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
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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.
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
The Franchise Agreement that you sign with a Franchisor.
Products that a franchisee must purchase from the franchisor and
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
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 locations are owned and operated by the franchisor and
similar in most respects to a franchise location.
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
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.
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
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
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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