Common Franchise Terms

Glossary of terms

Acknowledgement of Receipt : This is the last page of the UFOC (Unifying Franchise Offering Circular), which is signed to indicate you have received this document on a particular date.

Capital Required : The amount of cash required to have available.

Earnings Claims : Representation the franchise company has made that the franchisee has reached specific levels of sales profitability.

Exclusive Territory : This is the specific location granted to you by a franchise company. It restricts the franchisor from establishing your territory to other franchises.

Federal Trade Commission (FTC) : This is a federal agency located in Washington D.C. that regulates trade practices including those in a franchise business.

Franchisee : The owner of one or more franchise

Franchise Fee : The initial fee paid to the franchisor to acquire a franchise.

Franchising : Not a business, nor an industry, but it is simply method of doing business within a given industry. At least two parties are involved in franchising: the franchisor and the franchisee.

FTC Rule 436 : This law went into effect in 1979 which regulates the franchise industry. It sets a disclosure requirements and prohibited franchisers from making earnings claims.

Initial Investment : This is usually the initial cash investment required of you (the franchisee) to buy and open a franchise. This may include the franchise fee and other start-up costs and other expenses you could incur, but may not be reflective of the total investment.

Liquid Capital : This is also known as liquid assets, quick assets, quick cast or realizable assets. This is held in cash or in something that can be liquidized into cash quickly.

Master Franchisee : This is a description of an individual or company that owns the exclusive right to develop a particular territory for the franchising company.

Net Worth : This is the total assets you have after subtracting total liabilities.

Non-Compete Clause : If for some reason, you decide to leave the franchise, this form prohibits you from competing in any way with the franchised company.

Offer : This is either an oral or written proposal to sell a franchise to you and that you understand general terms and conditions.

Protected Territory : This is a particular designated area or geographic boundary granted to the franchisee according to the terms of the franchise agreement. The franchise promises not to open another franchised or company-owned business of a similar nature within the protected territory.

Qualification Questionnaire : A document prepared by the franchisor to be completed by the prospective franchisee. This provides information to the franchisor to aid in determining if the prospect is capable or motivated enough to own a franchise.

Registration : Several states require that specific information be submitted and approved by state regulatory authorities before franchises may be offered n that state. States that request this registration may also include a bond, fingerprints and photos.

Royalty Fee : The fee paid to the franchisor usually on a monthly basis and is based on sales.

Start Up Costs : This is the amount of money needed for the franchisee to invest in the new franchise unit in its beginning stages and generally should not be loaned money.

Total Investment : This is the money needed for a complete set up of the business, including the initial investment, working capital and any additions to inventory and equipment necessary for an operational and profitable business.

UFOC or the Uniform Franchise Offering Circular : This provides background information in more than 20 categories as well as a copy of the proposed franchise agreement, also known as the circular or disclosure document.