Becoming a franchisee for the right franchise can be a great way to run a successful business. However, when exploring franchise opportunities, it can be a whole new world with new terminology. This can become overwhelming. That is why we have created this top ten list of franchise-related terms that you should know.
1) FDD – Financial Disclosure Documents
These are documents that a Franchisor legally must keep and disclose 1) yearly to most states attorney general’s office where it offers a franchise opportunity and 2) to each potential buyer of a franchise.
2) Franchise
This is a business model where a company allows others the limited right to license the name, trademarks, and systems of that company in exchange for a Franchise Fee and signing a Franchise Agreement that places several obligations on a Franchisee.
A Franchise is essentially an opportunity to lease a business because after the Franchise term (sometimes 10 years, sometimes 20 years), the Franchisee will no longer be given the limited right to license the name, trademarks, and systems of the company and will need to return all tangible and intangible assets of the franchised business back to the Franchisor.
3) Franchisor
A Franchisor is a company that wishes to expand its business by allowing others the limited license to use the name, trademarks, and systems of the company in exchange for payment and other obligations by a Franchisee.
4) Franchisee
This is the individual or entity who has agreed to purchase and operate a Franchise from a Franchisor.
5) Franchise Agreement
This is the contract where the Franchisor outlines the rights and responsibilities of a Franchisee to operate a Franchise. A standard version of a Franchise Agreement is always included in the FDD for potential Franchisees to review before becoming a Franchisee.
6) Personal Guarantee
Most Franchise Agreements include a Personal Guarantee by the Franchisee which means if the Franchisee’s business does not meet the financial responsibilities outlined in the Franchise Agreement, then the Franchisor will be able to pursue recovery against the Franchisee personally.
7) Royalty
Royalties are payments made by the Franchisee to the Franchisor (typically monthly) as outlined in the Franchise Agreement. Royalty payments usually range between 3% to10% of the gross revenue of a Franchisee, regardless of profitability.
8) Franchise Fee
A Franchise Fee is the amount of money a Franchisee must pay for the opportunity to begin operating a Franchise for the Franchisor. Depending on the size of the Franchise, these can range from below $10,000 to over $150,000.
9) Non-Compete Agreement
Non-compete agreements are almost always included in Franchise Agreements because when the Franchise Agreement term ends, a Franchisor wants to make sure that a Franchisee does not continue operating a business that would compete with the Franchisor. These can be enforceable depending on a number of factors. For more information about the enforceability of a non-compete agreement, click here.
10) Non-Disclosure Agreement
Both when reviewing a Franchise opportunity as a potential Franchisee and after becoming a Franchisee, the Franchisor will require that you sign a non-disclosure agreement which means you cannot use or share any information you learn about the Franchise or Franchisor outside of operating your Franchise.
Contact Timothy Coons’ Legal Team
If you need help reviewing a Franchise opportunity or if you need help litigating claims against a Franchisor, then please contact Counxel Legal Firm. We would love to help!
Contact us at (480) 744-6621 or at request@counxel.com. Don’t forget to check out the good things that others are saying about the services they received from Timothy Coons on Google.
This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact request@counxel.com or (480) 744-6621 to request specific information for your situation.
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