Franchise Terms to Know

Before immersing yourself into looking for a franchise, you should learn the lingo. Here are some of the most common franchise terms:

FDD

The FDD, or Franchise Disclosure Document, is the document that discloses franchise information to prospective franchisees. The FDD is given to prospects at least 14 days before they are asked to sign a franchise agreement.

Conversion Franchise

A conversion franchise refers to the situation when an operating small business converts into a franchise.

Royalty

The royalty is a fee that is usually paid monthly or quarterly, for the continuous use of franchise’s trademarks and operating systems.

Item 19

Item 19 is a section in the FDD, which details the earnings, costs and more of the franchisees within the system.

Exclusive Territory

A geographic area which provides the franchisee with certain rights, which may include exclusive operation

Working Capital

Working capital is cash available for daily business operations. Current assets – current liabilities = working capital.

Right of First Refusal

The franchisor’s right to purchase a franchise when the franchisee wants to sell

Addendum

An addendum is an additional document that is not included in the initial contract.

Registration States

There are 15 states that require franchisors to register the FDD with a state agency before they are allowed to sell franchises in that state.