Glossary Franchise Terms DL - IFA.pdf · Franchise Terms The following glossary of franchise terms

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  • A Glossary of

    Terms Franchise

    1

    www.EducatedFranchisee.com

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  • Welcome to The Educated Franchisee

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    www.EducatedFranchisee.com

    The E

    ducated

    Fear is

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    motiva

    to r. So

    is wealth

    . This bo

    ok show

    s they c

    an wo rk

    together

    to help

    you find

    success

    as an en

    trepren e

    u r in fr

    anchis ing

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    Frank C

    arney Co

    -founde

    r, Pizza H

    utCur

    rent Fra

    nchisee

    , Papa Jo

    hns Pizz

    a

    The H

    ow-To

    Book fo

    r

    Choos

    ing a W

    inning

    Franch

    ise.

    By

    R ick B

    i s io

    Written

    w ith M

    ike Kohle

    r

    S EC O

    N D E

    D IT I

    O N

    Franch

    isee

    The Educated

    Fear is a good motiva

    tor. So is wealth. This

    book shows they can w

    ork

    together to help you fin

    d success as an entrepre

    neur in franchising.

    Frank Carney Co-founde

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    chisee, Papa Johns Pizza

    The How-To Book f

    or

    Choosing a Winnin

    g Franchise.

    By

    Rick Bisio

    Written with Mike Kohle

    r

    S E C O ND E D I

    T I O N Franchisee

  • Quality is never an accident; it is always the result of

    high intention, sincere effort, intelligent direction

    and skillful execution; it represents the

    wise choice of many alternatives.

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  • Thanks must be given for the substantial assistance received from

    The International Franchise Association (www.Franchise.org)

    The Educated Franchisee

    (www.Educatedfranchisee.com) Kenneth S. Kaplan, General Counsel, Fantastic Sams

    Intl Lee Plave, CFE, Partner, Plave Koch PLC Additional sources include, but are not limited to,

    www.Webster.com and www.Wikipedia.com.

    Glossary Sources

    Copyright 2011 by Rick Bisio. All rights reserved. No part of this publica-tion may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the author.

    4

  • Glossary of Franchise Terms

    Thefollowingglossaryoffranchisetermshasbeenmeticulouslyconstructedtobeasaccurateaspossible.Whilesometermsarebasedongenerallyaccepteddefinitions,othertermsmaybesubjecttodifferinginterpretationsanduses.Franchisingisanevolvingandchangingbusinessformatand,assuch,theterminologyusedbyitspractitionersissimilarlyfluid.Theintentofthisglossaryistogivethereaderanintroductiontosomeofthelanguageusedinfranchising.Itisnotintendedtobeallinclusivebutmerelyonetooltounderstandingthisuniquebusinessformat.Wehopeyoufindituseful.

    A AcknowledgementofReceiptThefinalpageofaFranchiseDisclosureDocument(FDD),which,oncesignedandreturned,confirmstothefranchisorthedateyoureceivedthedocument.AdvertisingCoopAparticipatorybodyoffranchiseesoccasionallyincludingthefranchisorthatcontributesmoneytoacommonfundtopayforregionalornationaladvertisingprograms.Administrationofadvertisingcoopfundsvariesfromcompanytocompany.Inmostcasesacommitteeoffranchiseesadministerthefund.Alternatively,aspecialadvertisingcommitteemadeupofbothfranchiseesandthefranchisormayoverseeuseofthefunds.AdvertisingCommitmentThisisanamountthatafranchiseecommitstospendonadvertisingandpromotioninthelocalmarket.Thesemoniesarecon

    5

  • trolledbytheindividualfranchiseeandusedtopromotethefranchiseesindividualbusiness.AdvertisingContributionThemoniesthatafranchiseeisrequiredtocontributetotheadvertisingfundortheadvertisingcoop.Thesefundsareusedtopayforsystemwideadvertisingandpromotionalexpenses.Themannerinwhichadvertisingcontributionsaremadevariesfromcompanytocompany.Manyfranchiseagreementsspecifyapercentageofgrosssalestobespentonadvertising;thebreakdownofexpendituresforlocal,regional,and/ornationaladvertisingmayalsobespecified.AdvertisingFeePleaseseeAdvertisingContribution.AdvertisingFundSimilartoanadvertisingcoop,thisfundisadministeredandcontrolledbythefranchisor.AgentApersonauthorizedbyanother(oftencalleda"principal")toactonhisbehalf.AngelInvestorAnindividualorgroupofindividualswhoprovidecapitalforabusinessstartup,usuallyinexchangeforconvertibledebtorownershipequity.Angelinvestorsinvesttheirownpersonalfunds,unlikeventurecapitalfirmsthatmanagethepooledmoneyofothersinamanagedfund.Insomecases,ifafamilymemberorafriendweretolendyoumoneytostartabusiness,theyalsowouldbereferredtoasanangelinvestor.AntitrustLawLawsadoptedtooutlaworrestrictbusinesspracticesconsideredmonopolisticorthatrestraintrade.IntheU.S.,theprincipalantitrustlawsaretheShermanAntitrustAct(enactedin1890andfrequentlyamended),theClaytonAct(originallyadoptedin1914),theRobinsonPatmanAct(passedin1936toaddprice

    6

  • discriminationprohibitionstotheClaytonAct),andtheFederalTradeCommissionAct(alsoadoptedin1914).Somestateshavealsoadoptedantitrustlaws,suchastheDonnellyActinNewYork.OutsidetheU.S.,antitrustlawsareoftenreferredtoascompetitionlaws.Approval/ConsentInfranchisingthisisaprovisionwithinthefranchiseagreementrequiringthatapartywhowishestoactmustobtaintheconsentorapprovaloftheotherparty.Forexample,thefranchiseagreementmayrequirethatbeforethefranchiseecantransferinterestinthefranchise,he/shemustobtainapproval/consent"ofthefranchisor.ApprovedSupplier/VendorAnapprovedsupplier/vendorisanentitythathasbeenapprovedbythefranchisortosellproductsand/orservicestofranchiseesofitssystem.Itemssoldbyapprovedsuppliersmayincludeequipment,ingredients,andothermaterialsoritemsforuseinoperatingthefranchisebusiness.Thefranchisorwillgenerallyapproveseveralsuppliersforeachitemandthefranchiseemaypurchasetheitemsfromanyoftheapprovedsuppliers.Insomeinstances,afranchisorapprovesonlyoneapprovedsupplierofaspecificproduct(i.e.,asoftdrinksupplier)forpurposesofsystemwideuniformity.AlsoseeDesignatedSupplier/Vendor.ArbitrationIndisputesbetweenafranchiseeandafranchisor,submittingthedisputefordeterminationtoprivate,unofficialpersonsorarbitrators.Agreementtoarbitratemustbestated,forexample,inthefranchiseagreement,andarbitrationfindingsarebindingonbothparties.Acourtsonlybasisforreviewofanarbitratorsdecisioniswhetheritwasarbitrary,capricious,andanabuseofthearbitratorsdiscretionorbeyondthearbitratorsauthority.AreaDeveloperThefranchisorawardsasinglefranchiseetherighttooperatemorethanoneunitwithinadefinedarea,underadevelopmentagreementandbasedonanagreedupondevelopmentschedule.

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  • AreaRepresentativeAtypeoffranchiseethatcanownandoperatefranchiseoutlets,representthefranchisorinsellingnewfranchises,andprovideongoinglocalsupporttoexistingfranchiseesinadesignatedmarket.Thearearepresentativenormallyreceivesaportionoftheroyaltyfees(andpossiblytheupfrontfranchisefee)payablebythefranchiseestothefranchisor.Arearepresentativesmayoperateinavarietyofgeographicalconfigurations,includingmetropolitanareas,asinglestate,oracombinationofstates.Thearearepresentativeisnotapartytothefranchiseagreement,whichisbetweenthefranchisorandthefranchisee.See,forcomparison,MasterFranchisee.AssignmentContractualauthorityofafranchiseetogiveaway,sell,orotherwisetransferordisposeofallorcertainownershiprightsinthefranchiseagreement,thefranchisedoutlet,and/orinterestinthelegalentitythatownsthefranchise.Assignmentrightsvaryfromfranchisortofranchisorandmayincludetherighttosellthebusinessandtransferthefranchiseagreementtothebuyer;ortotransferownershipandrightstothefamily;and/orfortheestatetosellthefranchiseupontheownersdeathordisability.Virtuallyallfranchiseagreementslimitassignmentinonewayoranother.

    B BonaFideWholesalePriceDefinedintheFederalTradeCommissionsFranchiseRuleandoneofthreetermsemployedindefiningabusinessformatfranchise.Referstothepriceofgoodsorservicesforusebyortobemadeavailableforresalebythefranchisee,thepriceofwhichisestablishedingoodfaithwithoutfraudordeceit.TheFTCRuleprovidesthatpaymentsforthepurchaseofreasonableamountsofinventoryatbonafidewholesalepricesforresaleorleasearenotrequiredpaymentsandthereforearenotconsideredthepaymentofafranchisefee.AlsoseeFranchise.

    8

  • BreakawayFranchiseeAfranchiseewhohasunilaterallyterminatedtheirfranchiseagreement.Obligationsofabreakawayfranchiseemayincludesomeorallofthefollowing:paymentofsubstantialdamagestothefranchisor,resaleofthebusinesstothefranchisor,oranobligationtoabidebyapostterm,noncompetecovenant.BundleofRightsAllthoserightsandobligationsthatpasstothefranchiseeunderthetermsofafranchiseagreement.Thesemayincludesuchitemsasrighttousethetradename,righttoknowledgeoftradesecrets,righttousetheformatofthebusiness,righttobuildequity,andrighttomanagedaytodayoperationsintheprescribedmanner.BusinessBrokerAnintermediarywhomanagesthesaleand/orpurchaseofanexistingfranchisedbusiness.Brokerscanrepresenteithersellers,buyers,orboth.Abusinessbrokercommonly,butnotalways,hasaFiduciaryDutywithintherelationship.BusinessFormatFranchisingThefranchisingsystemwhereinthefranchiseebuysfromthefranchisoratotalblueprintfordoingbusiness.Usuallyincludedisthelicenseofatradename,thetrademark,accesstotradesecrets,andaclearlydefinedmethodandsetofguidelinesforconductingthebusiness.Occasionallyreferredtoaspureorcomprehensivefranchising.BusinessOpportunityLawsLawsregulatingthesaleofnonfranchisedbusinessopportunities.Statesthathavesuchbusinessopportunitylawstypicallyexemptfranchiseprogramsthathavefederallyregisteredtradeorservicemarks,butsomenonethelessrequirefranchisorstofilesomeformofapplicationtoclaimthatexemption.Somecommonbusinessopportunitiesincludevendingmachines,wormfarming,envelopestuffing,andinhomemailorderenterprises.In2007,whenitissuedamendme