Franchise glossary

Franchising is a very complex process and whilst typically safer than other routes into business start-up, risks still exist in franchising. It is vital that you understand fully all the common franchise terms.

Advertising fee – a contribution made to an advertising fund that the franchisor manages for the whole franchise system. The franchisor usually uses the fund for national advertising and marketing, or to attract new franchise owners to their franchise system. It is not typically used to promote individual outlets. It is usually less than 3% of the franchisee's annual sales and usually paid in addition to the royalty fee monthly. Not all franchisors charge advertising fees.

Advertising fund – see advertising fee

Approved supplier - suppliers approved or chosen by your franchisor.

Area franchisee/area developer – buys the rights from the franchisor to develop their system in a defined region in Ireland. An area developer cannot sell franchises.

British Franchise Association (bfa) – the only voluntary self-regulatory body for the UK franchise industry, with a standards based approach to membership. They promote ethical franchising in the UK.

Broker – These are independent professionals who market on behalf of franchisors, selling their franchisees on a fee-paying basis. This is a popular way of working in the US; franchise brokers are not as common in Ireland. If you are buying a franchise that is being “sold” by a broker you need to do your own evaluation into the franchise and always insist in speaking directly with the franchisor before signing any legally binding agreements.

Business Format Franchising – one party, the franchisor, grants the other party, the franchisee, a license to operate a business in Ireland using their products, service and trademark under certain guidelines for a specified time.

Business plan –outlines the objectives of a business and the steps necessary to achieve those objectives. This can include financial projections and the planned steps for expansion, and is an essential tool for anyone looking to raise finance. Many of the well-known banks can offer advice and assistance on formulating a comprehensive and achievable business plan as can the franchisor. It is however vital that you do the majority of the plan yourself as it is your business and only you know what your aims and objectives should be.

Company-owned outlet - an outlet that operates under a franchise brand name but is owned by a franchisor as opposed to a franchisee. Company-owned outlets are often used by franchisors to trial new ideas and systems before implementing them across the franchised outlets within the Irish network.

Copyright – the franchisor produces manuals and other documentation to ensure the franchise system is uniform. These are the franchisor's documents and he/she has copyright over them.

Designated supplier – see approved supplier

Development type - this is the method by which the franchisor wishes to build their franchise network in Ireland. See Unit Franchise, Multi-unit Franchise, Area Developer, Regional Franchisee and Master Franchise.

Distributorships – this business method is when a manufacturer and wholesaler grant permission to Irish businesses and individuals to sell their products. A distributorship is normally not a franchise.

Earnings claim - is any information the franchisor gives to a prospective franchisee which allows you to attempt to predict potential sales, costs, income, or profits.

Estimated initial investment – this is a detailed listing of all fees and expenses you can expect to incur when starting a franchise in Ireland. This listing represents the total amount that you would need to pay or get financing for, including fees paid to the franchisor; estimates for furniture; fixtures and equipment; opening inventory; real estate costs; insurance inventory, etc. This estimate should include a provision for working capital through the start-up phase.

Exclusive territory – Most franchisors grant franchisees an exclusive territory in which to operate. This area can be large or small and no other franchisee in your network or company-owned business would be allowed to operate there.

Franchise - the rights you acquire from the franchisor to offer specific products or services within a certain Irish location for a declared period of time.

Franchise agreement - outlines the obligations of both the franchisor and franchisee. This includes information such as territorial rights of the franchisee, location requirements, training schedule, fees, general obligations of the franchisee, general obligations of the franchisor, franchisee performance monitoring etc.

Franchise fee - an upfront entry fee that is usually payable upon the signing of the franchise agreement. This grants the franchisee the right to use the franchisor's name, logo, and business system. The franchise fee often covers initial training, site selection, operations manuals, and other help given by the franchisor before the opening of the business in Ireland.

Franchisee - The operator or owner of a franchise.

Franchise resale – this is when an existing franchise business is up for sale by the current franchisee. As franchising becomes more common in Ireland, more franchise resales are becoming available. Franchisees sell on their Irish franchise opportunity for a number of reasons; retirement, another business venture, moving overseas, have made their money etc. Whilst the investment may be higher than buying a new franchise in Ireland, buying an existing trading franchise minimises the risk of failure and is operational from day one.

Franchise type – this identifies in general the type of work involved in running the franchise. There are five main categories, retail, management, single operator manual, single operator executive and investment.

Franchising - a method of doing business within a given industry that involves at least two parties - the franchisor and the franchisee. The contract binding the two parties is the franchise.

Franchisor - the parent company or person that grants, for a fee and other considerations, a franchisee with the right to use its’ name and operating systems.

Initial investment – the funds needed to initially set up a franchise in Ireland and begin trading. This amount must cover the franchise fee paid to the franchisor and also includes outlay needed to secure space, purchase products, and cover any other initial set-up costs.

Investment – this is when the franchisee invests a significant amount of money into a franchise such as a hotel. The franchisee in this case will not work in the franchise but will employ a management team to operate it.

International Franchise Association (IFA) - trade association for franchising in the US.

Irish Franchise Association - promotes the development of franchising in Ireland through Irish exhibitions, seminars, newsletters, awards and networking.

Management franchise – this is any franchise that involves managing people. These franchises are premises-based and can include those franchises that deal with both businesses and consumers.

Management service fee - a term for royalties which is usually in the form of a fixed fee or percentage.

Marketing plan – this should form part of your overall business plan. The purpose of the marketing plan is to define your market, i.e. identify your customers and competitors, and to outline a strategy for attracting and keeping customers and to identify and anticipate change.

Master franchise – is when a franchisee is given the right by the franchisor to develop and sell franchises under the brand name within a certain territory. Unlike area development rights, where a franchisee can open outlets themselves within a given region, an Irish master franchisee must only sell franchises in a particular region.

Multi-level marketing (MLM) - a form of distributorship in which you receive commission on your own sales and on the sales of others whom you sign up as distributors. Some MLMs are considered pyramid schemes and illegal in some countries. Some are legitimate business opportunities. Any business of this nature should be investigated closely.

Multi-unit franchise – occurs when the franchisor awards the right to a franchisee to operate more than one unit within a defined Irish area.

Offer - an oral or written proposal to sell a franchise to a prospective franchisee upon understood general terms and conditions.

Operating manual - comprehensive guidelines advising a franchisee on how to operate their Irish franchised business. It covers all aspects of the business, and may be separated into different manuals addressing such subjects as accounting, personnel, advertising, promotion and maintenance.

Product format franchise – once the rights to market a product or service in Ireland has been acquired, you may offer other products along side your "product franchise." For example you may have a service station that sells a brand of gasoline, but you are not restricted on the other products or services that you can sell. Many times these are not true franchises, but can be considered distributorships.

Regional franchise – franchisee buys the rights from a master franchisee or the original franchisor to sell franchises in a defined region.

Renewal - the rights given to a franchisee to renew their franchise business once the initial period set out in the franchise agreement has lapsed. The franchise agreement should also state the terms and conditions under which both parties agree that the business relationship can or cannot be renewed.

Retail franchise – occupies retail premises, selling products or services during retail hours for ‘walk-in' customers. Fast food franchises are the most common and popular type of retail franchises.

Royalty fees - ongoing fees paid to the franchisor by franchisees in respect of ongoing training and support services provided, this is usually a % of turnover.

Single operator executive (also referred to as a “white collar franchise”) – this franchise usually takes the form of a business supplying a service. It may be mobile, home-based or requiring small office premises. The type of work is executive.

Single operator manual (also referred to as “job franchise) – this is usually a trade franchise e.g. plumbing, gardening, computer repairs etc, and involves supplying, selling and delivering a product or service. It may be mobile, home-based or requiring small office premises.

Termination - refers to the legal provisions by which either party in the relationship may terminate the contract, i.e. for breach of contract.

Territory/area – this is the exclusive area, whether it be town, region, country, which is allocated to the franchisee as part of their franchise package.

Total investment – the amount of money estimated for complete set up of a franchisee's business in Ireland. This includes the initial investment, the working capital, and subsequent additions to inventory and equipment deemed necessary for a fully operational and profitable enterprise.

Turnkey package - a package that includes all the systems, information and equipment a franchisee needs to be able to ‘turn the key' and start trading in Ireland from day one.

Unit franchise – operating a single unit franchise in Ireland. A unit franchisee may at a later stage buy further unit franchises. If they are of the same brand they are referred to as a multi-unit franchisee.

White collar franchise – see Single Operator Executive

Working capital - a major cause of business failure is not having enough cash in the bank, trade credit, borrowing capacity or cash flow to meet start-up expenses and see the business through any unusual dips and changes in its daily activity. Initially funds are needed to pay first and last month’s rent, utility deposits, licenses and any number of incidental costs. As it takes time to build up a new business the first months are usually loss months, which need to be financed.