Franchise glossary

100 terms

Ad fund

A pooled marketing fund franchisees pay into, usually a percentage of sales, used for regional or national advertising.

Approved supplier

A vendor the franchisor authorises franchisees to buy specific products or services from.

Area developer

A buyer who signs an agreement to open a set number of units in a defined area on a schedule.

Area development agreement

The contract that grants development rights for multiple units and sets the opening schedule.

Area representative

A person who recruits and supports franchisees in a region in exchange for a share of fees and royalties.

Arthur Wishart Act

Ontario's franchise disclosure statute, requiring disclosure at least 14 days before signing or payment.

Audited financial statements

Financial statements examined by an independent accountant; franchisors include them in Item 21 of the FDD.

Average unit volume (AUV)

Average annual sales per location across a franchise system.

Back-office support

Help with payroll, accounting, scheduling and reporting provided by the franchisor or a vendor.

Brand fund

Another name for the ad fund or marketing fund.

Brand standards

The required look, product, service and operating rules every unit must meet.

Break-even point

The sales level at which revenue covers all costs, producing zero profit.

Business format franchise

The most common model: the franchisee uses the brand plus the full operating system, training and support.

Cash injection

The buyer's own money put into the project, often required by lenders as a percentage of total cost.

Cease operations

A unit that closed; reported in Item 20 of the FDD.

Company-owned unit

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

Conversion franchise

An existing independent business that joins a franchise brand.

Cooling-off period

A window after signing in which a franchisee may withdraw; mandatory in Australia.

Cure period

Time a franchisee has to fix a default before the franchisor may terminate.

Debt-service coverage ratio (DSCR)

Cash flow available for debt payments divided by those payments; lenders often require 1.15x or more.

Default

A breach of the franchise agreement, such as unpaid royalties or failing brand standards.

Development fee

An upfront payment for the right to develop multiple units.

Development schedule

Deadlines for opening each unit under an area development agreement.

Disclosure document

A required pre-sale document describing the franchise; called the FDD in the United States.

Discovery day

A visit to meet the franchisor's leadership, see operations and decide whether to proceed.

Dispute resolution

Contract terms on mediation, arbitration or litigation for franchisor–franchisee disputes.

EBITDA

Earnings before interest, taxes, depreciation and amortisation; a common profit measure for valuation.

Emerging franchisor

A franchisor with a small number of units, usually franchising for only a few years.

Encroachment

A new unit or channel that takes sales from an existing franchisee's market.

Equity injection

See cash injection.

Exclusive territory

An area in which no other unit of the brand may operate.

Executive model

An ownership model where the franchisee manages managers and focuses on growth rather than daily operations.

FDD

Franchise Disclosure Document, the 23-item disclosure the FTC requires in the United States.

Field consultant

A franchisor employee who visits and advises franchisees.

Financial performance representation (FPR)

Any statement of actual or potential sales, costs or profits; must appear in Item 19.

Franchisability

How well a business can be replicated profitably by other owners.

Franchise agreement

The contract granting the right to operate a franchise unit.

Franchise broker

A consultant who matches buyers with franchisors and is typically paid by the franchisor.

Franchise consultant

See franchise broker.

Franchise Directory (SBA)

The SBA's list of brands eligible for SBA-guaranteed loans, reinstated under SOP 50 10 8.

Franchise fee

The one-time payment for the right to open a franchise.

Franchise Rule

The FTC regulation, 16 CFR Part 436, that governs franchise disclosure in the United States.

Franchisee

The independent owner who buys the right to operate under the franchisor's brand and system.

Franchisee association

An independent group of franchisees that represents owners' interests to the franchisor.

Franchisor

The company that owns the brand and system and grants franchises.

Grand opening

The launch period for a new unit, often with mandatory marketing spend.

Gross sales

Total revenue before expenses; royalties are usually calculated on it.

Holdover

Continuing to operate after the agreement expires without renewal.

Home-based franchise

A franchise run from the owner's home, without a storefront.

Initial investment

The total cost to open a unit, estimated in Item 7 of the FDD.

Item 12

The FDD section describing territory rights and what the franchisor reserves.

Item 19

The FDD section where any financial performance representations must appear.

Item 20

The FDD section listing outlet counts, openings, closures and franchisee contacts.

Item 21

The FDD section containing the franchisor's financial statements.

Item 7

The FDD section estimating the initial investment.

Key facts sheet

A summary document required under Australia's Franchising Code.

Lease rider

An addendum to a lease giving the franchisor rights, such as taking over the lease on default.

Liquid capital

Cash and assets that can be converted to cash quickly.

Master franchise

Rights to sub-franchise a brand in a country or large region.

Master franchisee

The holder of master franchise rights, who recruits and supports unit franchisees.

Mature unit

A location past its ramp-up period with stable sales.

Mobile franchise

A franchise operated from a van or vehicle at customers' locations.

Multi-brand franchisee

An owner operating franchises of more than one brand.

Multi-unit franchisee

An owner operating several units of the same brand.

Net worth

Total assets minus total liabilities.

Non-compete clause

A restriction on operating a competing business during and after the franchise term.

Non-renewal

When a franchise agreement ends without renewal; reported in Item 20.

Operations manual

The franchisor's confidential guide to running the business.

Owner-operator

A franchisee who works in the business daily.

Passive investment

Ownership without operating involvement; rare in franchising because most systems require active oversight.

Personal guarantee

A promise by the owner to be personally liable for the company's obligations.

Point of sale (POS)

The system used to record sales, often mandated by the franchisor.

Protected territory

An area with some limits on new locations, but not necessarily full exclusivity.

Ramp-up period

The months after opening before a unit reaches mature sales.

Receipt page

Item 23 of the FDD; signing it starts the 14-day waiting period.

Recurring revenue

Repeat income from memberships, contracts or scheduled service.

Registration state

A US state that requires franchisors to register their FDD before selling there.

Renewal

Extending the franchise agreement for another term, often with conditions and a fee.

Resale

A franchise unit sold by an existing franchisee to a new owner.

Rescission

Cancelling a contract; Canadian provinces grant rescission rights for deficient disclosure.

Right of first refusal

The franchisor's right to match an offer for a franchisee's business.

ROBS

Rollover as business start-up: using retirement funds to capitalise a business through a C corporation.

Royalty

An ongoing fee, usually a percentage of gross sales, paid to the franchisor.

SBA 504 loan

An SBA program financing real estate and long-life equipment with a bank and a Certified Development Company.

SBA 7(a) loan

A US Small Business Administration-guaranteed loan, up to $5 million, widely used for franchises.

Seller's discretionary earnings (SDE)

Profit before owner pay and one-off costs; used to value small businesses.

Semi-absentee

An ownership model where a manager runs daily operations and the owner works part-time on the business.

SOP 50 10 8

The SBA standard operating procedure for 7(a) and 504 loans; version 8.1 applies from October 1, 2026.

Sub-franchising

When a master franchisee grants unit franchises in its territory.

Supply chain fee

A charge or markup on products the franchisee must buy through the franchisor's system.

Technology fee

A recurring charge for required software and systems.

Term

The length of the franchise agreement, often 5 to 20 years.

Termination

Ending the franchise agreement before its term expires.

Trade area

The geography from which a unit draws most customers.

Transfer

Sale of a franchise to a new owner with franchisor approval.

Transfer fee

A fee charged when a franchise is transferred to a new owner.

Turnkey

A unit the franchisor builds and hands over ready to operate.

Unit economics

Revenue, costs and profit for a single location.

Validation

Speaking with current and former franchisees to verify a franchisor's claims.

Working capital

Cash needed to run the business until it covers its own costs.