If you’re thinking about entering the world of franchising, there’s a lot you’ll need to learn. As you research business entities and the franchising process, you’re bound to come across a range of terms and acronyms you don’t recognize. Understanding these concepts is critical to building a strong foundation for your franchising journey.
Fortunately, a lot of these terms are quite simple to get the hang of! Check out this list of 20 franchising concepts you need to know before you open up your very own franchise business.
- Advertising and promotion fee (A&P): Also known as a marketing fee, the A&P is a fee paid by franchise owners to contribute to advertising and promotional activities for the entire franchise system. This helps execute a consistent and widespread marketing strategy that enhances brand visibility and customer engagement across all franchise locations. The fee may be a percentage of gross sales or a flat rate.
- Break-even point: The break-even point is a crucial financial milestone for franchisees. It marks the point at which a franchise’s total revenue equals total expenses, resulting in neither profit nor loss.
- Discovery Day: A franchise Discovery Day is when potential franchisees visit the franchisor’s headquarters to learn more about the franchise system. During your visit, you can expect to meet key personnel and evaluate the overall culture and operations of the business. Some franchise brands hold these events virtually.
- EBITDA: EBITDA stands for “earnings before interest, taxes, depreciation and amortization.” It’s a financial metric used to gauge a franchise’s operational performance, excluding certain expenses. This measure provides a clearer picture of the business’s profitability, focusing solely on its ability to generate operating income.
- Franchise Agreement (FA): The Franchise Agreement is a comprehensive legal document outlining the terms and conditions between the franchisor and franchisee. It outlines the rights, responsibilities and obligations of both parties, covering things like territory, fees, duration and operational guidelines. You’ll sign the Franchise Agreement as the final step on your path to ownership.
- Franchise Disclosure Document (FDD): The Franchise Disclosure Document is a detailed legal document franchisors provide to potential owners. It offers in-depth information about the franchise opportunity, including the franchisor’s background, financial performance, fees and other essential items. Reviewing the FDD enables informed decision-making while selecting a franchise.
- Franchise fee: The franchise fee is an upfront payment made by a new franchisee to the franchisor. It gives the franchisee the right to operate under the franchise system.
- Franchise resale: A franchise resale occurs when an existing franchisee sells their operational business to another party. This transaction allows the new franchise owner to step into an established business with an existing customer base, operational framework and brand presence.
- Franchise system: The franchise system includes the overall structure and framework established by a franchise business. This includes standardized processes, brand guidelines, training programs and ongoing support mechanisms.
- Franchisee: An individual or entity that buys the right to operate a business using the franchisor’s brand, system and support. A franchisee is also called a “franchise owner.”
- Franchisor: The company or individual that grants a franchisee the right to operate a business using its brand, system and support.
- Initial investment: The initial investment, also known as the startup cost, is the total amount of money a prospective franchisee needs to invest to launch and operate a franchise. This usually includes the franchise fee, equipment and other foundational expenses.
- Item 19: Found within the FDD, Item 19 is a section that provides prospective franchisees with financial performance information from existing franchise units. This offers insight into the potential earnings and financial viability of the business.
- Key Performance Indicators (KPIs): KPIs are quantifiable metrics used to evaluate the success and performance of a franchise over time. They represent the goals of your business and are intended to help you grow.
- Multi-unit franchising: In a multi-unit franchising arrangement, a franchise owner is given the rights to open and operate multiple locations within a specific territory. This allows for broader market penetration and increased economies of scale.
- Non-Disclosure Agreement (NDA): An NDA is a legal contract that protects confidential information from being disclosed to third parties. In the franchising context, an NDA may be used during early discussions between the franchisor and potential franchisees to protect the franchisor’s intellectual property.
- Owner’s discretionary profit (OPD): ODP represents the profit available to the franchise owner after deducting business expenses but before factoring in interest, taxes, depreciation and amortization. This is often similar to EBITDA, but usually includes the owner’s compensation/salary.
- Request for consideration (RFC): A request for consideration is a formal request made by a potential franchisee to express their interest in joining a specific franchise system. It is one of the initial steps in your franchise journey. This request is non-binding, meaning you are not obligated to invest after submitting one.
- Royalty fee: A royalty fee is an ongoing payment made by franchisees to the franchisor. This fee supports the ongoing use of the franchisor’s brand, system and support services. Royalties are usually calculated as a percentage of gross sales.
- Territory: A territory is a defined geographical area where a franchisee has exclusive rights to operate and develop their business.
Understanding the fundamentals of franchise terminology is important to making informed decisions. But you’re not in it alone! Franchisors like SpeedPro are available to help explain the franchising process, so your franchise investment goes as smoothly as possible.
Interested in learning more about a franchise opportunity with high profit margins, low startup costs and nearly unlimited scalability? Reach out to SpeedPro, the nation’s leading large-format printing franchise, to get started.