Thinking About Buying a Franchise? Get a Better Understanding of Franchising Lingo

Franchising can be a great way of getting into business for yourself. As a franchisee, you will be beginning your business with an established idea, something that has shown time and again that it will work. You'll get the tools that you need.

But in order to make sure that you know what you are getting yourself into, there are some common terms – franchising lingo – that you should make an effort to become familiar with if you are looking for an opportunity with one of over 750,000 franchise businesses within the US alone.

The first terms are franchisor and franchisee. The franchisor is the developer/owner of the business that you would be buying into; the franchisor owns the concept. You would be the franchisee, the person who runs the business and takes part in developing the company as a whole.

Between the franchisor and the franchisee there is a franchise agreement. The franchise agreement is a written description that explains the rights and responsibilities of the franchisee and the franchisor.

Often, the franchise agreement is a part of the franchise contract. The franchise contract sets out the ways in which the business will be operated. It provides the franchisee with the right to use the business name, clearly outlines the obligations of both the franchisor and the franchisee and includes financial terms as well as the length of the contract and effects of terminating the contract before that time.

Among the financial terms of the contract is the franchise fee. The franchise fee is a one time payment made by the franchisee to the franchisor in order to operate a business under the name of the franchise. This is not to be confused with the royalty payment: the continuing payment to the franchisor that is a portion of the franchisees sales during a specified period of time.

Another financial element that may be discussed is the earnings claim. The earnings claim is a statement of sales levels and profitability.

Of course, even before you sign a franchise agreement, the franchisor is responsible for providing you with the UFOC, the Uniform Franchise Offering Circular. This is a written prospectus that lays out everything about the franchise. It will include such information as fees associated: the franchise fee, start-up costs, advertising fund fees. It will also contain information about the relationships between franchisees and franchisors as well as background information about the company.

Along with the UFOC, you should receive information about the franchise territory: whether you will have an exclusive territory so that your franchise will not be competing with that of another franchisee in the area, and whether or not multiple unit franchising – the ability to operate a number of franchises within the area – is acceptable.

And, speaking of other franchises, another important consideration is the non-compete clause that will be included. A non-compete or non-competition clause is a statement that prevents you from taking the knowledge that you've gained working with a franchise and putting it to work in for a competing business.

How would a non-compete clause be used? One example is that, if you are working with a franchisor such as Ace Hardware, they would not want you to take the information that you had gained working from them and apply it to a competing business: it would not be in their best interest.

Of course, not all franchising restrictions are meant to protect the franchisor; just as many are in place to protect the business of the franchisee. And, by learning more, you will also be better able to protect your own interests as your pursue your franchise business.

Author: Jessica Miller
Source: RedHotFranchises.com