Franchise Agreement Terminology 1.01
Victory loves preparation. As you delve into the world of franchising opportunities, performing due diligence is essential. Though definitions to franchise terms vary across the industry, we’ve compiled a list of commonly used franchise agreement jargon to keep you informed throughout the due diligence process.
*Please keep in mind that the definitions below have been simplified for your ease of reference. They are not exhaustive and should in no way be relied on as legal or financial definitions. Certain franchisors’, agencies’, individuals’, entities’, etc. definition of the same term below may differ.
For definitions of “Franchise”, “Franchisor”, and “Franchisee” see this related blog post: “Financial Franchise Terminology 1.01“.
Federal Trade Commission (FTC): Federal agency in Washington, D.C. that regulates the franchise industry as well as other industries that affect U.S. consumers.
Franchise Disclosure Document (FDD): A legal document that must be provided to prospective franchisees by the franchisor, containing 23 items of specific information regarding the franchise offering, the franchisor, its officers, its franchisees, and more, so that potential franchisees may weigh certain benefits and risks associated with purchasing that franchise.
Term (of a Franchise Agreement): The time period that a franchise agreement is valid – usually 5 to 20-years. [See 101 Mobility®‘s term specifics and more in this related blog post: “101 Mobility: The Facts“.
Renewal Term (of a Franchise Agreement): One or more additional terms, after the expiration of the initial term, which a franchisee is typically granted the right to exercise if they meet certain conditions set in their then-active franchise agreement (though some franchisors may retain discretion on whether to award renewal terms). Renewal terms tend to be set for shorter periods of time than the initial term (i.e. 10 year initial term with 2 5-year renewals). Some commonly-seen conditions for renewal include not being in default under any current agreements with franchisor, signing franchisor’s then-current franchise agreement (which would govern the renewal term), and payment of a renewal fee.
Franchise Agreement: A contract signed by the franchisee and franchisor which governs the franchise relationship between them.
Receipt: The last two pages of the FDD are the Receipt pages. One copy is for the franchisee to complete and keep for their records while the second is for the franchisee to complete and send to the franchisor. The signed receipt page also includes a space for the prospective franchisee to complete with the date he or she received the franchisor’s FDD. An FDD must be provided to a prospective franchisee at least 14 days before any binding agreement related to the franchise is signed and/or any consideration is given (or monies are paid) with respect to the franchise.
Territory: A defined geographic area within which a franchisee may be granted certain rights and/or obligations. For example, for franchise systems that provide services to customers in their homes, the grant of a territory may delineate those locations where a franchisee may provide services. Typically, a franchisor will agree not to open any company-owned units, or grant another franchisee the right to open a unit, inside of a franchisee’s territory as long as the franchisee is not in default of their obligations. Territorial rights, restrictions, and obligations, however, vary greatly across different franchise systems. [See available 101 Mobility® territories here].
Company-owned units: Corporate locations that are similar to franchise units except they are owned and operated by the franchisor (or an affiliate, parent, or subsidiary of franchisor).
Conversion: When someone who owns and operates an independent business that mirrors the franchise offered elects to sign a franchise agreement and change their name and business system to that of the franchise systems’.
Absentee ownership: An option offered by some franchisors allowing an individual to own a franchise without being actively involved in its day-to-day operations. 101 Mobility does not offer absentee ownership. [See related post here: “Wise Words to Prospective Franchisees from Seasoned 101 Mobility® Franchisee”]
Job Franchise: A franchise model where at least one owner of the franchise is a hands-on owner-operator rather than a more passive supervisor.
Master Franchise (aka “Subfranchise”): The right, within a defined geographic area, to sell unit franchises and provide support services to franchisees. Master Franchisees essentially acts as the franchisor in their designated area, entering into franchise agreements with franchisees, providing training, advertising guidance, and other services the franchisor may require them to offer. Master Franchises are most common in international franchise expansion.
Area Representative (aka Area Director, Regional Developer, etc.): Although the industry has not decided on a uniform term to use for this arrangement, an Area Representative arrangement involves the grant of the right, within a defined geographic area, to recruit prospective franchisees to enter into franchise agreements with the franchisor, and/or to provide services to franchisees entering into unit franchise agreements with the franchisor. Area Representative arrangements are commonly used both domestically in the U.S. and internationally.
Resale/Transfer: When an established franchise is sold, whether to another existing franchisee or to a new prospective franchisee. Such sales are typically more expensive than if a prospective franchisee simply bought franchise rights to open and establish a franchise business “from scratch” as some of the up-front costs may have already been paid (i.e. build-out) and, for some systems, there may be an existing customer base from which the incoming franchisee can draw from.
When researching a franchise opportunity it is always a good idea to utilize the services of a trusted legal and financial advisor. If you have questions about the 101 Mobility® franchise system, browse 101MobilityFranchise.com or learn more about 101 Mobility at 101Mobility.com.