FRANCHISING - TERMS AND DEFINITIONS

Several terms are commonly used in association with the concept of franchising. A person interested in purchasing a franchise needs to be familiar with these terms. Here you will find explanations for the most important franchising terms.

Franchise -- A legal agreement that allows one organization with a product, idea, name or trademark to grant certain rights and information about operating a business to an independent business owner. In return, the business owner (franchisee) pays a fee and royalties to the owner.

Franchisor -- A company that owns a product, service, trademark or business format and provides this to a business owner in return for a fee and possibly other considerations. A franchisor often establishes the conditions under which a business owner operates but does not control the business or have financial ownership. McDonald's is an example of a franchisor.

Franchisee -- A business owner who purchases a franchise from a franchisor and operates a business using the name, product, business format and other items provided by the franchisor. For example, McDonald's sells a franchise to a franchisee. This allows the franchisee to open and operate a McDonald's fast-food restaurant.

Franchise fee -- A one-time fee paid by the franchisee to the franchisor. The fee pays for the business concept, rights to use trademarks, management assistance and other services from the franchisor. This fee gives the franchisee the right to open and operate a business using the franchisor's business ideas and products.

Royalty fee -- A continuous fee paid by the franchisee to the franchisor. The royalty fee is usually a percent of the gross revenue earned by the franchisee.

Franchise trade rule -- A law regulated by the Federal Trade Commission that places several legal requirements on franchisors. It requires that franchisors disclose all pertinent information to potential buyers of a franchise. These disclosures provide potential buyers with most information needed to make a wise purchasing decision.

Federal Trade Commission (FTC) -- A commission authorized by the United States Congress to regulate the franchise business. The Federal Trade Commission oversees the implementation of the Franchise Trade Rule and monitors the activities of franchisors. You can register complaints about a franchisor with this agency. Contact the office of your local U.S. Representative or Senator for information about how to register a complaint with the FTC.

Disclosure statement -- Sometimes called an offering circular, a document that provides information on twenty items required by the FTC. The law requires that a franchisor provide a disclosure statement to a potential franchise buyer.

Trademark -- A distinctive name or symbol used to distinguish a particular product or service from others. A trademark must be registered with the U.S. Patent and Trademark Office. It can be used exclusively by the owner, and no one else can use it without the owner's permission. Part of a franchise's value is the right to use a recognized trademark.