About franchising

Advertising fee

The monies that a franchisee is required to contribute to the advertising fund or the advertising coop. These funds are used to pay for system‐wide advertising and promotional expenses.The manner in which advertising contributions are made varies from company to company. Many franchise agreements specify a percentage of gross sales to be spent on advertising; the breakdown of expenditures for local, regional, and/or national advertising may also be specified.

Area development

The franchisor awards a single franchisee the right to operate more than one unit within a defined area, under a development agreement and based on an agreed‐upon development schedule.

Business franchising

The franchising system wherein the franchisee buys from the franchisor a total blueprint for doing business. Usually included is the license of a trade name, the trademark, access to trade secrets, and a clearly defined method and set of guidelines for conducting the business. Occasionally referred to as “pure” or “comprehensive” franchising.

Conversion franchising

The process by which existing independent businesses or dealers within an industry become franchisees when they assume the trade name and trade dress of the franchisor. Conversion franchising has been particularly widespread in the real estate industry.

Exclusive territory

A territory assigned to a franchisee within which a franchisor agrees not to operate a facility (or grant a license to another party to operate a facility) that is the same as the franchised business, under the same marks, and under the same system. Most franchisors reserve rights with respect to other methods of distributing products or services (such as internet sales). Not all franchisors offer exclusive territories.


The FTC Franchise Rule defines a “franchise” as an arrangement whereby a franchisor grants franchisees the right to operate a business that: 1) is identified with the franchisor’s trademark; 2) is subject to the franchisor’s significant control and/or assistance; and 3) in exchange for which, the franchisee pays a “franchise fee” to the franchisor or its affiliate. Most state franchise laws adopt a similar definition (except in New York, where any combination of elements 1 and 3, or elements 2 and 3, are enough to satisfy the state law definition of “franchise”).

Franchise Fee

A sum of money the franchisee pays to the franchisor when the franchise agreement is signed. The fee may cover a variety of expenses, including but not limited to training costs, on‐site startup costs, and promotional charges. Also called a “License Fee” or “Initial Fee.”


A method of marketing products and/or services under which a franchisor licenses its trademark and operating system and/or know‐how to a franchisee in exchange for both ongoing fees paid by the franchisee to the franchisor during the term of the franchise and the franchisee’s agreement to follow the franchisor’s standards and specifications for the franchise system. Franchise arrangements have been subdivided into two broad classes: 1) Product distribution arrangements in which the dealer is to some degree, but not entirely, identified with the manufacturer/ supplier; and 2) entire business format franchising, in which there is complete identification of the dealer with the buyer.


Franchisor has established company, but limited resources, so in order to expand company on his/her own, franchisor offers know-how, brand name and other necessary goods to person who is willing to buy franchise (right to work with companies name) and manage company work on his/her own, paying franchisor monthly fee.


Franchisee is person who is using franchisors brand, know-how, marketing and other goods while managing company on his/her own. Franchisee is the person who bought franchise and is allowed to work with Franchisors advantages on behave of agreement.

Initial Investment

The required amount of money required for a new franchisee to open and operate a location for at least three months. This must include all “start‐up” expenses, but may not be reflective of total investment.

Managment fee

Working capital: A financial metric that represents liquidity available to a business or organization. A company can have both assets and profit but be short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short‐term debt and upcoming operational expenses.

Master Franchisee

A system whereby a franchisor grants to a party (usually referred to as the Master Franchisee) the right to operate franchised businesses and to grant sub‐franchises to third parties, within an agreed‐upon geographic area. The Master Franchisee serves as if it were the “franchisor” within the sub‐franchise territory, providing localized support services within the territory. The Master Franchisee typically retains a portion of the royalty as compensation for its services.

Multi unit Franchisee

A franchisee that owns and operates more than one franchised location.

Product franchising

Arrangement in which a supplier (franchisor) supplies a product family to a dealer (franchisee) who may also take on the identity (brand name) of the franchiser. Exclusive brand-name stores are usually product-franchisees. Also called trade name franchise.

Royalty Fee

A regular and continuing payment made by the franchisee to the franchisor, often paid on a weekly or monthly basis. The royalty may be a percentage of sales, a fixed recurring fee, or a combination. Royalties commonly cover use of a trademark and trade name and also constitute a fee for services performed by the franchisor such as training and assistance, marketing, advertising, accounting, and so on. Also called “service fees” and/or “license fees.”

Service Franchising

A type of franchising which primarily provides a service, assistance or advice to the consumer. Service franchises are typically business format franchises and include, but are not limited to, the following: tax preparation, accounting, haircutting, staffing, windowwashing, business coaching, real estate, maid services, dry cleaning, painting, etc.


Supplier is company that with its services/products can offer help for franchisor and/or franchisee. For example real estate companies, legal services, advertising and so on.

What is Franchising?

Franchising means that the franchisor (established company and brand) let’s franchisee operate under its name and know-how on the basis of an agreement.


In the start franchisee receives ongoing support, gathering all information necessary to establish a previously untrained person in the business. The agreement between the two parties sets out the obligations and rights of both franchisor and franchisee and determines how long the franchise arrangement will last. Goal is simple. Instead of developing company-owned outlets, some businesses expand by granting a franchise to others to sell their product(s) and/or service(s).

Who is in control?

Franchisor remains in control over the way products/services are being processed, controlling quality and standards of the business model and way it is held. Each franchise business is owned and day-to-day operated by the franchisee.

What are the cost implications?

Franchisor is supposed to provide know-how, advertising, product improvement, education, trainings, and other managemental help for franchisee. In return franchisee pays for buying franchise and later monthly, quarterly or yearly fee, usually depending on annual turnover.