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FRANCHISE "LINGO"As you begin to venture into the franchise business, you will want to know theterms and Lingo that goes with it. Best way to become an educated buyer is to know the language first. The following list of terms will greatly benefit you.Acknowledgement of Receipt: A document provided to you by the franchisor that yousign and return to the franchisor. It confirms that you received the legalfranchise documents on a certain date.Advertising Fee/Fund: A fee or fund paid by franchisees, usually to the

franchisor, for advertising expenditures. The fund may be used locally, regionallyor nationally. A franchisor may have more than one fund. This fee is usually apercentage of the franchisee's annual sales and is in addition to royalty fees.Arbitration: A method of resolving disputes that is an alternative to going tocourt. Many franchise agreements require that disputes between the franchisor andthe franchisee be resolved by arbitration. The American Arbitration Association isoften identified as the organization that will provide the arbitrator (a neutral,disinterested third party). The arbitrator hears from both sides and renders aruling.Area Development Rights: The rights one obtains by which you receive the right todevelop or sell multiple franchise rights for the franchisor in a specificgeographic area. Normally, the area development agreement will provide a build outschedule that details how many locations are to be opened within a given period of

time.Balloon Payment: A final payment due at the end of a loan.Business Plan: A critical document that details your company's management, plansand strategy and details the resources, financial and otherwise, that are neededto succeed. Used for your own planning and required by lenders and investors toevaluate your business. You usually can't get a loan without one.Collateral: Assets used as security for a loan in the event of default.Company-owned: A site or location owned and operated directly by the franchisor.DBA: DBA stands for "doing business as." You can organize your corporate entityunder one name but be known to the public under a different name. Thus, you are"doing business as " You usually must fill out appropriate forms to register your business name with the states in which you do business.Default: Failure to live up to obligations or otherwise comply with the terms of a

legal agreement.Designated Supplier: To ensure quality standards are met, some franchisors requirethat franchisees buy supplies or products for their franchised business only froma designated, exclusive list of suppliers.Distributorship: A distribution method for a company's products by which abusiness, the distributor, is authorized under the terms of the DistributorAgreement, to sell the products or services of another company. This is usually amanufacturer/reseller relationship and, although somewhat similar to a franchise,is different. Distributorship agreement may but need not provide exclusive rightsto the distributor.EBITDA: A calculation used to value businesses. It stands for "Earnings BeforeInterest, Taxes, Depreciation and Amortization."Earnings Claims: Statements of sales, profit or other financial information made

by the franchisor regarding the operations of their franchisees' locations.Exclusive Territory: A specifically defined geographic area in which a franchiseehas the exclusive, protected right to operate with in the franchisor's system.Federal Trade Commission (FTC): The agency of the federal government charged withregulating trade practices including franchises. The Uniform Franchise OfferingCircular (UFOC) exists because of FTC regulation.Franchise Agreement: The legal agreement which governs the relationship between afranchisor and a franchisee.Franchisee: The owner of franchise rights who is entitled to use the franchisor'strade names, trademarks and systems.Franchise Fee: The initial amount of money paid to the franchisor for the right to

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become a franchisee in that system.Franchising: A method of conducting business in an industry that involves afranchisor (parent company) and franchisee (someone who pays for the right to sellthe parent company's products and use their trademark/name).Franchisor: The company that owns a business system, products, trade names andtrademarks that has decided to and has registered to sell its products andservices through a distribution method using franchisees.FTC Rule: A federal regulation that requires franchisors to prepare an extensive

disclosure document called The Uniform Franchise Offering Circular (UFOC) and togive a copy of the UFOC to any prospective purchaser of a franchise. A franchisormay not accept any money from or enter into a contract with a potential franchiseeuntil no less than ten (100 days after delivery of the UFOC.Initial Investment: The upfront cash investment required to purchase a particularfranchise business. Generally refers to the amount of the franchise fee ordeposits needed at time of signing of a franchise agreement.Master Franchisor: A term, sometimes used synonymously with Area Developer,describing the right of a franchisee to sell franchise locations to otherfranchisees within a designated geographic territory.Net Operating Income (NOI): The amount of cash generated by the business afterdeducting operating expenses. NOI us usually calculated without considering debtpayments.

Net Profit: Sometimes also referred to as Net Cash Flow, the amount of cashgenerated by the business after deducting operating expenses and debt payments.Net Worth: A calculation determined by subtracting the value of a person orentity's total liabilities from their total assets.Non-Compete Clause: A clause often found in a Franchise Agreement which purportsto restrict the franchisees ability to, during and upon termination of theFranchise Agreement, compete with the franchisor's business.Operations Manual: A detailed manual that is provided by the franchisor to thefranchisee and which contains the training and operational details andspecifications required to properly operate the franchise business.Pro Formas: Projected financial results for a business.Registration: Many states require franchisors to file documentation before afranchise can be sold and thereby "register" with the state.

Renewal Rights: Franchises are generally offered for a period of time with a rightto renew the relationship. The franchise agreement will detail what renewalrights, if any, are provided to the franchisee.Royalty: A percentage of gross sales that a franchisee pays to the franchisor.Total Investment: Generally speaking, the total amount of funds you will need toget started in a particular franchised business. This amount should include mayinclude the Initial Investment plus any required build out, inventory, equipmentpurchases and working capital for at least three months of operation.Uniform Franchise Offering Circular (UFOC): Required by the FTC to be provided byfranchisors to potential franchisees, it is a treasure trove of information for apotential franchisee. Sometimes also referred to as the Disclosure Document, thedocument provides detailed information in 23 specified categories. A copy of theproposed franchise agreement is attached as an exhibit.

Working Capital: The amount of money you need to have and maintain in order tooperate your franchised business. Planning for and having sufficient workingcapital available at the time you start your business and until your business isgenerating profits, is critical to your success.

Getting Into the Groove: Learn the Franchise LingoJul 14, 2006- Franlinkasia.comEmail this articleFranchising

Common Definition:A method of doing business by which a franchise is granted the right to engage inthe business of offering, selling or distributing goods and services under a

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marketing plan or system prescribed in substantial part by a franchisor and whichis substantially associated with the franchisor s trademark, name, logo and advertising.

Legal Definition

Franchising is a contract or agreement, express or implied, oral or written,between two or more persons by which:

* A franchisee is granted the right to engage in the business of offering, sellingor distributing goods or services under a marketing plan prescribed in substantialpart by a franchisor;* The operation of the franchisee s business pursuant to that plan or system as substantially associated with the franchisor s trademark, service mark, tradename, logo type, advertising, or other commercial symbols designating the franchisor or its affiliates; and* The franchisee is required to pay directly or indirectly, a franchise fee.FranchisorThe parent company or operator of a franchise concept or system that grants, for afee and other considerations, the right to use its name and system of businessoperations.

FranchiseeAn independent business person or novice entrepreneur who has been granted by thefranchisor the right to duplicate its entire business format at a particularlocation and for a specified period, under terms and conditions set forth in thecontract (franchise agreement).

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

Operations ManualA written document which clearly explains the franchisor s standards of operation, and identifies the operational tasks required to establish and operate thefranchise business. The operations manual supports and promotes the use ofconsistent and uniform day-to-day procedures at each franchise unit within thenetwork franchise unit in order to maintain the quality of service and products inevery franchise outlet.

Franchise OpportunityA franchise opportunity is a business opportunity that involves the sale of goodand services that enable a novice entrepreneur to begin a franchise business.

Master (or Regional) Franchising

A model of multi-level franchising wherein the master franchisor sells thedevelopment rights in a particular geographic market to a master franchisee, who,in turn, sells individual or single-unit franchises within the territory. Inreturn for a front-end master franchise fee, the master franchisee has the soleresponsibility of developing that area or market under a mutually agreed uponschedule. The master franchisee is rewarded by sharing in the franchise fee andongoing royalties paid by the franchisees within the territory to the master orparent franchisor.

Area Development AgreementThis is another variation of multi-level franchising where the franchisor grants

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exclusive development rights for a particular geographic area to an areadevelopment investment group or an area developer. In return for the rights to anexclusive territory, the area developer pays the franchisor a front-enddevelopment fee and commits to develop a certain number of units within aspecified period of time.