Franchise Glossary

In researching franchises and reviewing franchise legal documents and contracts you may hear or read terminology that you don't understand, or of which you aren't certain of the meaning.

This glossary of franchising words and phrases defines some of the terms most commonly used in the franchise industry.

Please note: the guide is a general reference tool, only. If you are planning to buy a franchise or have specific legal questions that need to be answered, you should consult with a franchise attorney.

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Acknowledgment of Receipt

It is the last page of the FDD that you sign and return. It provides proof of the received FDD.

Advertising Fee

A fee paid by the franchisee to the franchisor for co-op advertising expenditures. Advertising fees typically are deposited into a fund which is used for advertising and promotions according to the terms of the franchise agreement. Not all franchisors charge advertising fees.

Agreement

The Franchise Agreement that you sign with a Franchisor.

Approved Products

Products that a franchisee must purchase from the franchisor and approved suppliers.

Arbitration

The process in which an arbitrator hears both sides of a dispute and renders a decision. Compared to using the courts this process is usually less costly.

Area Development Rights

The rights granted to a franchisee to open a certain number of franchise locations within a specified geographic area within a certain time frame. The Area Developer may sign one franchise agreement with an addendum that details the requirements for opening additional locations.

Area Developer

An Area Developer sometimes called a Regional Developer, obtains the rights to a large territory and opens a single location. The AD is then expected to recruit single unit franchises, multi-unit franchises and area development franchises and can receive a portion of the franchise fees and royalties.

Business Format Franchising

The franchisor licenses the franchisee to use the franchisor product, service and trademarks and also teaches the franchisee the marketing, selling, financial and personnel procedures. Most franchises are business format franchises.

Company-owned Outlet

Company-owned locations are owned and operated by the franchisor and similar in most respects to a franchise location.

Conversion Franchise

A franchise that was converted from an independent business to a franchise operation. There is usually a reduced franchise fee or other consideration for the business owner converting to a franchise.

Default

A provision or clause in a franchise agreement, which the franchisee fails to comply with. The action triggers a default. Franchisee and franchisor may default.

Distributorship

A right granted by a manufacturer to sell a product to others. A distributorship is not a franchise. However, certain distributorship arrangements may qualify as a franchise or as a business opportunity requiring disclosure.

Earnings Claims

A representation by the franchisor pertaining to the sales or earnings performance of the franchisees. Disclosing this information to a franchise candidate must conform to section 19 of the FDD.

Exclusive Territory

An exclusive territory right gives you, as the franchisee, the right to that territory. The franchisor cannot sell other franchises within that territory. May also relates to products or services sold in the territory.

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