As you’re considering whether to purchase a franchise, you may run into a lot of unfamiliar terms. After all, franchising is its own industry, and every industry has its own jargon. This blog post is the first in a series of handy glossaries to help you understand some of the most common franchise terms you might encounter.
Discovery Day
Franchise companies usually require potential franchisees to attend a discovery day. This typically involves visiting the company’s headquarters, meeting members of the corporate team, and learning about the company and how it handles the franchising process. You may also get to meet current franchisees or visit a franchise. Think of it as a mutual interview, with both sides investigating whether they’re a good fit for each other.
Executive Owner
An executive owner is a franchise owner who does not work full-time in the business. Instead, the owner sets strategy for the business, keeps an eye on the overall financials, and hires a team to run the daily operations. The owner typically visits the business and checks in with the team regularly, similar to an executive running a division at a corporation. Some people use the terms executive owner and semi-absentee owner interchangeably, especially in situations where the owner is minimally involved.
Franchise Disclosure Document
According to FTC (Federal Trade Commission) regulations, a franchise company must provide potential franchisees with a Franchise Disclosure Document. This is a legal document with 23 standard sections. The franchise company must provide it to you at least 14 days before you have to sign it. It contains information about fees, each side’s obligations, copyrights or patents, products, and more.
Franchise Rule
When the FTC issues regulations, these regulations are called rules. The Franchise Rule, then, is the FTC’s regulation pertaining to the franchise industry. It outlines the steps franchise companies must follow and the information they must disclose so that potential franchisees can make a fully informed decision about whether to invest. Among other requirements, the Franchise Rule stipulates that franchise companies must provide potential franchisees with the Franchise Disclosure Document.
Franchisee
The franchisee is you: the person who purchases a franchise business. Before you become a franchisee, you should carefully consider your financial resources and goals and thoroughly research your target franchise companies. Being a franchisee is not right for everyone. It requires a significant investment (of both time and money) and the self-determination to run your own business. For people who want to be entrepreneurs, however, franchise ownership can provide a number of benefits that increase the possibility of success.
Franchisor
The franchisor is the company that owns the franchise brand. You must pay them an up-front fee to own one of their franchises. Fees vary, but are usually between $75,000 and $350,000. In return, the franchisor should provide you with support such as training, marketing, and networking opportunities. Make sure to thoroughly research any franchisor you are considering.
Semi-Absentee Owner
Many people use the terms executive owner and semi-absentee owner interchangeably. For those who distinguish between the two, a semi-absentee owner is usually someone who is minimally involved in the franchise business. The owner provides the up-front investment and ensures that the business gets up and running, but they rely heavily on a team of people (such as an accountant, site manager, and employees) to keep the business going. A semi-absentee owner may only visit the franchise a few times a year.
Owner-Operator
An owner-operator is a franchisee who works full-time in the business. Owner-operators may work alone or with a partner. They may even hire employees, but they are still the primary manager of day-to-day business activities. They are the “face of the business” to customers. Some franchisees may start out as owner-operators and transition to executive or semi-absentee ownership as they approach retirement age.
Turnkey
Turnkey means “complete”: all you have to do is turn the key and walk into a business that is fully operational. In a turnkey franchise arrangement, the franchisee pays the up-front fee, and the franchisor takes care of getting the business up and running. This may include choosing a location, handling a build-out, stocking merchandise, conducting launch marketing, and even hiring employees. Some franchisors offer a “partial turnkey” arrangement where they take care of some of the startup process, and the franchisee handles the rest. Buying a turnkey franchise can be convenient, but it also usually costs more and provides less flexibility than a non-turnkey franchise.
Multi-Unit Franchise
A multi-unit franchise is a franchise with more than one location owned by the same person. Most franchisees start with a single unit/location, and many owners are able to achieve their goals at that level. For franchisees with additional funds to invest, however, multi-unit franchising can be a good way to increase returns and build significant wealth. But keep in mind that it also means more work. Most multi-unit franchisees find that they need to hire site managers to keep things running smoothly. It’s an arrangement that works best for people who prefer to be executive owners, not owner-operators.
The blog posts in this series will give you a basic understanding of the most common franchise terms you may encounter during the research or launch process. Working with a consultant can provide you with a more in-depth understanding of how these concepts work. If you’re ready to learn more, schedule a free consultation with me–I’ll be glad to help!
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