14 Franchise Terms You Need to Know

As you further explore affordable franchises and home-based business opportunities, such as those offered at Neighborly, we’d like to offer you a short glossary of common franchise terms you may find valuable to know.

1. Franchisee/Franchisor:

A franchisor is an individual business owner or corporation looking to offer individuals the chance to start and operate a business using the franchisor’s products, processes, and trademarks for a fee. The franchisee is the person who purchases the right to operate the business using the franchisor’s name and system. The franchisee also agrees to run the business as the franchisor stipulates, with the benefit of gaining access to a successful business model.

2. Franchise Fee:

This is the upfront fee the franchisee pays the franchisor for the right to run and operate the business.

3. Franchise Disclosure Document:

Franchisors are required by the U.S. Federal Trade Commission (FTC) to present this legal document to potential franchisees, who cannot sign a franchise agreement until they have had the FDD for a minimum of 2 weeks.  As a potential franchisee, you should always ask for a copy of the FDD. It includes (but is not limited to):

  •      The franchisor’s history
  •      The fees and costs to purchase a franchise and start your business
  •      Contractual obligations between the franchisor and franchisee
  •      Additional critical information pertinent to the franchisor/franchisee relationship.

4. Royalty Fee:

Most franchisors will require that you pay a fee on a regular basis. The fee usually is a percentage of sales, but it also may be a flat fee.

5. Trademark:

This is the brand name, logo and marks that identify a franchisor. These are owned by the franchisor – and the franchise agreement is what grants franchisees the use of these valuable assets.

6. Franchise Agreement:

A written contract between the franchisor and franchisee, which details what is expected when the purchase is complete. This is a legal document, and it’s advisable to have a franchise attorney review this document. Franchise agreements are typically not changed nor negotiated; franchise attorneys understand this, and will provide helpful feedback and ultimately advise the candidate on whether and when to sign. Often attorneys that do not specialize in franchising will attempt to negotiate terms, which runs up legal fees that you will ultimately be saddled with.

7. Registration States:

Fifteen states require franchisors to annually register their FDD with a state agency. Franchisors must do this before they legally may sell their franchise in the state. Franchise registration states include: California, Hawaii, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, Virginia, Washington, and Wisconsin.

8. In-House Financing:

This is financing your franchisor may offer to help you with expenses, such as startup costs, the initial franchise fee, inventory and equipment, and even payroll.

9. Absentee Ownership:

Some franchisors offer their franchisees the option to own the franchise without being actively involved in its daily operation. In order to ensure the best chance for your success, we do require all of our franchisees to start as owner operators.

10. Area Developer:

This is a franchisee who agrees to start a certain number of franchises (franchise units) within a large territory within a specified period of time. The area developer can open/operate the units himself or recruit other franchisees to open them.

11. Rights of Grantee:

This means that the franchisor (who “grants” or holds the franchise) has the right to enter upon the franchisee’s location to construct, maintain and operate equipment, facilities and other improvements. The right is to the extent expressed in the franchise agreement and must conform with local, state and federal statutes and regulations.

12. Revocation/Termination:

This term refers to the provisions within the franchise agreement that deal with “how, when, and by whom the franchise can be terminated….” You really must read –and understand – any termination provisions and what can or could trigger them. Again, we highly recommend you hire your own attorney before you purchase a home-based business opportunity.

13. Force Majeure:

You’ve no doubt heard the term “an act of God.” Force majeure is a French phrase that means pretty much the same thing: something that occurs that not only was unpreventable but also unforeseeable, such as a wildfire, airplane crash, riots, flood, war, etc. When it comes to franchises, a force majeure usually is a clause within the agreement that absolves “either party” of having liability for failing to comply with the agreement should the failure be caused by something “beyond the reasonable control of the party.” Again, make sure your attorney is there for you should you and your franchisor disagree over any particular force majeure incident.

14. Subject to Authority:

In a nutshell, you and your franchisor are “subject to the authority” of the laws of the U.S., the state(s) and city (cities) in which you operate your franchise location(s). (The franchisor also must run his business subject to his state’s laws, etc.) You must build, operate and maintain all equipment and facilities in full compliance with all laws, rules and regulations as set by the state and city in which you do business. 

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Whether you want to achieve your professional goals by starting your first business or have the flexibility to be your own boss, Neighborly® is ready to help you build a legacy in the home services industry.