Franchising isn’t an industry; it’s a community made up of many businesses in different industries choosing a common method of distribution for expansion.  As a community, franchising has its own terminology and thus new franchisees and franchisors have to learn the meaning of these terms in addition to the language of the particular industry of the business. Franchising vernacular can add to the confusion of those people considering joining the franchise community as franchisors, franchisees or even as suppliers.

To help newcomers I’ll share here the meaning of some of the most common terms and acronyms used in franchising. These are short definitions; later posts will take a few of these terms at a time and expand on them.

Zor(s) = Franchisor(s)

A Zor is the business that has chosen to expand via franchising; it means the franchisor; that is, the company that has created this unique opportunity. The word “franchisor” is sometimes spelled “franchiser” following the British spelling.

Zee(s) = Franchisee (s)

Zees are the people who choose to invest in a franchise to become business owners. They enter a business relationship with a franchising company that entitles them to use the intellectual property of the franchisor for the term of the agreement in exchange for their investment.

FDD

FDD is an acronym for Franchise Disclosure Document. It’s the legal document required by the FTC (Federal Trade Commission) of every franchise company. Its objective is to provide potential franchisees with sufficient data about the company and the opportunity to enable them to make an informed decision. Each portion of the FDD that speaks to a different aspect of the opportunity is called an Item.

Most commonly discussed items are:

Item 5 = Initial Franchise Fee

Item 7 = Initial Investment

Item 12 = Territory

Item 19 = Earnings claims

UFOC (Uniform Franchise Offering Circular)

UFOC is an acronym for Uniform Franchise Offering Circular. It is simply the predecessor of the FDD and is no longer in use.

Franchise Agreement

The franchise agreement is the foundation document of the franchise relationship. It’s legally binding on both parties, and it describes the rights and obligations of franchisor and of the franchisee.

Territory

Territory is the area which franchisors assign to franchisees and within which they grant the right to franchisees to operate and market the business. Territories can be exclusive and non-exclusive.

Intellectual Property

In franchising intellectual property refers to the trademarks, trade dress, copyright, know-how, trade secrets, business concept, processes and methodologies, as well as, if relevant, designs and patents that franchisors license to franchisees through the franchise agreement.

Regional Developer

Regional Developers are franchisees who make a larger investment giving them greater rights and responsibilities over a particular region. A region generally refers to a state or multiple states; some larger states like for example, California, may be divided into two or more regions. In exchange for the larger investment Regional Developers normally share a percentage of the initial franchise fee and royalties generated from franchisees in their region.

Area Developer

Area Developers are also franchisees with agreements similar to those of Regional Developers but with smaller territories and sometimes lesser responsibility. The territory of Area Developers is limited to an area such as a city or a county instead of a region which normally implies an entire or multiple states.

Multi-Units Franchisees

As the name implies, Multi-Units Franchisees are franchisees who invest in more than one location. They can acquire the additional locations either initially or over time.

Master Franchisees

Master Franchisees have been replaced by Regional Developers in the US. This type of franchise is nowadays used solely when a company wants to expand overseas. A Master Franchisee takes on all of the responsibilities of the original franchisor in the country for which the rights have been acquired.

Franchise Operations Manual

The Franchise Operations Manual is an extension of the franchise agreement. It includes all the information a franchisee needs to operate the business according to the franchisor’s system.

—->>> Have you encountered a term that you don’t know? Share it with us and we’ll add it to this list…

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1.     Trademark

• Do you want to grant the right to others to distribute goods and services bearing your trademark, service mark, trade name, advertising, or other commercial symbol?
• In other words, do you want the new locations to use your business name and display your logo?
• Are you okay with the locations not trading under your name yet offering your products and services? 
   

2.    Significant control or assistance

• Do you want to have significant control over the way others operate their businesses? For example, do you want to approve the site, the design and the appearance of each location?
• Do you want to dictate the operating hours, the accounting practices as well as other business practices?
• Do you want to ensure that all locations follow and use the same promotional campaigns?
• Or, are you okay with every location doing their own thing, choosing whatever they want to look like, serving customers whenever and however they chose?

OR

• Do you want to provide assistance to the owners of the new locations?
• For example, do you want to provide training programs that will teach others how to obtain and serve clients?
• Do you want to provide operations manuals detailing how others should operate their businesses?
• Or, are you okay with them figuring out how to run the business as they go?

3.   Required Payment

• Do your want others to pay you an upfront fee larger than $500 to access your knowledge and open a location?
• Do you want others to pay you ongoing fees as royalties, training fees, bookkeeping charges or other payments for services, rent, or even from product sales?

If you are considering entering or have entered into a business relationship which involves ALL three of these elements, you are contemplating or are operating as a franchise. You can call it what you want but by the Franchise Rule as specified by the Federal Trade Commission deems your business a franchise. And, as a franchise you are required to provide a disclosure document to those people who wish to enter into a business relationship with you (prospective franchisees). If you fail to provide such a document, you are subject to fines up to $10,000 per violation at the federal level. What’s worse, in some states, violation of franchise laws is considered a felony.

Related posts:

1. Franchising – Federal (FDD) vs State Registrations
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These regulations can be summarized as follows:

1.   If a franchise company has a current FDD (Franchise Disclosure Document) and has a federal trademark but is not registered in any states requiring a franchise registration or exemption filing, the disclaimer must list the states of:

·     California (RS)

·     Connecticut (ES)

·     Florida (ES)

·     Hawaii (RS)

·     Illinois (RS)

·     Indiana (RS)

·     Kentucky (ES)

·     Maryland (RS)

·     Michigan (RS)

·     Minnesota (RS)

·     Nebraska (ES)

·     New York (RS)

·     North Dakota (RS)

·     Rhode Island (RS)

·     South Dakota (RS)

·     Texas (ES)

·     Utah (ES)

·     Virginia (RS)

·     Washington (RS)

·     Wisconsin (RS)

RS= Registration State

ES= Exemption Filing State

2.    If a franchise company has a current FDD (Franchise Disclosure Document), is NOT registered in any states requiring franchise registrations or exemption filings and does  NOT have a federal trademark, the disclaimer must list the states of :

·     California (RS)

·     Connecticut (ES)

·     Florida (ES)

·     Georgia (NT-ES)

·     Hawaii (RS)

·     Illinois (RS)

·     Indiana (RS)

·     Kentucky (ES)

·     Louisiana (NT-ES)

·     Maine (NT-ES)

·     Maryland (RS)

·     Michigan (RS)

·     Minnesota (RS)

·     Nebraska (ES)

·     New York (RS)

·     North Carolina (NT-ES)

·     North Dakota (RS)

·     Rhode Island (RS)

·     South Carolina (NT-ES)

·     South Dakota (RS)

·     Texas (ES)

·     Utah (ES)

·     Virginia (RS)

·     Washington (RS)

·     Wisconsin (RS)         

RS= Registration State

ES= Exemption Filing State

NT-ES= No Trademark in Place Exemption Filing State

EXAMPLE:

·          California (RS)

·          Connecticut (ES)

·          Hawaii (RS)

·          Illinois (RS)

·          Kentucky (ES)

·          Maryland (RS)

·          Minnesota (RS)

·          Nebraska (ES)

·          New York (RS)

·          North Dakota (RS)

·          Rhode Island (RS)

·          South Dakota (RS)

·          Utah (ES)

·          Virginia (RS)

·          Washington (RS)

·          Wisconsin (RS)

As they either register or file for exepmtions in different states they can delete that state from the disclaimer.

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The FDD is a lengthy document that describes the company history, the business, the terms, and the associated costs. The FDD contains a copy of the Franchise Agreement as an exhibit.  Customized FDDs and franchise agreements are effective during the recruiting phase and become tools to manage the future franchise relationship.

In addition to ther federal compliance requirements, some states have additional requirements. Complying with state laws can be cumbersome and costly. Following is a list of the states that require registrations and or filings grouped into three categories: Most time consuming and costly, less time consuming and less costly, and easy filing states.

Registration states are those states which require the submission of an application, a copy of the FDD and the payment of an annual fee. The application and FDD are reviewed by state employees upon submission. During the review process questions may arise and the state may require the FDD to be amended prior to approval of the application. The annual registration fees can be as high as $1,100 and  the application process may take up to four months or even longer.

Exemption states differentiate franchising from other Business Opportunities. These states have laws requiring  franchise companies to file an form that exempts them from paying the state’s Business Opportunity Fees. The exemption form must be filed before a franchise company can offer a franchise in an Exemption State. Filing for an exemption is typically a one-time event. However, some states such as Florida have an annual filing requirement. The fees associated with exemption filings are usually quite low, $100 or less.

1.  Most Time Consuming and Costly Registration States

• California
• Illinois
• Maryland
• New York
• Virginia

2.  Less Time Consuming and Less Costly Registration States

• Hawaii
• Indiana
• Michigan
• Minnesota
• North Dakota
• Rhode Island
• South Dakota
• Washington
• Wisconsin

3.  Easy Exemption States

• Connecticut
• Kentucky
• Texas
• Florida
• Nebraska
• Utah

When a franchise company does not have a federal trademark, the states of Georgia, Louisiana, Maine, North Carolina and South Carolina require they register an exemption filing with the state. This is filing is not needed otherwise; that is, a franchise company that has a federal trademark is not required to comply with any filings requirements in the states of GA, LA, NC, ME and SC.

All other states do not require any registration or filings at the state level and are thus termed Non Registration/ Non filing states. In these states compliance with the FDD is sufficient.

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