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Apr
2
2019
OWNERSHIP

Common Terms You Need to Know Before You Buy a Franchise

Common Terms You Need to Know Before You Buy a Franchise

Learn about some common franchising terms to get up to speed when opening your own franchise.

Deciding to buy a franchise location can be both exciting and daunting. There are a lot of factors to consider and decisions to make. For new entrepreneurs considering franchising, even some of the terminology itself may be unfamiliar and confusing. Many industries seem to have their own language, and franchising is no exception.

In the franchising world, the lingo can be overwhelming at times, especially for prospective franchisees conducting early research to compare opportunities across multiple brands. Understanding the commonly used terms below will give you a better grasp of the ins and outs of franchising and help you make an educated and confident decision when choosing the right business for you.

Common Franchise Terms

Franchisor

The parent company that grants individuals the right to operate a business using their trademark, products and processes.

Franchisee

The individual granted the right to operate a business using the franchisor’s name and method of operation.

Feasibility Study

An analysis used to determine the potential success of establishing a franchise location in a specific market or location.

Franchise Agreement

The legal, written contract between the franchisor and franchisee that outlines the responsibilities of each party during the franchise relationship.

Franchise Disclosure Document (FDD)

A legal document that franchisors are required by the Federal Trade Commission to provide prospective franchisees. You’ll want to review this carefully as it provides details about the franchisor, contractual obligations, fees, start-up costs, a listing of current and former franchisees and other required information about the franchise system.

Term of Agreement 

The length of time the franchise agreement is valid, typically anywhere from 5 to 20 years. At the end of the term, the franchisor can offer a renewal, often for a percentage of the then-current franchise fee.

Intellectual Property Terms

Trademark

The marks, brand name and logo representing the franchisor that are licensed for use by the franchisee.

Service Mark

Protected by law like a trademark, service marks distinguish the services a company provides from the services of another.

Copyright 

The right to use and license others to use a piece of work created by the franchisor, such as system manuals or other published materials.

Franchise Types

Business Format Franchise (BFF)

This type of franchise includes licensing for the complete operating methods/system of doing business in addition to the product, service and trademark. It refers to the system of delivery, rather than a specific product or service itself as in a Product Distribution Franchise.

Product Distribution Franchise

This type of franchise includes licensing to sell or distribute a specific product or service only using the franchisor’s trademark, trade name and logo. It does not include the franchisor’s method of conducting business as in a Business Format Franchise.

Franchising Contracts

Single-Unit (Direct Unit) Franchise

The simplest and most common type of franchise agreement. When you buy a franchise using this model, you are licensed to own and operate a single franchise location.

Multi-Unit Franchise

A franchise agreement where a franchisee purchases the rights to open and operate more than one unit, generally in a defined market over a specified period of time.

Company-Owned Location

A location owned and operated by the franchisor, rather than a franchisee.

Master Franchisee

In this arrangement, the franchisee assumes some of the responsibilities of the franchisor within a specified territory. They have the right to sell franchises to other individuals (sub-franchisees) and receive the fees and royalties themselves while also taking on training and support activities.

Area Franchise

A relationship where the franchisee agrees to open a certain number of locations within a defined territory during a specified period of time. These franchisees usually pay an area fee and may open and operate the locations themselves or recruit other franchisees to open them.

Multi-Concept Franchisee

A franchisee that owns and operates franchises from two or more different franchisors. Some brands strictly prohibit this practice while others encourage it.

Fees Associated with Opening a Franchise Business

Start-up Cost/Initial Investment

Also known as an Item 7 disclosure, this is the total amount required to open the franchise. It includes the franchise fee, along with other start-up expenses such as the cost of real estate, leasehold improvements, inventory, equipment, supplies, deposits, other fees and costs, business licenses and working capital.

Franchise Fee

The initial, one-time fee paid by the franchisee to the franchisor for the rights to operate under their name and use their systems. The fee arrangement varies among franchises. Some are a standard flat fee and others vary based on territory size, experience or other factors. In addition, many franchisors offer discounts for veterans, minorities and current franchisees.

Royalty Fee

In addition to the franchise fee, most franchisors also require franchisees to pay a fee at given intervals of time (weekly, monthly or annually). These regular payments are typically a percentage of gross sales, but they could also be fixed or based on another fee structure.

Advertising Fee

A monthly contribution to a collective pool of funds the franchisor uses to market the brand. The fee is typically calculated as a percentage of gross sales.

Financing Options When Opening a Franchise Business

In-house Financing 

Many franchisors offer financing options to new franchisees to help get their business off the ground. Financing can be used to help cover the initial franchise fee, startup costs, equipment and inventory, as well as day-to-day expenses like payroll.

Third-Party Financing

Financing provided by an organization outside of the franchisor like a bank or specialty financing source. Many franchisors have relationships with banks or are registered with the Small Business Administration. This helps to expedite the loan process for their franchisees.

What to Do Before You Buy a Franchise

Before you buy a franchise, do your homework on the industry and opt for the brand that best aligns with your goals and expectations. Look for an experienced brand with the knowledge and support systems necessary to help franchisees succeed. You should also reach out to current franchisees to learn first-hand about day-to-day operations and what it takes to be successful. Take the time to thoroughly review all aspects of the business to ensure a long and prosperous franchise relationship.

Entrepreneur's Franchise Top Rated for Veterans in 2020 badge

We Proudly Support Our Veterans

Participating partners with the VetFran program, The UPS Store offers qualifying veterans $10,000 off their franchise fee to start their new business. To learn more, contact The UPS Store Franchise Development Team.

Entrepreneur's Franchise 500 Ranked #3 in 2021 badge

Ranked for over 30 Consecutive Years

The UPS Store has been ranked #1 in the postal and business services category for over 30 years and remains in the top 5 overall for the fifth consecutive year according to the Franchise 500 list.

Kristin Howard

Franchisee, Michigan

The reason my husband and I decided to go into franchising and specifically with The UPS Store, is the different opportunities we're given with the business. The UPS Store has name recognition as well as opportunities to expand.

Debbie Adams

Franchisee, Kentucky

What I enjoy most about being a The UPS Store owner is working with my customers. We are the solution specialists for our customers.

Jim George

Franchisee, Illinios

My favorite part about The UPS Store network is the camaraderie with other franchisees. Everybody loves to help everybody else. You’re really part of a family.

Greg Murray

Franchisee, Florida

The interesting thing about The UPS Store is that when a customer walks through the door there's an extremely high probability that they're coming there to do something that is important to them. So at the end of the day, what we do for customers is very important and they are trusting that we are going to do it well.

See the Full Testimonial

Mariana Huberman

Franchisee, Washington, D.C.

One of the things that I love about The UPS Store franchise system is that you're not ever in this by yourself. The franchisees of The UPS Store network are great.

Heidi Morris

Franchisee, Colorado

The thing I enjoy most about being a The UPS Store franchisee is I get to get up, go to work and know that I'm helping other business owners succeed in what they're doing.

Bob Brown

Franchisee, Tennessee

Owning a The UPS Store franchise has changed my life because it's finally given me the opportunity to engage my customers and my staff and be able to take real pride in what I do. As a franchisee, we get faced with solving peoples' problems every day and we do everything we possibly can to try to help.

Marie Jensen

Franchisee, Oregon

My favorite thing about The UPS Store is the variety. I love the variety of customers, I love the variety of services; getting to know the customers, meeting their needs, finding out how we can help them accomplish what they need to accomplish and seeing how happy they are. That makes me ecstatic.

Tad Mollnhauer

Franchisee, Florida

With the products and services that The UPS Store provides we can make a difference in people's lives and that is the best reason for being a The UPS Store owner.

Joy Batchelor

Franchisee, Idaho

What makes being a The UPS Store franchisee worthwhile at the end of the day is the customers. The customers treat us like we're family.

Paul Erchinger

Franchisee, Texas

One nice benefit of owning a The UPS Store franchise for me has been that it gives me the opportunity to be more involved in the community. As I make relationships with others it seems like no matter what the environment is, in one way or another business comes out of that and that's not my objective—it's been a secondary benefit to being involved in the community.

Chris Reminder

Franchisee, Ohio

There are several things that I really enjoy about being a The UPS Store franchisee. First and foremost it allows me to get to know the people in the local community and that is a lot of fun. We get to see people on a regular basis. We get to know their life stories. That's a lot of fun.

Bruce Jones

Franchisee, Kentucky

Since we have joined The UPS Store, our life has changed by just having more time to spend together as a family. We've been very fortunate with the stores that we have and we have a great staff that looks out for our best interest and we look out for theirs.

Lonnie Williams

Franchisee, Oklahoma

What makes The UPS Store so successful is it gives each individual an opportunity to grow with the network and just meet the challenges that are brought to them on a daily basis. Every day gives us a new opportunity to help another person, to help another small business, to answer a question and to solve a problem.

Jeff Graham

Franchisee, Alabama

I love my customers. I love my employees. I love every person, every face that comes into my store. I enjoy every day going into work and I can't see doing anything else for the rest of my life.

Stacie Stigar

Franchisee, Alaska

I think that this franchise is so successful because of all of the resources that are available to us as center owners—we have marketing materials, we have so many different opportunities for help from the home office, and it just really makes for a great franchise.

Don Pollard

Franchisee, New Jersey

I think the thing that makes this franchise successful is a number of things. First of all we have an outstanding system, we have a great product, a great brand, and we're able to attract dynamic people to run these centers and run the business. So I think when you put all that together it really provides for a winning combination.

Mary Ellen Nichols

Franchisee, Tennessee

The thing I love about the franchise is that you have the UPS name backing you but yet you also have the autonomy to make your own decisions to promote.

Laura Griffin

Franchisee, Florida

In the eight short months I've owned my The UPS Store it has really changed my life. I've gone from being an employee of someone else to being an employer of my associates. It's a big responsibility but it's exciting every day.

Sandy Scandrett

Franchisee, Wisconsin

Being a The UPS Store franchisee has improved every aspect of my life. It's very rewarding financially, professionally, and emotionally. I have a large number of regular customers who are really, really appreciative of everything we do.

Kristie Robison

Franchisee, Alabama

I would say owning a The UPS Store location has changed my life to where I have more time and flexibility. In owning your own business you get your store up and running and you get employees that you can trust that are going to help keep your store running. This allows me to attend my two boys' ball games and also travel and do things with them so it has really changed my life for the better.