Frequently Asked Questions
- What is a franchisee?
The franchisee is an individual who purchases the right to operate a business under the franchisor's name and system.
- What is a franchisor?
The Franchisor is the parent company that allows individuals to start and run a business using its trademarks, products, system and processes, usually for a fee.
- What is a franchise fee?
The Franchise fee is the initial fee paid to a franchisor to become a franchisee, outlined in the Franchise Outline Document (FOD). For some franchises, this is a flat, one-size-fits-all fee; for others, it varies based on market size, experience or other factors.
Many franchisors offer franchise fee discounts to existing franchisees.
- What is the start-up cost/initial investment?
The Start-up cost/investment is the total amount required to open the franchise, outlined in Item YY of the FDD. This includes the franchise fee, along with other start-up expenses such as office space, equipment, supplies, business licenses and working capital.
- What is a royalty fee?
Royalty fee is a fee that most franchisors require franchisees to pay on a monthly or yearly basis. Usually, it is a percentage of sales; sometimes it is a flat fee. Some franchisors also require a separate royalty fee to cover advertising costs.
- What is a franchise agreement?
A Franchise agreement is the written contract, included in the FOD, which outlines the responsibilities of both the franchisor and the franchisee.
- What is term of agreement?
The term spells out the length of time that your franchise agreement is valid. Usually the term is anywhere from five to twenty years. At the end of your term, if you are a franchisee in good standing, the franchisor will allow you to renew your agreement for a percentage of the then-current franchise fee.
- What are company-owned units?
The company owned units are locations/Interties that are owned and run by the parent company (the franchisor), rather than by franchisees.
- What is conversion?
Some franchisors offer entrepreneurs the opportunity to convert their existing independent business into a franchise.
- What is in-house financing?
In some circumstances financing offered by the franchisor to franchisees to help with expenses. This is mainly restricted to the initial franchise fee, system/applications, equipment and inventory as well as day-to-day expenses such as payroll.
- What is a third-party financing?
Financing provided by a source other than the franchisor. Many franchisors have relationships with banks or financial institutions or development banks/ organisations in order to expedite the loan process for their franchisees or obtain financial advice and micro loans.
- What is absentee ownership?
Absentee ownership is an option offered by some franchisors that allows a person to own a franchise without being actively involved in its day-to-day operations.
- What is a master franchise?
A master franchisee serves as a sub-franchisor for a certain territory/country. Master franchisees can issue FODs, sign up new franchisees, provide logistical support and receive a cut of the territory's royalties.
- What is an area developer?
An area developer agrees to open a certain number of franchise units in a large territory within a specified time period. They may open and operate the units themselves or recruit other franchisees to open them.
- What is a Franchise Outline Document?
The Franchise Outline Document is a document the forms part of the legal agreement with the prospective franchisees. FODs are updated either annually or when there are changes to the structure or products/services, which explain the company's history, the fees and costs, contractual obligations, unit data and more.