When getting into anything new for the first time, understanding the industry jargon and debunking the myths are part of navigating it all–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 knowledge you need regarding common franchise terms 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 to help you navigate confidently.
What Is a Franchise vs. Franchisor?
A franchise is a commercial arrangement where a parent company (known as a franchisor) grants individuals or entities (franchisees) permission to utilize 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 under its established brand and systems. As the franchisee, this arrangement gives you the right to use the franchisor’s name and benefit from a proven business model and ongoing support. As the franchisee, you also agree to run your franchise business according to the franchisor's terms. This relationship defines your journey in the franchise world, 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 franchisee to the franchisor for the right to operate the business. It’s important to note that this 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, or FDD, is a legal document mandated by the U.S. Federal Trade Commission (FTC) that franchisors must provide to potential franchisees. As a potential franchisee, you should always remember to ask for a copy of the FDD. This document includes important information including:
- The franchisor’s business history.
- The financial implications of purchasing and starting the franchise.
- The contractual obligations between the franchisor and franchisee.
- Other critical details affecting the franchisor/franchisee relationship.
How Is This Related to a Franchise Agreement?
After completing the FDD review process and showing genuine interest, the potential franchisee is given the franchise agreement. This comprehensive document 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 franchisee a minimum of two weeks prior to finalizing the franchise agreement. This timeframe is mandated to promote transparency and enable well-informed decision-making.
What Is a Franchise Territory?
Understanding your franchise territory allows you to recognize where you can operate without stepping on another franchisee’s toes. As your franchise agreement outlines, this territory is your exclusive or non-exclusive area for business operations. Exclusive means you’re the only one from your franchise in that area. That way, there is no internal competition crowding your market.
The size and scope of a franchise territory depend on factors like population density and market demand in your area. The ZIP codes or demographic specifics commonly define it. This gives you a clear area to target your efforts to develop your business effectively.
Franchise Myths FAQ
Unraveling common misconceptions can help you find success in your franchise journey. Below are some of the most prevalent franchise FAQs surrounding myths to set the record straight so you can make informed franchise decisions.
Are Startup Costs and Royalty Fees 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, as many incorrectly believe.
Can You Negotiate a Franchise Agreement?
Your franchise agreement is the cornerstone of your franchisor-franchisee relationship, and it’s essential to understand what information is included in a franchise agreement. It details the commitments of each side when the purchase is completed and acts as a legal document usually set by the franchisor’s standards. It tends to have minimal to no room for negotiation depending on the franchisor.
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 franchisee and the franchisor. An experienced attorney can be invaluable in clarifying these terms, 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, providing ample opportunities for entrepreneurship and a network of franchisees so you never feel alone. Whether seeking full-time independence or supplementary income, Neighborly empowers you to be your own boss, enjoy flexible schedules, and pursue your business dreams.
If you are ready to start down the path to franchise ownership, download the Neighborly Franchise Ownership Guide today.
