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GLOSSARY

Franchise

"A franchise is an agreement by the franchisor to the franchisee, entitling the latter to the use of a complete business package containing all the elements necessary to establish a previously untrained person in the franchised business, to enable him or her to run it on an ongoing basis, according to guidelines supplied, efficiently and profitably".
How to Franchise Your Business, FASA

Franchisee

The franchisee buys the right to run the business using the trademark and trading system. The business is run according to the procedures set out in the franchise operating manual and under the terms of the franchise agreement.

Franchisees should be:

  • Capable of absorbing new concepts quickly.
  • Willing to follow the franchisor's blueprint to the letter.
  • Positive people-persons imbued with the necessary enthusiasm to market the business and motivate staff.
  • Adequately resourced to meet the initial (capital investment) and ongoing (working capital) financial requirements of the business.
  • Able to manage and control the business, and willing to drive the brand at local level.
  • Prepared to co-operate with the franchisor's team as well as with fellow franchisees, and play an active part in programs offered by the network.
  • Determined to build the business into the best and most successful in the territory.
  • Convinced of the merits of the franchise and the brand, and prepared to defend both against possible attack by competitors or others.

Franchise Agreement

A written contract detailing the mutual responsibilities of franchisors and franchisees. It is usually for a several-year term, and when the term is up, the contract expires and must be renewed. Some state laws require the contract to be renewable at the franchisee's option. Usually a franchise agreement may not be sold, transferred, or otherwise assigned without the franchisor's permission.

Franchising

Neither an industry nor a business, but a method of doing business within a given industry. At least two parties are involved in franchising: the franchisor and the franchisee. Technically, the contract binding the two parties is the franchise.

Franchise Contract

The legal agreement between the parties which sets out the terms under which the Franchisee will operate the business. The terms usually include the following:

  • The right to use the trade name
  • The Franchisee's obligations
  • The Franchisor's obligations
  • The premises and the territory
  • Length of Franchise contract
  • Financial aspects such as initial franchisee fee and ongoing royalties
  • Renewal terms
  • Control of standards
  • Rights of sale
  • Performance targets
  • Termination
  • Effects of termination

Franchisor

The franchisor owns the business system and associated trademarks or trade names. Franchisors allow franchisees to use these under licence in a designated area and for a fee. They then support their franchisees both in starting their business and in continuing to make it work.

The franchisor should:

  • Know every facet of the business and have a hands-on approach to problem solving.
  • Be honest and forthright in all dealings.
  • Have operated the business he wishes to franchise for a reasonable period. Agreement exists that the minimum period should be one to two years but research has shown that most companies wait for six years or more before they roll out a franchise.
  • Have adequate financial resources to develop the concept and make the necessary investment into the brand.
  • Want to grow through others, and be prepared to share the rewards resulting from teamwork with franchisees.
  • Strive for excellence in every facet of the business and determined to grow.

Master Franchisee

In master franchising, the franchisor grants the master franchisee the right to act as the franchisor in the target territory. The master franchisee may open his or her own outlets, sub-franchise or do both. The primary advantages to the franchisor of master licensing are: limited capital investment; tapping into the master franchisee's knowledge of the local market and only having to deal with one party.

Royalty

A continuing payment to the franchisor that is payable on a periodic basis (usually weekly, biweekly, or monthly) throughout the term of the franchise agreement. In theory this royalty payment is for:

  • Compensation for the continuing services given by the franchisor (for training, field services, etc.)
  • Payback financing of the true market value of the franchise. Royalty payments can be either fixed amounts, based on percentage of gross sales, or based on a sliding scale, with graduated breakpoints.

Rules of Operation

Specific mandatory rules with which every franchisee and company outlet must comply. This document will change from time to time. By incorporation by reference in the franchise agreement, violation of the Rules of Operations allows the franchisor to cancel a franchise agreement.