In addition to several new chapters addressing key concerns for franchise prospects and how the franchise business model has evolved over the years, I have also included the Franchise Glossary to provide readers with definitions for key terms they’ll see during the due diligence process. This is the first time the glossary, which is also found inThe Franchisee Workbook (a fill-in-the-blank step-by-step workbook that will help address everything a modern-day prospect will face during their franchise exploration process), is making an appearance in The Educated Franchisee.
As a teaser, I’d like to share with you 10 key franchise terms and definitions readers can find in the glossary that can help educate themselves about all aspects of franchising.
Franchise - The FTCFranchise Rule defines a “franchise” as an arrangement whereby a franchisor grants franchisees the right to operate a business that: 1) is identified with the franchisor’strademark; 2) is subject to the franchisor’ssignificant control and/or assistance; and 3) in exchange for which, the franchisee pays a “franchise fee” to the franchisor or its affiliate. Most state franchise lawsadopt a definition (except in New York, where any combination of elements 1 and 3, or elements 2 and 3, are enough to satisfy the state law definition of “franchise”).
Discovery Day - An event set up by the franchisor so that potential franchisees may learn more about becoming a franchisee. A discovery day typically takes place at the franchisors headquarters and is often the final step in the due diligenceprocess. It provides the opportunity to meet the management team, support team, and trainers face-to-face. Occasionally called “Meet The Team Day” or “Open House.”
Due Diligence - Usually undertaken by investors, but also customers, due diligencerefers to the process of making sure that someone is what they say they are and can do what they claim; i.e., investigation of a business (e.g., Does the product or system really work? Does the franchise really have customers?).
Financial Performance Representation - Any oral, visual, or written representation to a prospective franchisee or for general dissemination in the media which states or suggests a specific level or range of potential or actual sales, income, gross, or net profit. This information must be provided in Item 19 of the Franchise Disclosure Document. Previously called “Earnings Claim.”
Franchise Disclosure Document - The Franchise Disclosure Document (FDD) is the form for providing disclosure in the U.S. under the FTC Franchise Rule. Before the 2007 amendments to the FTC Franchise Rule, the principal format for providing disclosure in the U.S. was a document prepared under the “Uniform Franchise Offering Circular” (UFOC) format. The FDD provides extensive information about the franchisor and the franchise organization in a uniform format, which a prospective franchisee can use to compare different franchiseofferings. The FDD is meant to give a potential franchisee certain specified information to help make educated decisions about their potential investments. Also see “Disclosure Document” and “FTC Franchise Rule.” NOTE – The Educated Franchisee Resource Center, an extension of the print edition of the book, includes The FDD Exchange,an online Franchise Disclosure Document library with more than 2,500 FDDs from leading franchise brands in various industries.
Area Developer - The franchisor awards a single franchisee the right to operate more than one unit within a defined area, under a development agreement and based on an agreed-upon development schedule.
Master Franchisee - A system whereby a franchisor grants to a party (usually referred to as the Master Franchisee) the right to operate franchised businesses and to grant sub-franchises to third parties, within an agreed-upon geographic area. The Master Franchisee serves as if it were the “franchisor” within the sub-franchise territory, providing localized support services within the territory. The Master Franchisee typically retains a portion of the royalty as compensation for its services.
Operations Manual - The document detailing the operation of a particular franchised business. Operations manuals—also called franchise manuals—describe such items as: quality control requirements; recommended hours of operation and financial and management practices; the correct use of any trademarks or trade names; forms and written materials for use in business operations; payment of fees and royalties; approved suppliers; and so on. Increasingly, operations manuals also address other matters, such as systemwide policies concerning data, environmental and energy standards, health and safety matters, etc.
Royalty Fee - A regular and continuing payment made by the franchisee to the franchisor, often paid on a weekly or monthly basis. The royalty may be a percentage of sales, a fixed recurring fee, or a combination. Royalties commonly cover use of a trademark and trade name and also constitute a fee for services performed by the franchisor such as training and assistance, marketing, advertising, accounting, and so on. Also called “service fees” and/or “license fees.”
SBA-Guaranteed Loan - A program of financial assistance available to small business owners from the U.S. Small Business Administration (SBA). While the SBA seldom loans money directly to franchisees, an SBA guaranteed loan makes it easier for a qualified individual to borrow money from a commercial lending institution, such as a bank. Under the program, the loan is made directly by the bank to the franchisee. The SBA protects the bank against financial loss in the event of business failure.
The Franchise Glossary has almost 200 key terms that will help educate the reader on all of the ins and outs of the franchise process. The Educated Franchisee is now available for purchase through Amazon and in bookstores around the country.