Franchise Glossary – all you need to know
Below is a glossary of fundamental terms for the franchising industry – scroll down the list (which is set out in alphabetical order) to read a definition of each concept.
Advertising levy –
This is the amount a franchisee must pay to support the franchise’s advertising efforts. Typically, this is paid to the franchisor monthly and is usually calculated as a percentage of the franchisee’s total revenue – in the UK, the average is three per cent, according to bfa research. It is often expressed as part of the overall franchise fee (see below).
The British Franchise Association (bfa) is a self-regulatory body for the franchising industry in the UK. It has been running since 1977, with individuals either joining as full members (established franchises), associate members (franchises that have launched at least one outlet), provisional listing (franchise start-ups) or affiliates (professionals offering advice to the sector). As well as maintaining standards, the bfa helps members share best practice and access development opportunities.
Confidentiality agreement –
A confidentiality agreement between the franchisor and franchisee guarantees that specified figures, processes or contract details will not be shared with a third party.
Defined trading territory –
When taking on a franchise, you may be allocated a defined trading territory. Some will be exclusive and some won’t, dependent on the type of franchise you buy. An example of an exclusive, geographically defined territory is one that may be determined by a postcode area; other franchisees operating under the same brand are not allowed to conduct business in that area. This usually means neighbouring territories would have the same ‘protection’, so you have to ensure the territory you buy has enough business to meet your expectations. Some territories can also be determined by demographics or by the number of households in a given area. Whichever approach your franchisor has chosen it’s worth doing your research and understanding why.
Due diligence –
This refers to the investigation that takes place before an investment or similar business transaction takes place – essentially, it is about establishing facts to ensure unnecessary harm is not inflicted to either party in the deal.
A franchise is a licence to use a brand name that is sold to another person for a set time period. The arrangement also includes details of the business model, which must be adhered to, training, support and advertising – all for a fee paid by the franchisee to the franchisor.
Executive franchise –
Sometimes referred to as a ‘white collar’ franchise, an executive franchise is one that provides a professional service, such as a financial consultancy; it will generally be a solitary person running a franchise for themselves – often from home – without employing others.
Investment franchise –
An investment franchise differs from other sorts of franchises in that a large amount of money is required – this type of arrangement tends to require at least £100,000 of capital. Example investment franchises are big businesses such as hotels or restaurants where you may need to buy the property and the necessary equipment.
Job franchise (or single operator franchise) –
This kind of franchise tends to require a relatively low investment, as the franchisee is only buying the brand name and a position for themselves – they are not seeking to build a large organisation. In this way, a job franchise is the same as an executive franchise in all but the kind of work in question.
Management franchise –
In contrast to a job franchise, a management franchise is all about a franchisee being the head of a firm and bringing in employees to actually carry out the work.
Master franchise –
When an international brand is introduced to the UK by a franchisee, the individual who licences it is referred to as a master franchisee and they can then sell the licence to other people in the country. The international originator of the brand is referred to as the master franchisor and they hand over licensing rights to the master franchisee in a specific territory
Franchise fee –
The franchise fee is the amount of money a person pays a franchisor for the right to operate a franchise. Your initial franchise fee is what you pay to be given the right to use the franchise brand and business systems within a specified territory. This initial fee usually covers your start-up training. Your ongoing franchise fee or service fee varies between franchisors and is typically a percentage of your turnover. Payable weekly or monthly, it helps the franchisor to grow and develop the business and brand.
The organisation that licences its brand and business model to be used by franchisees.
The individual who buys the licence to use a brand name and business model (franchise). In return for a fee paid to the franchisor, they can expect to get training, ongoing support and advertising assistance. Nevertheless, a franchisee remains an independent business owner, with appropriate autonomy and, in most cases, ultimate responsibility for the success or failure of their business.
Investment capital –
In franchising terms, this is the amount of money put in by the franchisee to get their business up and running. A franchisee may need to buy equipment and other essentials to begin with, as well as pay for the franchise licence.
Operations manual –
A franchise’s bible, the operations manual gives people all the details they need to follow a franchise business model, including policies and procedures. Whilst the operations manual may not cover every aspect of the day-to-day running of the business, failure to comply with the terms of the operations manual would generally be considered a breach of the franchise agreement.
Once a franchisee has the business up and running, they can choose to sell it on – this is known as a resale. Whereas buying a licence for a franchise involves setting everything up and becoming established, an individual that purchases a resale has had much of the work done for them, so the upfront purchase price tends to be higher. Bear in mind that this kind of transaction is generally between the current and incoming franchisee, not the franchisor.
Start-up (or greenfield) –
A start-up or greenfield location is one in which the franchisor has no existing involvement in that space (i.e. does not already have an outlet in place). It requires the business to be started from scratch, which can involve more start-up expenses and take time to get going, but offers great growth potential and strategic opportunities.
Working capital –
A great measure of a company’s short-term health is to calculate its working capital, which is basically the liquid assets it holds to meet short-term debts. It does not include fixed assets or long-term returns. To calculate working capital, deduct the value of current liabilities from current assets – if the figure is less than one, then a business has negative working capital.