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A - Z
of Franchise Terminology
A
Advertising
Levy - The
Franchise Agreement may provide for the contribution to an
Advertising Fund by each Franchisee. Such funds are normally
retained in a separate account and applied only to matters related
to advertising. It is not uncommon for Franchisees, through their
council, to assist the Franchisor in decisions on how this fund is
applied. See "Franchise Advisory Council". The
Advertising Levy may be a fixed fee or, more normally, a percentage
of Franchisee turnover.
Administration
Levy - See
"Service Fee."
Arbitration
- The Franchise
Agreement must provide for arbitration between the parties to the
Agreement. Arbitration is a form of dispute resolution in the
event of a disagreement between the Franchisee and the Franchisor,
and is normally chaired by a nominated individual or body, as
determined under the ‘Franchising Code of Conduct’.
Assignment
-
The sale of a franchise by one Franchisee (assignor) to another
(assignee) is called an assignment. The Franchisor will
normally retain the rights to interview and accept any proposed
buyer and may also retain the rights of buying the franchise back
himself. The vendor Franchisee has the right to set the value of
the franchise. It is normal for an assignment fee to be paid
to the Franchisor, who will utilise those funds to train and induct
the new Franchisee.
B
Bank Finance
Package - A loan
scheme by banks to provide the Franchisee with some of the finance
required to buy the franchise. Often restricted to a maximum
of two thirds of the total investment. Some banks have
off-the-shelf packages for specific franchise opportunities, which
they have previously evaluated and know. This is not a warranty by
the bank, simply an acknowledgment that they have detailed
information in-house about the business.
Business Format Franchise - A franchise in which the
Franchisor provides the Franchisee with a complete format
(blueprint) for the setting up and operation of the business, hence
the name. Otherwise known as a Business System Franchise.
Buy-out Clause - The Franchise Agreement may include a
clause giving the Franchisee the option to buy himself out of the
franchise and continue to trade at the same site and in the same
style of business, but as a totally independent owner. Such a
clause is uncommon in Australian practice.
C
Company Owned
Units - Units of
the franchise which are owned by the Franchisor and operate
alongside the Franchisees within the group. Such company
owned units are normally obliged to contribute to group expenses
such as advertising and marketing. Such units allow the
Franchisor the ability to pilot new ideas and products without
detriment to the operation of a particular franchise owned
business.
D
Disenfranchise
- The
withdrawal of the franchise by the Franchisor from the Franchisee.
This is likely to occur when there have been persistent
breaches of the Franchise Agreement by the Franchisee and such
breaches have not been rectified.
Dispute
Resolution - A mechanism
for Franchisors and Franchisees to deal with disagreements. A
requirement under the
‘Franchising Code of Conduct’.
E &
F
Fixed Service
Fee - The
Franchisor may choose to obtain his continuing income from the
Franchisee through a fixed-amount monthly or weekly payment, or
through a service fee calculated as a percentage of turnover, but
carrying a minimum payment amount. Such arrangements are seen
by their critics as a form of setting performance targets, which
some would find unacceptable. The argument is that the
Franchisee-Franchisor relationship is a partnership where both
parties share the risks and rewards of success and failure.
It is not uncommon to find a fixed service fee where the
franchise business income is by way of small cash payments, which
in itself would prove difficult for the Franchisor to audit or
monitor.
Franchisee Advisory Council - The Franchise Agreement may
provide for the formation of a Franchise Advisory Council with
Franchisees assuming the role of assisting the Franchisor with
marketing or advertising decisions. Such Agreements may allow
for the annual election of Franchisees to this Council.
Franchise Agreement - The contract entered into by the
parties to the franchise in which all the obligations and
responsibilities of each party should be clearly defined.
Normally, such contracts are forty pages or more in length
and it is of vital importance that any party consult with a legal
adviser prior to signing an Agreement. The Franchise
Agreement is normally signed on the day of settlement, from which
time the Franchisee owns the rights.
Franchise Fee - The up-front payment by the Franchisee to
the Franchisor for the granting of the franchise rights. This
fee is paid upon the settlement of the franchise to the Franchisee,
once the Franchise Agreement is signed. The Australian average
Franchise Fee in 1998 was $25,000.
Franchisee - The person, partnership, or company who buys
the rights to a franchise from the Franchisor. Also
sometimes referred to as a Licensee, or franchise owner.
Although Franchisees are normally individuals, they are, in
some instances, major public companies. Where a company or
trust enters into a Franchise Agreement, the Franchisor would
normally ask the individuals behind it to also guarantee the
performance of the corporate Franchisee.
Franchisor - The franchising company which sells franchises
in its system to Franchisees. The creator of a business
format franchise system. A Franchisor should prove the
success of his concept and his ability to pass his operating system
to others by running company owned or pilot franchised operations
before generally offering the franchise to the public.
Franchise Council of Australia Ltd - The Franchise Council
of Australia Ltd (FCA) is a single organisation comprising of
Franchisors, Franchisees, and advisors, with "State
Chapters" meeting regularly in each State of Australia. The
FCA has been established since 1982 and has produced a growing
range of publications on the various aspects of franchising, as
well as coordinating exhibitions and conventions.
G
Goodwill
-
The value of goodwill in a business is normally only applied once a
business is operational. It is calculated on
the value of trade already established and which is likely to
continue to the benefit of the new business owner.
H &
I
Intellectual Property Rights - Trade marks, service marks,
know-how and copyright. These often form an important
component of the franchise system (see Downings' Legal site for
further information).
J, K & L
Lease
Franchise - The
Franchisor leases the premises to the Franchisee at a rental, based
on turnover, which also covers the Management Services Fee.
This is close to approaching a landlord/tenant arrangement
and may present problems in Western Australia because of that
State's particular Retail Tenancy Act.
Licensee - See Franchisee or Master Licensee.
M
Management
Service Fee - See
"Service Fee" and "Fixed Service Fee".
Marketing Manual - A manual of information often provided to
guide a new franchise owner in how to promote and effectively
market their products or services into the community.
Traditionally, such manuals will provide bromides of forms
and posters to be used, together with details of how to monitor
performance of the promotions conducted.
Master Franchisee/Sub Franchisor - Franchisors sell master
licences to operate their systems in other countries, regions or
States. Thus, an Australian Sydney-based Franchisor may allow
his business to expand into Western Australia by the appointment of
a Western Australian based Master Licensee, who in turn has the
rights to sell franchises in Western Australia, providing it all of
the local support services. Franchise agreements in such a
situations are normally between all three parties, The National
Franchisor, The Master Licensee, and the Franchisee.
Multi-Level Marketing - A form of direct selling by
distributors to the public in their homes. Not a business
format franchise.
Multi-Unit Franchise - A Franchisee with more than one unit.
Such Franchisees are usually a sign of the successful
franchises which have proved their ability to be run under
management, for naturally a Franchisee cannot actually operate in
more than one place at one time. Very common in the U.S.A. but less
common in Australia, where many Franchisors see a major component
to franchise success being the actual day-to-day involvement of the
franchise owner. For that reason some Australian Franchisors
actually prohibit ownership of more than one unit.
Multiple Franchisors - Franchisors offering more than one
franchise concept.
N &
O
Operations
Manual - Manuals
supplied by the Franchisor to his Franchisee as part of the
franchise package to provide him with step-by-step instructions
(the business system) on how to set up and operate the business to
the correct specification and standard required. The manuals
are copyright of the Franchisor and, as they contain the very
essence of how to duplicate the business, they have to be treated
with the utmost care and confidentiality.
P
Party Plan
Selling - A form of
direct selling to the public through "parties" in their
home. Not a business format franchise.
Pilot Unit - A unit of the franchise run by the Franchisor
or under his close supervision during the "proving" time
of system development, to demonstrate that the concept, system and
procedures will provide a successful business and that the know-how
can be transferred successfully to an inexperienced Franchisee.
The pilot unit is the ultimate test bed for the Franchisor's
training methods and manuals.
Plant and Equipment - The plant and equipment required by
the Franchisee within the franchised business to operate the
business in the manner laid down by the Franchisor. Normally
paid for at settlement or immediately prior to possession of
premises.
Product Supply - The Trade Practices Act prohibit the fixing
of a line of supply or prices. Most Franchisors with a
business which supplies products or goods do, however, wish for a
standard range of products to be supplied by their Franchisees.
The Franchise Agreement may provide for the supply of
products through a nominated supplier, and set guidelines for the
acceptable standards of products to be used in the Franchisee's
business. Should the suppliers nominated not be able to
supply the nominated product, a Franchisee would normally have
the ability to seek other suppliers, provided that the goods meet
the standards set.
"Old fashioned" franchise thinking was that a Franchisor
could obtain an income from product supply. As that is more
transparent and could provide an opportunity for abuse by
interfering with end prices and their structure, most Franchisors
now adopt only a service fee or royalty income.
Pyramid Selling - An arrangement, often associated
incorrectly with franchising, which involves the selling of
territorial rights through a pyramid, or tiered sub-licence
structure. The promoters rely for their income on the sale of the
tiered territories, rather than the sale of product or the success
of the territory owner to provide service fees. Such schemes are
now illegal in some countries.
Q &
R
Renewal
-
Franchise Agreements are normally granted by the Franchisor for a
specific period (see Term). That period is broken down into units
of time, perhaps five years, at which point renewal of the
franchise is required. If the Franchisee has been in repeated
breach of the Agreement then the Franchisor may exercise any rights
he may have under the Agreement not to allow such renewal, in which
case the franchise will lapse. If the Franchisee has performed to
the Agreement, then the right of renewal is granted , subject to
any newly written Franchise Agreement being put in place.
That new Agreement may be in different wording, but cannot
alter substantially from the original agreement made at the outset.
Royalties, service fees and advertising levies cannot be amended.
A renewal fee of $1,000 or more may be applied to cover the
Franchisor's costs at renewal, but again that amount is stipulated
in the original Franchise Agreement.
Royalties - Another term for Service Fee but, in fact a
misnomer because service fees are calculated on the same basis as
royalties (percentage of gross turn-over). In essence,
royalties are a form of passive income which requires little or no
effort from the recipient. Examples are copyright or patent
royalties.
S
Service
Fee - The
Franchisor will obtain his continuing income, required to support
the Franchisee, by way of a weekly or monthly fee, normally
expressed as a percentage of Franchisee turnover. Otherwise
known as Franchise or Management Royalty.
Service Marks - Similar to trade marks, but applicable to
services rather than actual products. The granting by the
Franchisor to the Franchisee of the rights to use his service
marks, trade marks and copyright material (Operations Manuals,
etc.) is a basic element of a franchise package. One important
obligation of the Franchisor is to prevent his marks from being
used by any unauthorised person in order to protect the interests
of his Franchisees, who, in their Franchise Fee, have paid for the
right to use those exclusively. There are laws which protect
service marks, similar to trade marks.
Sub-Franchises - Sub-franchises are franchises granted
within the territory of an existing Franchisee, and are usually
allowed to be granted when the original Franchisee reaches a point
in business development whereby they cannot sustain any further
growth from the one unit or outlet. Each agreement will vary,
but it is normal for a Franchisee who owns a territory to be
allowed to offer the sub-franchise to another and take profit form
that offering. However, it is also normal for the Franchisor to
actually grant the new franchise, and to also receive an up-front
franchise fee to cover training and induction of the new franchise
owner.
T
Term
-
The period of time for which the franchise is granted. "Old
fashioned" franchising concepts used to grant terms as short
as one, three or five years. Modern thinking is to grant terms of
ten, twenty or thirty years.
Territory - Most Franchise Agreements will provide an
exclusive geographic area or territory in which the Franchisee may
operate without fear of competition from within his own group.
This may not always be possible, especially when the business
is perhaps a mobile "instant response" service.
Turn-Key Operation - A franchise in which the franchised
unit is completely fitted out, equipped and stocked for the
Franchisee, ready for opening day. A term taken from the
computer industry when you turn the key and the total system starts
to operate. This term is often applied to retail franchised
operations.
U through
Z
Up-Front
Fee - See
"Franchise Fee."
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