conditions.
A franchisor is typically a company offering the chance to operate a business utilizing its established brand and systems while adhering to the franchisor's brand standards.
As the franchise owner, this arrangement gives you the right to use the franchisor's name and benefit from a proven business model and ongoing support. As the franchise owner, you also agree to run your franchise business according to the franchisor's terms. This relationship defines your journey, impacting everything from your daily operations to your long-term success.
What Is a Franchise Fee?
The franchise fee is an initial cost paid by the franchise owner candidate to the franchisor for the right to operate the business. It's important to note that this initial fee, or initial franchise fee, is distinct from ongoing startup costs and royalty or license fees, and the franchise fee can vary depending on the franchisor and the territory size.
What Is a Franchise Disclosure Document (FDD)?
The Franchise Disclosure Document (FDD) is a legal document mandated by the U.S. Federal Trade Commission (FTC) that franchisors must provide to potential franchise owners. As a potential franchise owner, you should always thoroughly review the FDD. This document includes important information regarding the franchisor's business, including:
- The franchisor's business history
- The financial implications of purchasing and starting the franchise
- The contractual obligations between the franchisor and franchise owner
- Other critical details affecting the franchisor/franchisee relationship
How Is an FDD Related to a Franchise Agreement?
After completing the FDD review process and showing genuine interest, the potential franchise owner is given the franchise agreement. This comprehensive document, often reviewed with a franchise consultant, covers essential elements such as financial considerations, territory rights, support and training provided by the franchisor, advertising and intellectual property matters, termination procedures, and the official signing of the franchise agreement.
The FTC requires the franchisor to furnish the FDD to the potential franchise owner a minimum of fourteen days prior to finalizing the franchise agreement. This timeframe is mandated to promote transparency and enable well-informed decision-making. It is recommended that you review both the FDD and franchise agreement with an attorney.
What Is a Franchise Territory?
Understanding your franchise territory allows you to recognize where you can operate without stepping on another franchise owner's toes. As your franchise agreement outlines, this territory is your exclusive or non-exclusive area for business operations, which may include plans to open franchise units. Exclusive means you're the only one from your franchise in that defined area. That way, there's no internal competition crowding your market.
The size and scope of a franchise territory depend on factors like population density and market demand. The ZIP codes or demographic specifics commonly define it. This gives you a clear area to target your efforts to develop your business effectively.
What Are the Common Franchise Terms One Needs to Know?
At Neighborly®, we know that stepping into business ownership is a big move, and learning the language of franchising helps you feel ready. Here are some terms you’ll want to know as you explore becoming a franchise owner, including factors that affect a franchise owner's ability to understand and navigate the franchising space effectively.
Franchisee or Franchise Owner – That could be you! A franchisee's business is owned and operated by the individual or company and a part of the franchisor’s brand.
Franchisor – That’s us. The franchisor is the company (like Neighborly® and its affiliated brands) that licenses the brand name and trademarks, provides proven systems, and supports franchisees along the way.
Franchise Fee – This is the one-time, upfront fee you pay to join the franchise system. It covers initial training, onboarding, access to the brand and business model, and contributions to the system brand fund.
Royalty Fee – A recurring fee (usually a percentage of gross sales) that supports ongoing resources, support for franchise owners, and the continued development of the franchise system.
Marketing Fund – An ongoing contribution that fuels national and regional marketing campaigns designed to promote the brand and drive customer traffic to your business.
Operations Manual – Your go-to playbook based on decades of experience. This contains the detailed procedures, standards, and best practices for running your franchise successfully.
Initial Investment – The full range of estimated costs required to launch your business, including the franchise fee for an existing business, equipment, inventory, working capital, and more.
Multi-Unit Ownership – When a franchise owner operates more than one location or brand within the franchise system. Neighborly supports multi-brand ownership for qualified candidates.
Meet the Team Day – An in-person or virtual visit with the franchise brand team where prospective franchise owners meet the leadership team, ask questions, and get a feel for the company culture before signing the franchise agreement.
Validation – The process of speaking with current franchise owners to learn about their real-world experience. Understanding financial performance representation, which is generally the total sales, is an important step in making an informed decision.
Training and Support – The resources, business coaching, and ongoing support provided by the franchisor to help franchise owners succeed. At Neighborly, this starts before your doors even open and continues throughout your ownership journey.
At Neighborly, we’re proud to provide not only a business opportunity but a community of brands and owners who believe in service, quality, and support. If you’re ready to learn more, we’re here to guide you every step of the way.
Franchise Myths FAQ
Unraveling common misconceptions can help you find success in your franchise journey. Here are the most common myths about franchising.
Are Startup Costs and Royalty Fees Both Considered One-Time Payments?
Startup costs for investing in a franchise are upfront expenses like purchasing equipment and securing a location. These costs are primarily one-time payments. However, you will need to pay to upgrade and maintain your equipment throughout the life of your franchise.
On the other hand, royalty fees are ongoing payments you make to the franchisor, calculated as either a percentage of your sales or a flat fee. These are not one-time expenses.
If I Invest in a Franchise, Can My Agreement Be Terminated?
Investing in a franchise means agreeing to specific conditions under which your agreement can be terminated, emphasizing the parameters around termination or revocation decisions. This is to protect both the franchise owner and the franchisor. An experienced attorney can be invaluable in clarifying these terms, and ensuring you're prepared for any scenario in your franchise journey.
Do All Franchise Companies Offer In-House Financing?
Not all franchise companies provide in-house financing, a service that can ease initial financial burdens like startup costs and franchise fees. If your franchisor offers in-house financing, it's worth considering. However, you should always weigh it against external loans to find the best terms for your individual situation. Making informed decisions on financing is the key to managing your investment wisely.
Find Out if Investing in a Franchise Is Right for You
Investing in a franchise is a significant decision that requires careful consideration and understanding of the franchising world. At Neighborly, we encourage you to ask questions about these terms and myths so you can decide if franchise ownership is the right choice for you.
Neighborly offers a diverse network of home services brands and a network of franchise owners so you never feel alone. Whether seeking more independence or income, Neighborly empowers you to be your own boss, enjoy a flexible schedule, and pursue your business dreams.
Download the Neighborly Franchise Ownership Guide to get started today.
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