Franchise: Terms and Definitions
Franchise Guide – Philippines Franchise Information
Common Definition – A method of doing business by which a franchise is granted the right to engage in the business of offering, selling or distributing goods and services under a marketing plan or system prescribed in substantial part by a franchisor and which is substantially associated with the franchisor’s trademark, name, logo and advertising.
Legal Definition – Franchising is a contract or agreement, express or implied, oral or written, between two or more persons by which:
- A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan prescribed in substantial part by a franchisor;
- The operation of the franchisee’s business pursuant to that plan or system as substantially associated with the franchisor’s trademark, service mark, tradename, logo type, advertising, or other commercial symbols designating the franchisor or its affiliates; and
- The franchisee is required to pay directly or indirectly, a franchise fee.
Franchisor – The parent company or operator of a franchise concept or system that grants, for a fee and other considerations, the right to use its name and system of business operations.
Franchisee – An independent business person or novice entrepreneur who has been granted by the franchisor the right to duplicate its entire business format at a particular location and for a specified period, under terms and conditions set forth in the contract (franchise agreement).
Franchise Agreement – A written contract detailing the mutual responsibilities of franchisors and franchisees. It is usually for a several-year term, and when the term is up, the contract expires and must be renewed. Some state laws require the contract to be renewable at the franchisee’s option. Usually, a franchise agreement may not be sold, transferred or otherwise assigned without the franchisor’s permission.
Operations Manual – A written document which clearly explains the franchisor’s standards of operation, and identifies the operational tasks required to establish and operate the franchise business. The operations manual supports and promotes the use of consistent and uniform day-to-day procedures at each franchise unit within the network franchise unit in order to maintain the quality of service and products in every franchise outlet.
Franchise Opportunity – A franchise opportunity is a business opportunity that involves the sale of good and services that enable a novice entrepreneur to begin a franchise business.
Master (or Regional) Franchising – A model of multi-level franchising wherein the master franchisor sells the development rights in a particular geographic market to a master franchisee, who, in turn, sells individual or single-unit franchises within the territory. In return for a front-end master franchise fee, the master franchisee has the sole responsibility of developing that area or market under a mutually agreed upon schedule. The master franchisee is rewarded by sharing in the franchise fee and ongoing royalties paid by the franchisees within the territory to the master or parent franchisor.
Area Development Agreement – This is another variation of multi-level franchising where the franchisor grants exclusive development rights for a particular geographic area to an area development investment group or an area developer. In return for the rights to an exclusive territory, the area developer pays the franchisor a front-end development fee and commits to develop a certain number of units within a specified period of time.
Initial investment – The total capital required to start a franchise business. This typically includes Franchise Fee, Renovation, Equipment & Fixtures, Rent deposits, and Initial Inventory.
Franchise Fee – The initial fee paid to the franchisor. The Franchise Fee usually includes training, site selection and evaluation assistance, and the rights to use the franchisor’s trademark and business system.
Royalty – This is the fee paid to the Franchisor for continuing use of the trademark and in exchange for the franchisor’s ongoing support services. This is usually a percentage of the franchised outlet’s sales and is typically paid on a monthly basis.
Advertising Fee – Fee paid to the Franchisor as the franchisee’s contribution to the marketing effort. This is usually a percentage of the franchisee sales and is often paid on a monthly basis.
Initial Term of Agreement – The length of time the Franchise Agreement is in effect. If typical revenue and expense scenarios hold, the franchisee should be able to recover his initial investment within the initial term of agreement.
Territory – The franchisee’s territory is the geographic area or domain in which his business operates. The franchisor may grant exclusivity to the territory, meaning no other franchised or company-owned outlet may open in that territory, or the rights of first refusal to the franchisee, meaning that if the area can support other outlets, the franchisee is given first option to do so. The franchisor may give rights to the franchisee only where his location stands, no more.
- Single Unit Franchise The franchisor grants franchises to an individual or entity one outlet at a time.
- Area Multi-Unit Franchise The franchisor grants the franchisee the right to open several units within a territory, within a prescribed time frame. Part of the Franchise Fee for the units are paid upfront, with the balance for each unit being paid upon signing of the individual franchise agreement.
- Master Franchise (Area or Country) The Master Franchisee is both a franchisee and a franchisor. As a franchisee, he should open his own franchised units. As a franchisor, he is also responsible for finding, granting, and supporting sub- franchisees. For his effort, the Master Franchisee gets a share of the fees due the franchisor.
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