Glossary of Terms

This section of FranchiseUK provides a collection of some common and not so common terms used in franchising around the world.

Accounting Period

An accounting period is a period of time reflected in financial statements .  It is typically a year, a quarter or a month.

Accrued Interest

Accrued interest is the amount of money that you owe on a loan or is owed you on a loan or bond since the last principal payment was made.

Advertising Contributions

Also known as the advertising fee.  It is a fee, separate from the royalty fee that is paid to the franchisor to support advertising and marketing campaigns.  It is in addition to any advertising you do yourself.

Advertising Fee

See Advertising Contributions

Agent

An individual who can act on the behalf of another.  An individual who acts on the behalf of a corporation and can legally bind the corporation.

Agreement

Also called the Franchise Agreement . It is the contract that you sign with a franchisor.

Amortisation as with amortisation schedule

In loan terms, it is the periodic payment of interest and principal to pay down a loan.  In accounting terms, it the periodic writing down of an intangible asset.  It is similar to the concept of depreciation to write down the value of assets.

Amortization Schedule

The schedule that shows over time, usually monthly, the status of a loan and the principal and interest applied to the loan.  Alternately, the schedule showing, over time, the amortization taken against an intangible asset.

Approved Products

Proprietary products that a franchisee must purchase from the franchisor.  Also, products that must be purchased from approved suppliers.  The goal is to achieve uniform quality assurance among all franchisees.

Arbitration

A process in which a neutral third party hears both sides to a dispute and renders a decision.  It is an alternative to using the legal process, which can be costly, and time consuming.

Area Development Rights

The rights granted to a franchisee to develop a certain number of franchises within a specified geographic area, usually within a certain time frame.

Assets

In accounting terms, an asset is an item on the balance sheets of a company that has future economic value. 

Balance Sheet

The balance sheet is a financial statement that shows a company's assets, liabilities and equity as of  particular moment in time.

Break-Even Point

Break even is reached when sales equals costs.  Sales above the break-even point would generate profits.

Broker

An intermediary who manages a sale and purchase.  Brokers can represent either sellers or buyers.  Different brokers can represent both a seller and a buyer.

Business Format Franchise

A license to use the franchisor's product, service and trademark.  Training is involved that teaches the franchisee the "business format" that the franchisor is selling. 

Business Plan

A plan that provides the objectives of a business and the steps necessary to achieve those objectives.

Buy-Sell Agreement

A legal document that details the provisions under which a business may be sold. 

Calendar Year

An accounting year that runs from January 1 to December 31.

Closely Held Corporation

A corporation whose shares are held by either family members or by relatively few persons.

Company-owned Outlet

An outlet that is identical to a franchised outlet, but it is owned by the franchisor as opposed to the franchisee.

Compound Interest

Interest paid on the principal of a loan as well as on the previously accumulated interest.

Conversion Franchise

A conversion franchise is one in which the franchisee previously ran an independent business similar to a franchisors, and converted the independent business to a franchised business.

Copyright

The exclusive right to produce, publish and sell written or musical works.

Default

A failure to perform as required by a contract.

Depreciation

Depreciation is the decrease in the value, over time, of a long-term asset.  It is measured using a depreciation schedule.

Designated Supplier

A supplier designated by the franchisor as the source for purchasing approved products.  The use of a designated supplier for certain products guarantees the franchisor that each franchisee is providing the same product to its customers.

Directors

Elected by the shareholders, directors direct the affairs of a corporation. 

Distributorship

Usually a distributorship is not a franchise.  It is a right given that allows you to sell a particular product to others. 

EBITDA

This is an acronym for "Earnings Before Interest, Taxes, Depreciation and Amortization".  It is a measure of cash flow available to meet debt payments.

Equity

Equity represents the value of ownership in a business, less the claims made against the business.  Is also expressed as net assets, from the accounting equation:

Equity = Assets - Liabilities

Exclusive Territory

An exclusive territory right gives you as the franchisee the right to that territory.  The franchisor cannot sell other franchises within that territory.

Fair Market Value

A price arrived at by a buyer and seller with the assumption that both buyer and seller have reasonable knowledge of the prevailing market conditions.

Financial Statements

For smaller companies, usually the balance sheet and income statement.  For larger corporations, it will include a statement of cash flows.

Fiscal Year

A 12 month period that constitutes a company's financial year and does not correspond to a calendar year.  For example, a fiscal year may be July 1 to the following June 30.

Franchise

A franchise is arrangement whereby the owner(franchisor) of a particular trademark, trade name or copyright grants another (franchisee) the right to use that trademark, trade name or copyright in business with specified conditions and limitations.

Franchise Agreement

Also called the Agreement .   It is the contract that you sign with a franchisor.

Franchise Fee

The initial fee that you pay to a franchisor before you acquire a franchise.

Franchisee

That's you - the person who receives the license from a franchisor to conduct business under their trademark.

Franchisor

That is the owner of the license who sells the right to do business under a trademark to a franchisee.

Furniture, Fixtures and Equipment

Also abbreviated as FF&E.  Movable personal property used in the operation of a business.  Usually a separate line item on the balance sheet.

General Partnership

A business created by the agreement of the parties and one in which the personal liability of each general partner is unlimited.

Gross Sales

Gross sales is revenue before any expenses are deducted.  It is the sum of all money generated prior to deducting wages, product cost, taxes, interest, etc.

Income Statement

The statement indicating the profit or loss of a business during its accounting period.  Otherwise known as a profit and loss statement.  Simply put it is Revenue - Costs = Profit (or loss).

Initial Investment

What you are required initially to open a franchised business.  It reflects all monies required including the Franchise Fee and monies needed to secure space, purchase inventory, insurances, etc.

Limited Partnership

A partnership in which there is one general partner and one or more limited partners.  The limited partners are liable only to the extent of their capital contribution to the partnership.  The general partner has unlimited liability.

LLC

A limited liability company.  It is created by an agreement of the owner/members.  The members are liable only to the extent of their capital contributions.  It provides many of the protections of a corporation.  The LLC is not taxed at the business level, but "flows through" and the members are personally taxed.

Marketing Plan

A plan, usually included as part of a business plan, that identifies and plans the marketing strategy for a product or service.

Master Franchisee

A franchisee that is given the right by the franchisor to develop and sell franchises within a certain territory.  As opposed to Area Development Rights where a franchisee can open outlets themselves within a given region, the master franchisee can sell franchises in a particular region.

Master Region

The region that a master franchisee acquires.

MBE

An acronym standing for "Minority Owned Business".  A minority owned business must be certified as such and can receive certain advantages in government contracts from that certification.

Multi Level Marketing (MLM)

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 states.  Some are legitimate business opportunities.  Any business of this nature should be investigated closely.

Net Cash Flow

The amount of cash remaining in a business after costs, interest and principal payments are made.

Non-compete Clause

A clause in a contract that prohibits you from entering into the same line of business for a specified time and within a specified area after you leave employment or after you terminate, sell, or otherwise leave a franchise.

Officers

The directors of a corporation appoint the officers.  The officers are responsible for the daily operations of the business.  In most cases, they are the President, Treasurer and Secretary.  In some states, one person can occupy all three positions.

Operations Manual

Any and all information needed by the franchisee relating to the operations of the franchise.

Overhead

Expenses that do not change as production changes.  A simple way to look at overhead is even if there were no sales, what expenses would still have to be met?  Typically expenses such as lease payments, utilities, etc.

Partnership

A form of business created by the agreement of two or more individuals.  See also general partnership and limited partnership.

Personal Guaranty

Usually the owner(s) of a corporation cannot be held personally responsible for a corporation's debt.  If a loan requires a "personal guaranty" it means that the lender is asking the owner to personally guarantee the debt should the corporation default.

Pro Forma

Usually, financial statements that have hypotheticals or projections built into them.  They are forward looking projections of income and operations.

Product Format Franchise

The ability to sell a particular companies product that does not constitute all that you sell.  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.

Protected Territory

A geographic area granted to a franchisee in which the franchisor agrees not to sell franchises to others or to open company-owned stores.

Quality Control

Also known as quality assurance.  A franchisor will send teams or individuals to franchise locations to ensure that the rules in the operations manuals are followed.  This ensures the consistency of the product or service between different franchisees.  The strictness of the quality control is to the franchisees benefit as it ensures that his operation's reputation is not tainted by the laxness of another franchisee.

Real Property

Land and anything permanently affixed to the land.  If an item can be removed from real property without significant effort or damage, it is considered personal property.

Renewal

You are granted a particular time frame in which to conduct business as a franchisee in your initial Franchise Agreement.  The franchise agreement should also state the terms and conditions to renew that business relationship.  Renewal is the resigning of a Franchise Agreement after the initial or subsequent terms of the franchise expires.

Royalty

A royalty refers to a percentage of gross sale that you pay to the franchisor monthly. 

Service Mark

A service mark is similar to a trademark in that it registers exclusive use of a slogan or logo.  However, it is specifically used for services as opposed to tangible goods.

Shareholder

A shareholder owns "shares" in a corporation for which they typically give capital to the corporation in exchange for shares of the corporation.

SIC

SIC is an acronym for Standard Industrial Classification.  It is the predecessor of the NAIC and is a numerical identification system that classifies businesses into defined industries.

Sole Proprietorship

A form of business where one individual opens a business.  Legally, the owner is the business and the business is not considered a separate legal entity.  The owner is personally subject to unlimited legal liability for the business.

Sweat Equity

In the early stages of a business, an owner may invest their time without taking a salary in order to grow the business.  This concept is known as sweat equity.

Trade Secret

Trade secrets are what give some companies their competitive edge.  They can be diverse from secret product formulas to confidential customer lists.  Provisions for the confidentiality of trade secrets can sometimes be found in the Franchise Agreement.

Trademark

A legally registered mark that protects a logo or slogan identified with a tangible good that prohibits others from unlawfully using that mark to sell a product.

Turnkey

Literally a business whereby a new owner simply has to "turn the key" to start operations.

Variable Cost

Any costs that vary with the level of production.  For example, materials directly used to produce a product are variable costs.  The more product produced, the more materials needed to produce the product. 

Venture Capital

Money loaned by venture capitalists to new businesses that show the potential for above average growth, usually in new, or unusual industries.

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