Understanding Industry Language
The essential deal in franchising is that a Franchisor will grant brand rights to a Franchisee in exchange for an initial franchise fee, the Franchisor will train the Franchisee and get their business launched on receipt of the initial franchise fee. Then, and on an ongoing basis, the Franchisor will receive a share of the revenue generated, usually, but not always linked to the turnover of the Franchise.
Franchising is one of those business sectors that is easy to understand and easy to misunderstand too! It doesn’t help that many in the industry use certain lingo and slang! Franchising and franchise consultancy are very diverse sectors so there are often exceptions to many norms. In general terms, this is what the jargon usually means.
- Franchise – A clone of an already successful business operated by a third party under license.
- Franchisor – A Franchisor is a person or company who has the legal right to grant a license to another party to trade with a certain brand. It’s important to understand that a Franchisor doesn’t have to be the brand owner to do this, they could have an agreement with a brand owner to do it. The term Franchisor is sometimes abbreviated to “Zor”.
- Franchisee (Or Zee) – A Franchisee is a person or company that has the right to trade with a certain brand, that right is granted by a Franchisor
- Franchise Agreement – The exact terms of granting the license are defined legally and included within a document called a Franchise Agreement. Many franchise agreements have common terms within them and the legal document dovetails with a “how to” manual provided by the franchisor
- Operational Manual – Sometimes called an Operations Manual, and sometimes an Operations and training manual, this is the “how to” manual which details everything that a franchisee needs to concern themselves within the operation of the business. Some Operational Manuals are also combined with content that covers the training programme a franchisee follows.
- Franchise Fee – This is usually an initial fee that gets a new franchise launched and it’s owners trained in the business format. The term franchise fee is often used to describe investment or fees at a later date, howe er our preference at Lime is to isolate this description to the launch period for the franchise.
- Royalty – Or management Services Fee is what’s in it for the Franchisor once the business is trading. Royalties can be based upon turnover which in franchising is sometimes called “gross receivables” the difference being that gross receivables also include unpaid invoices. Another form of royalty is a fixed fee, usually a set £ amount per month. Some Franchisors even have a hybrid of a minimum £ fee and then a % of gross receivables beyond a certain amount. In non-retail formats, it’s common to see royalties between 8% and 25%. In retail formats and higher turnover businesses, the % is often lower. Fast food, for example, may be as low as 4 or 5%
- Advertising Levy – In franchise networks there are two types of marketing, those that the Franchisor does, and those that the Franchisee does. It’s common that the Franchisor concentrates on national marketing or advertising and the Franchisee concentrates on local marketing. Every Franchisee contributes towards the cost of national marketing through the Advertising Levy. This is often based on turnover too and ranges between 1% and 5% depending on the circumstances.
- Exclusive Territory – Not all Franchisors grant an exclusive Territory. This does mean that individual Franchisees could technically compete with each other. If an Exclusive territory is granted then this gives the Franchisee a protected territory where they would usually have the right to deal with every potential and actual client within the Territory. Not all exclusivities are geographical, they can also be sector specific. For example, a franchised recruitment consultancy might grant a Franchisee exclusivity for pharmaceutical business, or sales and marketing, or retail, or engineering etc.
Hopefully, this page will help you to orientate yourself around what the various franchise terms mean!