Commonly Used Franchise Terms

Several terms are commonly used in association with the concept of franchising. A person interested in purchasing a franchise needs to be familiar with these terms. Below are explanations for some of the most common franchising terms.

Advertising Fund or Branding Fund Contribution – a monthly contrition to the Advertising Fund or Branding Fund that is administered by the franchisor and is typically based on a percent of the gross revenue earned by the franchisee.  The Advertising Fund or Branding Fund contributions must be accounted for separately from the other funds of the Franchisor and is used to build the Franchisor’s brand.

Business Format Franchising – Under a Business Format Franchise, the franchisor grants the franchisee the right to use a business system owned by the franchisor.  This typically includes a license to use a trademark, trade name, or logos, and may include marketing strategies, promotional materials and reporting systems.  The franchisee’s business is completely identified with the franchisor’s trade name or trademark, so that customers would not readily distinguish between the franchisor and the franchisee.  The franchisor may provide support to the franchisee with regard to finding a location for the business, leasing, staffing, training, and other start-up matters, and will usually maintain a significant level of control over the franchisee’s business on a continuing basis.

Conversion Franchising - is simply a different form of business-format franchising.  This type of franchising is most commonly applied in industries where many independent businesses are firmly established in the marketplace e.g. real estate and travel agencies.  In this form of franchising, the franchisor seeks out an existing independent operator and offers that operator an opportunity to use its trade name and become part of a larger (National or regional) network.

Disclosure Document - a document that provides information on the franchisor and the significant terms of the franchise agreement.  The Provinces of Alberta, Manitoba, Ontario, New Brunswick and Prince Edward Island have laws that require the franchisor to provide a disclosure statement to a potential franchise buyer at least 14 days before signing the franchise agreement or paying any non-refundable money.  Franchisor members of the Canadian Franchise Association (CFA) are also required to provide a disclosure document to any prospective franchisee.

Franchise - A legal agreement that allows one organization with a product, idea, name or trademark to grant certain rights and information about operating a business to an independent business owner. In return, the business owner (franchisee) pays an initial fee and ongoing royalties to the franchisor.

Franchisee - A Franchisee is a business owner who purchases a franchise from a franchisor and operates a business using the name, product, business format and other items provided by the franchisor.  For example, McDonald's awards a franchise to a franchisee.  This allows the franchisee to open and operate a McDonald's fast-food restaurant.

Franchise Fee – This is also referred to as the Initial Franchise Fee, and is a one-time fee paid by the franchisee to the franchisor.  The fee pays for the business concept, rights to use trademarks, management assistance and other services from the franchisor. This fee gives the franchisee the right to open and operate a business using the franchisor's business ideas and products.

Franchisor - A company that owns a product, service, trademark or business format and provides this to a business owner in return for a fee and possibly other considerations.  A franchisor often establishes the conditions under which a business owner operates but does not control the business or have financial ownership.  McDonald's is an example of a franchisor.

Piggyback (Combination) Franchising- “Piggyback” or “Combination Franchising”, as it is sometimes known, is in essence a business within a business i.e. a combination of two franchises operating under the same roof.  Typically, a smaller niche-market business piggybacks onto a mass merchandiser, or on a store, which retails more general merchandise e.g. fried chicken counter within a convenience store or coffee bar within a gas station.

Royalty Fee - A continuous fee paid by the franchisee to the franchisor. The royalty fee is usually a percent of the gross revenue earned by the franchisee but in a few cases may be a flat fee.

Single-Unit Franchise – A Single-Unit Franchise is the most common form of franchising and is the method most recognized by the general public.  This is where the franchisee is granted a license to operate the franchised business at a specific location or within a specific territory.

Trademark - A distinctive name or symbol used to distinguish a particular product or service from others.  In Canada, a trademark must be registered with the Registrar of Trademarks in Ottawa.  It can be used exclusively by the owner, and no one else can use it without the owner's permission.  Part of a franchise's value is the right to use a recognized trademark.

Turnkey Franchise – In a Turnkey Franchise the franchisor locates, acquires (by purchase or lease), develops and inventories the franchised business, which is transferred to the franchisee ready to commence operations.