30 Essential Franchising Terms

What is royalty, franchise package, master franchise and sub-franchising? A comprehensive set of the 30 most important franchise words to understand before buying a franchise. Franchising is a special system of contractual relations, a form of long-term equal business cooperation between several companies, in which a company with a well-known brand (franchisor) resells the right to use it together with the technology for the production or sale of goods, provision of services to an independent enterprise (franchisee).

A franchisor is a firm (legal entity or individual entrepreneur), which, as a rule, has a good reputation, a recognizable image and a well-known trademark and which owns the rights to a franchise that transfers the right to conduct business to a second party using its name (brand) and business technology.

A franchisee is a firm (legal entity or individual entrepreneur) that acquires from the parent company the right to use its trademark, know-how, production system, etc. in a certain territory, paying the franchisor an initial fee and a service fee for their use.

A franchise is a full range of benefits that includes the right to use the franchisor’s trademark and business system, which is the subject of a franchise agreement. In some cases, a franchise can also be understood as the entire system of relationships in the field of franchising.

A franchise package is a form of existence of a franchise ready for sale in the form of a package of documents for the franchisee and documents for the franchisor’s internal use. It includes a brand book, a franchise management manual, a franchise policy and a set of legal documents. Drawing up a franchise package is one of the important stages in preparing a franchise for sale, since both the cost of the franchise and the reputation of the company itself depend on its quality.

The brand book is the provisions on which any positioning of the company in the external environment should be based. It must necessarily list the features of the target audience of the company, describe the brand concept and corporate identity of the company, the concept of brand promotion, the internal concept of communication. The brand book is necessary for the franchisee to use the trademark correctly and avoid unconscious violation of the franchise agreement.

The Franchisee Manual (instruction for the franchisee) is a set of rules and regulations that the franchisee undertakes to strictly comply with when conducting their business in order to achieve compliance with the franchisor’s business model. A well-written guide provides a detailed program of the franchisee’s behavior in a given situation. The manual does not replace, but complements the training provided by the franchisor.

Direct franchising is a type of transaction when a local entrepreneur acquires a franchise directly from the franchisor, bypassing intermediaries. This option is certainly the most convenient and beneficial for both the franchisor and the franchisee (although not always possible). In this case, the franchisee receives great support from the franchisor, who can first assess the local market and the prospects for developing their business in this region.

A master franchise (general franchise) provides an exclusive right to develop a franchise in a certain territory with or without the ability for the franchisee to sell sublicenses. The holder of such a franchise is sometimes referred to as a master license holder. He himself becomes a sub-franchisor within one region and has the right to sell franchises to other entrepreneurs.

Sub -franchising is a specific form of organizing a franchise business in which the owner of a district franchise receives from the franchisor the exclusive right to sell sub-franchises in a certain region (such a franchise is called a general or master franchise). As a rule, a master franchise is purchased for an entire country or even several countries.

Product franchising is a special form of franchising that involves the transfer to the franchisee of the exclusive right to sell goods that the franchisor produces. The user, together with the franchise, receives the right to sell products under the trademark of the copyright holder in a certain territory. In commodity franchising, the role of a franchisor can be wholesale trading enterprises that purchase goods from different suppliers at favorable wholesale prices. At the same time, the franchisor must have his own trademark, be able to competently form the assortment and manage it.

Production franchising is a form of franchising that involves the transfer by the franchisor of the exclusive right to the buyer of the franchise to manufacture products under the franchisor’s trademark in a certain territory using technologies, using the original components and developments of the copyright holder.

Service franchising is a special form of franchising in the service sector. The franchisor transfers to the franchisee the rights to open a service point (beauty salon, cafe, restaurant, training center, etc.) under the franchisor’s brand and using its technologies.

Distribution (distribution) franchising is a form of franchising that involves the transfer of the exclusive right to sell goods or provide services under the trademark (service mark) of the franchisor, limited to a certain territory. As a rule, in order to maintain the reputation of the parent company, additional obligations are imposed on the franchisee, which may include maintaining a certain assortment, decorating the trading floor in a certain style, organizing service in compliance with the requirements of the parent company, etc.

Business format franchising is the acquisition of a complete business system (that is, experience and a way of doing business), the exclusive right to open your own enterprise in a certain territory under the trademark (service mark) of the franchisor. In this case, the franchisee receives assistance in the operation and management of their business, as well as the marketing program, but assumes the obligation to completely copy the format of the franchised enterprise. The franchisor, on the other hand, provides his partner with complete and clear instructions for running a franchise business, provides training and ongoing support for the franchisee, receiving an initial fee and a service fee – royalties for this.

Direct (individual) franchising is a special form of franchising relations in which the franchisor transfers to the franchisee the exclusive right, limited only to a certain territory, to open one franchise enterprise under the franchisor’s trademark.

District franchising is a special form of franchising relations in which the franchisor transfers to the franchisee the exclusive right limited to a certain territory to open a network of franchise enterprises under the franchisor’s trademark. This form of franchising helps the franchisor retain control of a large franchise network over a large area. At the same time, new owners of sub-franchises pay a lump-sum fee and royalties directly to the sub-franchisor. The sub-franchisor pays the head franchisor a part of the payments received from the sub-franchisor.

Development of a territory (district) is such a form of contractual relationship between a franchisor and a person receiving the right to develop a certain territory (a territory investor), in which the territory investor concludes franchising agreements with new franchisees on behalf of the parent company. New franchise owners pay a lump-sum fee and royalties directly to the franchisor. At the same time, the territory investor does not have the right to sell sub-franchises.

Regional representation is such a form of contractual relationship between the franchisor and the regional representative (experienced franchisee), in which the regional representative selects new franchisees in a certain territory where he has his operating franchise enterprise.

Business franchising is a term for the relationship between two parties to a franchising agreement in the field of service, training and catering, in which the franchisee opens and develops his business according to the model and with the help of the franchisor. He also uses his trademarks, technologies and entrepreneurial experience.

Conversion franchising is a special way of expanding the franchise network, in which an already functioning independent enterprise switches to work under a franchise agreement and joins the system of franchise enterprises of one franchisor.

The initial (franchise) fee is a fee that the franchisee pays for granting him the right to engage in a specific type of business in a specific territory and using the franchisor’s trademark.

Royalties are a type of license fee, periodic payments of compensation (usually in cash) for the use of a franchise, established in proportion to the performance indicators agreed by the parties to the agreement, or in the form of a fixed payment.

Advertising fee (advertising share) is a monthly/annual fee from the user to the copyright holder, which is used for advertising expenses and the implementation of marketing programs.

A franchise agreement is a legal document that governs the relationship between two parties – the franchisor and the franchisee (see commercial concession agreement).

A commercial concession agreement is an agreement under which the right holder grants the user for a certain fee for a certain period and in a specific territory the right to use their exclusive rights in business activities.

A conditional (integral or non-deductible) deductible is an insurance deductible under which the insurer is exempt from compensation if the loss does not exceed the stipulated deductible amount. Otherwise, he pays the loss in full.

An unconditional (excessive or deductible) deductible is an insurance deductible in which the insurer compensates for the loss in the amount of the difference between the actual amount of the loss and the amount of the established deductible. The deductible can be set in absolute or relative terms to the sum insured, the assessment of one insurance object or the amount of damage.

Intellectual property is a temporary exclusive right enshrined in law, as well as personal non-property rights of owners to means of individualization, as well as copyright works (including scientific discoveries). The monopoly of authors on certain forms of using the results of their intellectual activity is legally established, therefore they can be used by other persons only with the permission of the copyright holders.

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