Franchise Terminology: Understanding the Definition and Key Terms
A franchise is a business model in which a company (the franchisor) grants the right to use its brand name, products, and services to another person or entity (the franchisee) in exchange for a fee. The franchisee operates a business that follows the franchisor's established system and guidelines.
The franchisor is the company that owns the brand name, products, and services that are licensed to the franchisee. The franchisor provides the franchisee with training, support, and ongoing assistance to help them operate the business successfully.
The franchisee is the person or entity that pays the franchisor for the right to use their brand name, products, and services. The franchisee operates the business according to the franchisor's established system and guidelines.
The franchise agreement is a legal contract between the franchisor and the franchisee that outlines the terms and conditions of the franchise relationship. The agreement typically includes details about the franchise fee, royalties, training, support, and other obligations of both parties.
The franchise fee is the initial payment made by the franchisee to the franchisor for the right to use their brand name, products, and services. The fee can vary widely depending on the franchise system and can range from a few thousand dollars to several hundred thousand dollars.
Royalties are ongoing payments made by the franchisee to the franchisor for the continued use of their brand name, products, and services. The royalties are typically a percentage of the franchisee's gross sales and are paid on a regular basis.
The Franchise Disclosure Document (FDD) is a legal document that the franchisor is required to provide to the franchisee before they sign the franchise agreement. The FDD contains detailed information about the franchise system, including the franchisor's financial statements, the franchise fee, royalties, and other important details.