The following lists provide information about franchising, including resources that may help you while you’re pursuing a franchise opportunity. Please keep in mind that the inclusion of any resource does not imply endorsement by FranchiseExpo.com. The information in these lists is not exhaustive, and if you’re looking for something that you can’t find in this section, please let us know.
Here are some of the most common terms used in franchising.
Many franchise opportunities require franchisees to pay a monthly fee into an Advertising or Marketing Fund. The fee is generally represented as a percentage (for example, 2%) and is almost always calculated on the franchisee’s gross sales, as opposed to net sales, or profits. The Advertising Fee may also be a flat fee. The Advertising Fee is ongoing and will be collected throughout the period of time the franchise agreement is in effect. Advertising Fund monies are used to advertise the franchise brand, its products and/or services. This is not money to be used by the franchisor!
Franchisees pay their Advertising Fees into an Ad Fund, which is used to underwrite the cost of advertising and promotions for franchisees. The franchisor, or Franchise Advisory Council, establishes the Ad Fund and oversees it on behalf of franchisees. Ad Fund money is often used to hire advertising and marketing agencies to assist the franchise network.
In some countries, and especially in the United States, franchisors are required by federal and some state laws to “disclose” individuals who are serious about acquiring a franchise. Disclosure is a process that includes providing prospective franchisees with a copy of the franchisor’s Franchise Disclosure Document (FDD) and Franchise Agreement. The FDD must be delivered to a franchise candidate at least 14 days prior to the candidate purchasing the franchise. Disclosure minimizes fraudulent sales in franchising and promotes the safety and longevity of franchising. Franchisors are required to comply with specific disclosure regulations that disseminate helpful information to prospective franchisees in advance of paying any money or signing any documents.
See Franchise Disclosure Document.
An Earning’s Claim (or a Financial Performance Representation) may be included in a franchisor’s Franchise Disclosure Document. An Earning’s Claim documents the earnings of franchisees in the franchisor’s network. Most franchisors do not include Earning’s Claims in their documents. Those who do not are prohibited from making any oral or written statements concerning the actual or potential sales, costs, income or profits of their franchise opportunities.
It’s a license that grants an individual or an entity, i.e. a corporation, the right to use a franchisor’s operating system for the purpose of marketing, selling and distributing the franchisor’s products and/or services. A franchise is a license.
A legal document (license) signed by both the franchisor and the franchisee granting the franchisee the right to operate the franchise system for a specified period of time, in a specified format, and sometimes in a specified location. It’s the legally binding document between franchisor and franchisee.
There are approximately 40 trade associations throughout the world that represent the interests of franchisors and franchisees. See International Franchise Association.
Franchise Disclosure Document (FDD)
Every franchisor in the United States is required to complete and maintain a Franchise Disclosure Document (FDD). The FDD, in layperson’s language, describes the franchise opportunity. The items of disclosure are standard for all franchise companies. There are 23 Items that require disclosure, including Litigation, Initial Franchise Fee, Franchisee’s Obligations, Franchisor’s Obligations, Territory, Restrictions On What The Franchisee May Sell, Renewal, Termination, Transfer And Dispute Resolution, List Of Outlets (Franchisees), Financial Statements, and more.
Prospective franchisees should read the FDD several times before investing in the franchise.
The individual or entity, i.e. a corporation, that’s assigned the rights to a franchise by a franchisor.
Franchise companies come together under one roof to exhibit their franchise opportunities for a day or more. The public is invited to these events. Expos sometimes include educational programs.
A one-time, upfront fee required by the franchisor. It must be disclosed in the Franchise Disclosure Document.
A Web site that promotes franchise opportunities and may also include educational information about franchising. The best example: FranchiseExpo.com.
The company that grants franchises to franchisees. The franchisor controls and owns the franchise system.
International Franchise Association
IFA is the world’s largest trade organization representing both franchisors and franchisees. Headquarters: Washington, D.C. Web site: www.franchise.org.
International Franchise Expo
The world’s premier event among franchise expos is sponsored by the International Franchise Association. The producer of the IFE is MFVExpositions. Web site: www.ifeinfo.com.
A payment of money by the franchisee to the franchisor. Usually represented as a percentage (as an example, 6%) and paid weekly or monthly. May also be a flat weekly or monthly fee. Royalties are almost always paid on the franchisee’s gross sales, as opposed to net sales or profits. This is an ongoing fee that must be paid during the period of time the franchise agreement/license is in effect. The royalty fee must be disclosed in the Franchise Disclosure Document.
International Franchise Association
1350 New York Ave. NW
Washington, DC 20005
Web site: www.franchise.org
In addition to representing franchisors and franchisees, the IFA also represents the Council of Franchise Suppliers, which includes attorneys, accountants, consultants, franchise brokers, and others who may be able to assist you in your exploration of franchising. IFA promotes numerous books and other resources about franchising, and publishes Franchising World magazine. Free resources are included on the IFA’s Web site.
For a list of Franchise Associations Worldwide:
Web site: www.mfvexpo.com
In addition to the International Franchise Expo, MFV Expositions produces the West Coast Franchise Expo, Franchise Expo South and international franchise events including Feria Internactional De Franquicias in Mexico City.
U.S. Government Resources
U.S. Small Business Administration: http://www.sba.gov
U.S. Commerce Department International Trade Administration: www.ita.doc.gov