What is franchising - definition of franchising
Confused about franchising? Our franchise glossary will highlight the most common franchise definitions. This will help you when considering buying a franchise. It will cover the basics from "what is a franchise" to the key financial and legal terms.
Advertising Fee – It' s a contribution made to an advertising fund that the franchisor manages for the franchise system. The franchisor customarily uses the fund for national advertising and marketing, or to attract new franchise owners, but not to target your particular outlet. It's usually less then three percent of the franchisee's annual sales and usually paid in addition to the royalty fee. Not all franchisors charge advertising fees.
Advertising Fund – see advertising fee
Approved Supplier - Suppliers approved or chosen by a franchise company.
Area Franchisee/Area Developer – Buys the rights from the original franchisor to develop the system in a defined region in Australia. An area developer cannot sell franchises.
Australian Franchise Code of Conduct - The Code was introduced in 1998 to regulate and strike a balance between the interests of franchisors and franchisees. All franchise businesses are required by law to comply with the Franchising Code of Conduct.
Brokers – These are independent professionals who market on behalf of franchisors in Australia, selling their franchisees on a fee-paying basis. Potential franchisees must always independently evaluate their chosen franchise.
Business Format Franchising - A license to operate a business using a franchisor's product, service and trademark under certain guidelines for a specified time.
Business Plan – A plan that outlines the objectives of a business and the steps necessary to achieve those objectives. This can include financial projections and the planned steps for expansion. If you are seeking funding from a bank or building society you will often be asked to provide your business plan to secure borrowing. In fact, many of the well-known banks can offer advice and assistance on formulating a comprehensive and achievable business plan.
Company-Owned Outlet - An outlet operating under a franchise company brand, but that is owned by the franchisor as opposed to a franchisee. Company-owned outlets in Australia are often used by franchisors to trial new ideas and systems before implementing them across the franchised outlets within the network.
Copyright – The franchisor produces manuals and other documentation to ensure the franchise system is uniform. These are the franchisor's documents and he/she has copyright over them.
Designated Supplier – see Approved Supplier
Development Type - The Development type is the method by which the franchisor wishes to build their franchise network in Australia. See Unit Franchise, Multi-unit Franchise, Area Developer, Regional Franchisee and Master Franchise .
Distributorships - Manufacturers and wholesalers grant permission to businesses and individuals to sell their products. A distributorship is normally not a franchise. However, certain distributorship arrangements may qualify as a franchise, may be licensed or be adjudged a business opportunity requiring disclosure.
Earnings Claim - Is any information the franchisor gives to a prospective franchisee which allows you to attempt to predict a range or level of potential sales, costs, income, or profits.
Estimated Initial Investment - A detailed listing of all fees and expenses you can expect to incur in starting a franchise. This listing represents the total amount that you would need to pay or get financing for, including fees paid to the franchisor; estimates for furniture; fixtures and equipment; opening inventory; real estate costs; insurance inventory, etc. This estimate should include a provision for working capital through the start-up phase.
Exclusive Territory - As a franchisee you can, with the consent of the franchisor, be given an exclusive area around your operation. This area can be large or small and no other franchisee or company owned business would be allowed to operate there.
Franchise - The rights you acquire to offer specific products or services within a certain location for a declared period of time. Read more on "what is a franchise".
Franchise Council of Australia (FCA) - FCA is the peak body for the $128 billion franchise sector in Australia, representing franchisees, franchisors and service providers to the industry.
Franchise Agreement - outlines the expectations and requirements of the franchisor and describes their commitment to the franchisee. Includes information that covers territorial rights of the franchisee, location requirements, training schedule, fees, general obligations of the franchisee, general obligations of the franchisor, etc.
Franchise Disclosure Document (FDD) - is a legal document given to prospective franchisees by the franchisor to disclose information on all areas of the franchise business.
Franchise Fee - An up-front entry fee, usually payable upon the signing of the contract (franchise agreement) for the right to use the franchisor's name, logo, and business system. Often, the franchise fee is also the consideration paid for initial training, site selection, operations manuals, and other help given by the franchisor before the opening of the business.
Franchisee - The operator or owner of a franchise.
Franchise Resale – The process of buying a franchise that is already up and running. Franchisees sell on their franchise for a number of reasons; retirement, another business venture, moving overseas, have made their money etc. Whilst the investment may be higher than buying a new franchise, buying an existing franchise minimises the risk of failure and is operational from day one.
Franchise Type - The franchise type identifies in general the type of work involved in running the franchise business. There are five main categories, retail, management, single operator manual, single operator executive and investment.
Franchising - a method of doing business within a given industry that involves at least two parties - the franchisor and the franchisee. The contract binding the two parties is the franchise.
Franchisor - The parent company or person that grants, for a fee and other considerations, the right to use its name and system of business operations
Initial Investment - The funds needed to initially set up a franchise and begin trading. This amount must cover the franchise fee paid to the franchisor and also includes outlay needed to secure space, purchase products, and cover any other initial set-up costs.
Investment - The franchisee invests a significant amount of money in the franchise such as a hotel. The franchisee in this case will be personally working at arm's length from the franchise and will employ a management team to operate it.
Job Franchise – see Single Operator Manual
Management Franchise - The franchisee will be using their experience to grow the franchise business and control staff who carry out the tasks of the job. It will require premises, which are more likely to be office than a High Street outlet. The majority of the turnover here is generated from Business to Business activities rather than from retail.
Management Service Fee - A term for Royalties, usually in the form of a fixed fee or percentage.
Marketing Plan - a marketing plan should form part of your overall business plan. The purpose of the marketing plan is to define your market, i.e. identify your customers and competitors, to outline a strategy for attracting and keeping customers and to identify and anticipate change.
Master Franchisee/License - This is a franchisee who is given the right by the franchisor to develop and sell franchises under the brand name within a certain Australian territory. Unlike area development rights, where a franchisee can open outlets themselves within a given region, a master franchisee must only sell franchises in a particular region.
Multi-Level Marketing - A form of distributorship in which you receive commission on your own sales and on the sales of others whom you sign up as distributors. Some MLMs are considered pyramid schemes and illegal in some countires. Some are legitimate business opportunities. Any business of this nature should be investigated closely.
Multi-Unit Franchise - The franchisor awards the right to a franchisee to operate more than one unit within a defined area based on an agreed upon development schedule.
Offer - An oral or written proposal to sell a franchise to a prospective franchisee upon understood general terms and conditions.
Operating Manual - Comprehensive guidelines advising a franchisee on how to operate the franchised business. It covers all aspects of the business, and may be separated into different manuals addressing such subjects as accounting, personnel, advertising, promotion and maintenance.
Product Format Franchise – Once the rights to market a product or service have been acquired, you may offer other products along side your "product franchise." For example you may have a service station that sells a brand of gasoline, but you are not restricted on the other products or services that you can sell. Many times these are not true franchises, but can be considered distributorships
Regional Franchise - Buys the rights from a master franchisee or the original franchisor to sell franchises in a defined Australian region.
Renewal - The rights given to a franchisee to renew their franchise business once the initial period set out in the franchise agreement has lapsed. The franchise agreement should also state the terms and conditions under which both parties agree that the business relationship can or cannot be renewed.
Retail Franchise - The franchise will occupy retail premises, selling products or services during retail hours for ‘walk-in' retail. The business is totally dependent on the premises and turnover is achieved from walk-in consumers.
Royalty Fees - Ongoing fees paid to the franchisor by franchisees in respect of ongoing training and support services provided, usually a % of turnover.
Single Operator Executive - (Also referred to as a ‘white collar' Job Franchise)- the franchisee will be working at the franchise which usually takes the form of a trade supplying, selling and delivering products or service. It may be mobile, home-based or requiring small office premises. The type of work is executive.
Single Operator Manual (Also referred to as Job Franchise) - the franchisee will be working at the franchise which usually takes the form of a trade supplying, selling and delivering products or service. It may be mobile, home-based or requiring small office premises.
Termination - Refers to the legal provisions by which either party in the relationship may terminate the contract, e.g., for breach of contract.
Territory/Area - That 'exclusive' portion of land, on a national, regional/area, county, metropolitan or postcode basis, which is allocated to franchisees as part of the franchise package.
Total Investment – The amount of money estimated for complete set up of a franchisee's business, including the initial investment, the working capital, and subsequent additions to inventory and equipment deemed necessary for a fully operational and profitable enterprise.
Turnkey Package - A package that includes all the systems, information and equipment a franchisee needs to be able to ‘turn the key' and start trading.
Unit Franchise – Buys the right to operate a single unit franchise. A unit franchisee may at a later stage buy further unit franchises. If they are of the same brand they are referred to as a multi-unit franchisee.
‘White collar' Job Franchise – see Single Operator Executive
Working Capital - A major cause of business failure is not having enough cash in the bank, trade credit, borrowing capacity or cash flow to meet start-up expenses and see the business through any unusual dips and changes in its daily activity. Initially funds are needed to pay first and last months rent, utility deposits, licenses and any number of incidental costs. As it takes time to build up a new business the first months are usually loss months, which need to be financed.