Common Franchising Terms You Need to Know
Franchising has its own language, like most industries. If you’re new to the franchising business or intend to enter the world of franchising, hearing commonly used franchise terms can spin your head for sure since the terminology can be perplexing. The present blog attempts explicate these common franchise terms which may make easier for you to comprehend them making your franchising decision fruitful.
A franchise/franchising is a form of marketing and distribution of services or products involving a franchisor, who establishes the brand’s trademark and a business system, and a franchise partner, who pays a royalty and often an initial fee to get the right to do business under the name and system of franchisor/brand. Basically, the contract binding the two parties is the “franchise”, however the term is more commonly referred to the actual business that the franchisee operates. In a nutshell, the practice of creating and distributing the brand and franchise system is mostly referred to as franchising. Franchising is getting widely known and rapidly accepted as an efficient strategy for the expansion of business.
To put it in simple words, Franchisees are business owners who operate franchises granted by franchisor to use the method of doing business and trademark to offer, sell, or distribute goods, services or commodities. A franchisee who is also known as franchise partner, purchases a franchise from the franchisor. Certain rules and guidelines need to be followed by the franchisee. Besides that, the franchisee must pay an ongoing franchise royalty fee to the brand owner. Franchise partner has to protect the franchised brand by operating the business in strict compliance with system operating standards. It is the responsibility of franchisee, to build a loyal and wide customer base by offering only approved products and services and by providing quality customer service.
A franchisor is a company or person that grants a franchise to an individual, group or business through an agreement. A franchisor is the one who sells the right to open stores and sell products or services using its brand, expertise and intellectual property. Generally, the franchisor company receives an initial start-up fee, an annual fee and a percentage of the branch’s profits. It is the role of franchisor to provide everything that is necessary for the franchisee to operate their business according to the franchise agreement. Franchisors get benefit from franchise agreements because they let companies to expand much more quickly than they could otherwise. Due to lack of funds and workers, a company grows slowly. However, through franchising, a company invests little capital and labor because the franchise partner supplies both of it.
- Franchise Fee:
By now you know that a franchisor sells the use of its business to others while franchise partner is a subject paying to use one’s business. Franchising involves a lengthy list of costs. The franchise fee is one of them. It is an amount of money which normally has to be paid to install this type of annexure. You should not confuse franchise fee with royalties. Royalties are amounts paid after the business begins to operate on the basis of sales or can be charged at a flat periodic rate. A franchisee fee has to be completely paid before the business can start to operate either with the assistance of the franchisor or under its name. Once the franchise fee has been paid, both the parties are bound by certain obligations to the other.
- Startup Fee:
You should definitely know the amount of money required to start a franchise. You can considerably attract investors, requesting funding, securing loans, saving money with tax deductions, breakeven analysis and estimating profits by calculative startup fee. Expenses sustained during the process of acquiring a franchise are startup fees. Research expenses, business and marketing plan, borrowing costs, and outlay for technology are included in Initial startup fee.
- Franchise Agreement:
A legally binding document that outlines a franchisor’s terms and conditions for a franchise partner is called a franchise agreement. In franchise agreement, franchisor consents to grant the enterprise name or company system to the franchise partner. These terms, which are generally outlined in a written agreement between both parties, govern every franchise. The franchise agreement governs how the franchise partner runs the newly owned business and lay out what they expect from the brand owner.
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