TYPES OF FRANCHISES

Franchising is a relatively flexible method, and just about any type of business can be franchised. There are
many types of franchises, that can be categorized according to different factors, like investment level,
franchisor’s strategy, operations, marketing and relationship models, etc. The five major types of franchises
are: job franchise, product franchise, business format franchise, investment franchise and conversion
franchise.

JOB FRANCHISE

Typically, this is a home-based or low investment franchise that is taken by a person who wants to
start and run a small franchised business alone. Franchisee usually has to purchase minimal
equipment, limited stock and sometimes a vehicle. A wide and diverse range of services fall into this
group, like travel agency, coffee van, domestic lawn care service, plumbing, drain cleaning,
commercial and domestic cleaning, cell phone accessories and repair, real estate service, shipping
service, pool mainatanance, corporate event planning, children’s services, etc.

PRODUCT (OR DISTRIBUTION) FRANCHISE

Product-driven franchises are based on suplier-dealer relationships, where franchisee distributes the
franchisor’s products. The franchisor licenses its trademark but usually does not provide franchisees
an entire system for running their business. Product franchises deal mainly with large products, such
as cars and car repair parts, vending machines, computers, bicycles, appliances, etc. Product
distribution franchising represents the highest percentage of total retail sales. Some well-known
product distribution franchises are Exxon,Texaco, GoodYear Tires, Ford, Chrysler, John Deere and
other automobile producers. Sometimes franchisor licenses not only distribution, but also part of the
manufacturing process, like in the cases of soft drink manufacturers Coca-Cola and Pepsi.

BUSINESS FORMAT FRANCHISE

The business format franchisee also gets to use the franchisor’s trademark, but more importantly, it
gets the entire system to operate the business and market the product and/or service. The franchisor
offers a detailed plan and procedures on almost every aspect of the business, provides initial and
ongoing training and support. Business format franchising is the most popular type of franchise
system and the one generally referred to when talking franchising. Businesses from more than 70
industries can be franchised, and the most popular are fast food, retail, restaurant, business services,
fitness and other.

INVESTMENT FRANCHISE

Typically, these are large scale projects which require a large capital investment, such as hotels and
the larger restaurants. The franchisees usually invest money and engage either their own management
 team or franchisor to operate the business and produce a return on their investment and capital gain on
exit.

CONVERSION FRANCHISE

Conversion franchising is a modification of standard franchise relationships. Many franchise systems

grow by converting independent businesses in the same industry into franchise units. The franchisees
adopt trademarks, marketing and advertising programs, training system and critical client service
standards. They also usually increase procurement savings. The franchisor in this model has a
potential for very rapid growth in terms of units and royalty fee income. Examples of industries that
extensively use conversion franchising are real-estate brokers, florists, professional services
companies, home-services, like plumbing, electricians, air conditioning, and so on.

Franchise Terminologies
1. 10-day and 5-day Rules: The Franchise Disclosure Document should be given to potential
franchisees within 10 days and the franchise contract should be given to potential
franchisees within 5 days.
2. Absentee ownership: A business owner who does not manage his own business
personally.
3. Acknowledgement of receipt: It is a page you sign and return to state the date you
received the Franchise Disclosure Document (FDD).
4. Advertising Fee: The annual fee paid by the franchisee to the franchisor to market the
brand which can be less than 3% from the franchisee annual sales.
5. Advertising Fund: An ongoing fee paid by franchisees to the franchisors to help with the
advertising.
6. Agent: An individual who acts on behalf of another.
7. Agreement: Also called the Franchise Agreement. It is the contract that you sign with a
franchisor
8. Anchor Tenant: A tenant in a shopping centre whose main aim is to maximise profit. For
example, Starbucks.
9. Approved advertising materials: The materials provided by the franchisor or created by
the franchisee that have been approved by the franchisor.
10. Approved products: The products that are bought from the franchisor or from approved
suppliers to ensure the same quality in their services and product.
11. Approved site: A location that meets the criteria of the franchisor.
12. Arbitration: A way to solve arguments.
13. Area Development Franchise: A type of multi-unit franchise, whereby franchise has no
resale rights, but are rather are themselves directly responsible for meeting a mandatory
development schedule for their given region.
14. Area franchise: A franchise agreement that allow a franchisee to open multiple outlets in a
specified agreement.
15. Area Franchisee: A franchisee who has acquired exclusive rights to open franchise units
within a defined territory.
16. Area Representative: A franchisee who also acts as a salesperson for the franchisor in a
specific territory.
17. Authorised suppliers: A supplier of goods approved by the franchisor.
18. Article 19: It is the part of the Franchise Disclosure Document provides details of factors
that effects future financial performance like earnings.
19. Absentee ownership: A franchisee who isn’t actively involved in the companies day to day
workings.
20. Area Developer: The franchisee given permission to operate more than one unit in a
particular area is an area developer.
21. Area Development Rights: The right given to the franchisee to develop a certain number of
franchises in a particular area in a given time frame.
22. Block Exemption: the European Union concessions to franchising which bypass the normal
EU anti-restrictive trade practices legislation seeking to protect competition – which, for
example, ‘exclusive areas’ can be deemed to contravene.
23. British Franchise Association (bfa): The BFA grants membership to those franchisors it
considers meet its Code of Ethics and procedures.
24. Broker: An outside salesperson that helps the franchisor with the selling of franchises.
25. Breakeven: When a franchisee earning the same amount as they have invested in the
franchise.
26. Business Format Franchising: the franchisee buys into a total turnkey system of brand,
know-how, training, methodology and support.
27. Business Plan: A plan that discusses the objectives for the business and how to achieve
them.
28. Buyback: When the franchisor agrees to purchase a franchise back from a franchisee if the
latter no longer wishes to continue.
29. Buy-Sell Agreement: A legal document that details the provisions under which a business
may be sold.
30. Candidate: Franchisors use this word to address potential franchisees.
31. Capital: Capital is cash in checking and savings accounts, insurance policy cash values,
non-IRA stocks and bonds, and loan receivables due within 30 days.
32. Capital required: The first investment needed to start the business.
33. Certification: It is given by the franchisors or franchisees to the employees to attest their
ability.
34. Churning: An unsuccessful business is taken by the franchisor and sold to the franchisee.
35. Copyright: The right to use other people’s creations like already published works.
36. Conversion: The rebranding of an existing business to a franchise for a different company.
37. Company owned location: A location owned and operated by the franchisors which
functions the same as their franchises.
38. Company-owned Outlet: Company owned stores that are the same as franchised ones.
39. Continuous training: The training provided by franchisors to franchisees and their staff.
40. Conversion Franchising: A franchise that permits an existing businesses to join a national
franchise system to use its recognized name and trademark and operating system.
41. Corporate Location: This is owned by the corporate entity rather than the franchisee.
42. Culture of Compliance: This is when the franchisee does what is right for the franchise
based on the feelings rather than the guidelines.
43. Days: This refers to calendar days unless specified.
44. Day to day management: A franchisee is meant to take care of the franchise daily functions
to meet the brand standards.
45. Default: The failure of not meeting the terms of the agreement.
46. Design: The trade dress used by the franchise system for the franchise locations, including
logo, layout, color scheme, signage, etc.
47. Designated Supplier: A supplier of goods approved by the franchisor.
48. Disclosure: This refers to revealing facts about franchisor.
49. Disclosure Document: All franchisor companies are required by the Federal Trade
Commission (FTC) to provide this document to prospective franchisees at the first personal
meeting to discuss the sale of the franchise and at least 14 days prior to the prospective
franchisee signing a franchise agreement or paying the franchisor money to buy the
franchise. The document aids the prospective franchisee’s evaluation of the franchisor
company
50. Discovery Days: A meeting before the franchisee choosing to buy the franchise.
51. Distributorship: The right granted by the manufacturer to sell their products.
52. Exclusive Continent: A contract that gives you the right to operate in that continent.
53. Exclusive (protected) Territory: A contract that allows the franchisee exclusive control over
the operations in a particular area.
54. Feasibility study: Examines the potential of the company.
55. Federal trade commission: The agency of the US government that regulates franchising.
56. Field Consultant: A worker of the franchisor sent to assist the franchisee with the franchise.
57. Field representative: An employee of the franchisor sent to monitor the franchisee.
58. Financial Performance Representation (FPR): It shows the finance of the company to a
potential franchisor under Article 19.
59. Footprint: Layout of locations including furniture etc.
60. Franchise: ” A franchise is a grant by the franchisor to the franchisee, entitling the latter to
the use of a complete business package containing all the elements necessary to establish a
previously untrained person in the franchised business, to enable him or her to run it on an
ongoing basis, according to guidelines supplied, efficiently and profitably”.
61. Franchise agreement: The written contract that outlines the duties of the franchisee and
franchisor.
62. Franchise Attorney: A lawyer familiar with the rules of franchising.
63. Franchise Consultant: An expert who knows the workings of a franchise.
64. Franchise Development: The process of adding new franchisees to a franchise.
65. Franchise Disclosure Document: A document containing important information about the
franchisor which is to be given before selling the franchise to the franchisee.
66. Franchise Expo: Events where potential franchisees can meet good franchisors.
67. Franchise Feasibility Studies: This is used to check if a company can be a good franchise.
68. Franchise Package: This includes the training, guidelines etc. after the initial payment is
done.
69. Franchise Fee: An initial amount paid by the franchisee to get into the franchise.
70. Franchisee Satisfaction Index: A 100-point scale that measures the satisfaction of the
franchisees with the franchisors.
71. Franchisee: A person who is given the right to run a franchise by the franchisor.
72. Franchisee in good standing: Franchises that are running smoothly for example make all
their payments.
73. Franchising: A method of growth or distributing.
74. Franchisor: A person selling the franchise.
75. Furniture, Fixtures and Equipment: Personal property used in the functioning of a
franchise.
76. Grey Marketing: When a Franchisee purchases under franchisor’s negotiated agreements
and uses the product or merchandise in another business, or sells products or merchandise
to another company.
77. Gross Profit: The profit earned after removing any other expenses except for the cost of
goods sold.
78. Gross Sale: The amount before expenses are deducted.
79. Group purchasing power: When products in a bulk the price reduces significantly.
80. Guarantee: An assurance that the products will perform well for a long period of time.
81. House mark: A mark used to identify the operations of a company.
82. Identify Items: Items that display the registered trademarks of the franchisor.
83. Initial investment: It includes the franchise fee and the amount needed to start operating a
franchise.
84. Intellectual Property Rights: The franchisor’s business secrets being imparted to the
franchisee.
85. International Franchise Association: Trade association for franchisors located in
Washington.
86. Internet Sales: A sale done online.
87. Inquiry: A person gathering information about a franchise opportunity.
88. Item 19: It is the part of the Franchise Disclosure Document provides details of factors that
effects future financial performance like earnings.
89. Job Franchise: When the franchisee is involved in the manual work of the company.
90. Joint Venture Franchise: In this case the franchisor also claims ownership of the franchise.
91. Key Supplier or Vendor: A supplier who the franchisors have negotiated prices with and
whose products are crucial to the franchise.
92. Lead: An inquiry that is prequalified after the initial interview with a member of the
franchisor’s development staff as meeting the minimum criteria to become a franchisee, and
who is invited to submit a franchise application.
93. Lender: A bank that provides a business loan.
94. Liquid capital: This capital can easily be turned into cash.
95. Location: The site of the franchised or company-owned operation.
96. Low-Cost Franchise: A franchise with a low initial investment which is usually below
$100,000.
97. Management Franchise: A franchise where the owner manages the daily workings of the
franchise.
98. Management Service Fees (MSF): Fees due to the franchisor, often based on total
turnover.
99. Manuals: The guide given by the franchisor that determines how the franchise works.
100.Market Introduction Program: Marketing, advertising, and public relations activities used
to introduce the franchise to the public.
101.Marketing plan: A technique by which franchises are sold.
102.Master Franchise: The franchisee is allowed to sell franchises in a particular area and
gains the power of a franchisor.
103.Master Franchisee: an individual or company granted exclusive rights ownership to
develop specific area or territory by sub-franchising.
104.Master region: The area the master franchisee is in charge of.
105.Multi-Concept Franchisee: A franchisee who owns multiple franchise business units.
106.Multi-Level Marketing (MLM): A form of distributing where you gain commission on your
sales and sales from the distributors.
107.Multi-Unit Developer: A franchisee that agrees to open more than one franchise in a
particular location.
108.Multi-unit development: This is when the franchisee owns more than one unit.
109.Multi-Unit Franchise: A franchisee that owns more than one unit.
110.Neighbourhood shopping centre: A shopping centre to satisfy the needs of people leaving
closer.
111.Net worth: The total assets subtracted from total liabilities.
112.Non-compete clause: A clause in a contract that doesn’t allows you to work in the same
industry or area for a given period of time after you have left the franchise.
113.Offer: A written proposal to sell the franchise to the franchisee with terms and conditions.
114.Operating manual: Guidelines of how the franchisee is supposed to run a franchise.
115.Operating principal: A person selected by the franchise owner to make decisions on
behalf of the franchisee.
116.Person: An individual, partnership or corporation.
117.Personal Guaranty: A guarantee to pay back a loan to a lender.
118.Pilot Operation: A test to see if the franchise concept will be successful.
119.Product and Tradename Franchising: When a franchisor allows the franchisee to sell a
product using their name or brand name.
120.Product Format Franchise: The ability to sell other products that are completely different
from what you sell.
121.Proforma: The ability to sell a product that is different from your theme.
122.Profit and loss projections: It is calculations based on the franchisor and franchisee’s
experiences which try and predict how soon franchisees can earn the return on their
investment.
123.Protected continent: A specific area granted to the franchise.
124.Protected or Exclusive Territory: Protection granted to the franchisee to open a franchise
in a particular area.
125.Prospect: A person who has completed the franchise approval form and interested in
proceeding to buy a franchise.
126.Qualification Questionnaire: A document to be completed by the franchisee by filling in
information about himself so it can be evaluated by the franchisor.
127.Quality Control: Quality control involves regional coordinators visiting each franchisee.
128.Quality Standards: The standards specified by the franchisor in the operation manual.
129.Real Property: Land that doesn’t have anything attached to it.
130.Regional Development Agreement: A franchise given to a third party to develop.
131.Registration: By law specific information needs to be submitted to the government and
approved before the selling of a franchise.
132.Registration States: In 15 states, franchisors are needed to register their FDD before
selling a franchise.
133.Renewal: Renewal is the resigning of a Franchise Agreement after the initial contract has
expired.
134.Retro franchising or Refranchising: When existing locations that may or may not have
ever been franchised, and which are currently operated by the franchisor, are offered for sale
to prospects. Not the same as churning – the franchisor has an expectation that the retro
franchised business will be successful (see churning definition above).
135.Return on Investment (ROI): The calculations that show how the franchisee needs to
change to achieve a break even.
136.Royalty Fee: A royalty refers to a percentage of sales that franchisees pay to the franchisor
monthly.
137.Rules of operation: Rules that every franchisee and company outlet must follow.
138.SBC: SBC is an acronym for Small Business Centres and they assist small business to get
their federal contracts for products and services.
139.Senior Care: A sector that focuses on caring for senior citizens and providing services for
them.
140.Service mark: A mark used in the sale of advertising of services of one person and
distinguishes them from the services of others.
141.Single-Unit Franchisee: Franchisee who owns a franchise in one location.
142.Slick: A idea used by the franchisor to advertise their franchises on different types of
media.
143.Start-Up Costs (Initial Investment): The first investment which includes the franchise fee,
the cost of fixed fee, the cost of fixed assets and any expenses required during the start-up
period.
144.Strip Centre: A retail centre comprised of several small stores.
145.Sub franchisors: A type of franchise where the franchisee take on the role of a franchisor
in that particular area.
146.Success: In franchising this refers to not losing a location.
147.Successor Agreement: Franchisee’s choosing to sign the franchise agreement after the
initial contract has finished.
148.Supplier/Vendor: A business providing supplies to the franchisees which is usually picked
by the franchisor.
149.System Brand Fund: A fund created by the franchisor for advertising which gains its
contributions from the franchisees and company- owned units.
150.Termination: When a franchisor stops the functioning of the franchise by stopping the
contract.
151.Territory: The land given to a franchisee by the franchisor as part of the franchise deal.
152.Total investment: The amount of money estimated for complete set up of a franchisee.
153.Trade Area: For shopping centres the geographical area from which majority of the sales
come from.
154.Trade Secret: Information given to the franchisee by the franchisor.
155.Trademark: The name associated with a product.
156.Transfer: The change in ownership of a franchise.
157.Turnkey: A location that is ready to function that is given to a franchisee.
158.Turnover: It refers to a franchise business agreement that has been terminated.
159.Tying: Forcing a franchisee to purchase one product as a condition to the sale of another.
160.Validation: When you are buying a franchise, you have to call the franchisors to check the
details mentioned by the franchisor about the franchise opportunity.
161.Variable Cost: Any costs that vary with the level of production for example materials
needed to create a product.
162.Vertical and Horizontal competition: Vertical connection deals with a buyer-seller
relationship, as in franchisor-franchisee. (See Tying) Horizontal restraints of trade in
franchising usually are concerned with potential price fixing arrangements among a group of
franchisees (sometimes including company owned outlets) in a defined and homogeneous
geographical area. Also, in franchising, horizontal competitors are those offering a franchise
or franchise product similar in price, whereas vertical competitors are similar in product or
service but not in price. Price fixing is illegal at any level of an organization.
163.WBE: This stands for Women Owned Business.