The parent company that grants, for a fee and other considerations, the right to use its name and system of business operations.
A person or entity to whom the right to conduct a business is granted by the franchisor or licensor.
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.
Describes an individual or company owning the exclusive rights to develop a particular territory for the franchising company.
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.
An up-front entry fee, usually payable upon the signing of the contract (franchise agreement) for the right to use the franchisor’s name, logo, and business system. Often, the franchise fee is also the consideration paid for initial training, site selection, operations manuals, and other help given by the franchisor before the opening of the business. Franchise fees can be amortized over the life of the franchise agreement.
Estimated Initial Investment
A detailed listing of all fees and expenses you can expect to incur in starting your franchised business. This listing represents the total dollar amount that you would need to pay or get financing for, including fees paid to the franchisor; estimates for furniture; fixtures and equipment; opening inventory; real-estate costs; insurance inventory; etc. This estimate should include a provision for working capital through the start-up phase.
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.