---
title: "Franchise Glossary"
description: "Search 200 franchise terms in plain English — clear definitions, real examples, and side-by-side comparisons of the terms franchise buyers confuse most."
url: "https://www.franchisegrade.com/tools/franchise-glossary"
canonical: "https://www.franchisegrade.com/tools/franchise-glossary"
markdown_url: "https://www.franchisegrade.com/tools/franchise-glossary.md"
type: "Glossary"
terms: "200"
---

# Franchise Glossary

Search 200 franchise terms in plain English — clear definitions, real examples, and side-by-side comparisons of the terms franchise buyers confuse most.

Every term below is addressable on the HTML page as an anchor — `/tools/franchise-glossary#<slug>` — so a citation can point at the single definition it used.

## Franchise Basics

What a franchise actually is, the ownership models available to you, and the words used to describe them.

### Franchise

A franchise is a license to run a business using someone else's brand, system and know-how, in exchange for fees and an agreement to operate the way that owner requires.

Under the FTC Franchise Rule, three elements have to be present: you use the franchisor's trademark, the franchisor exerts significant control over or gives significant assistance to your method of operation, and you pay them money to get started. Remove any one of the three and it is legally something else — a license, a dealership, or a distributorship.

**Example.** You pay a $45,000 fee for the right to open a sandwich shop under a national brand. You get the recipes, the supplier contracts, the store design and the training. In return you pay 6% of sales every month and you cannot change the menu.

**Related:** [Franchising](https://www.franchisegrade.com/tools/franchise-glossary#franchising) · [Franchisor](https://www.franchisegrade.com/tools/franchise-glossary#franchisor) · [Franchisee](https://www.franchisegrade.com/tools/franchise-glossary#franchisee) · [License](https://www.franchisegrade.com/tools/franchise-glossary#license) · [Distributorship](https://www.franchisegrade.com/tools/franchise-glossary#distributorship)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchise*

### Franchising

Franchising is the method of growing a business by selling the right to replicate it, rather than by opening and staffing every location yourself.

For the franchisor it converts capital expense into fee income, because franchisees fund the units. For the buyer it converts a business idea into a documented system. Both sides trade some control for speed.

**Example.** A regional coffee brand with four company cafes wants twenty locations. Building them alone would take a decade and heavy debt. By franchising, sixteen owner-operators fund and run their own cafes while the brand collects royalties and manages standards.

**Related:** [Franchise](https://www.franchisegrade.com/tools/franchise-glossary#franchise) · [Business Format Franchising](https://www.franchisegrade.com/tools/franchise-glossary#business-format-franchising) · [Franchise System](https://www.franchisegrade.com/tools/franchise-glossary#franchise-system)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchising*

### Franchisor

The franchisor is the company that owns the brand and the operating system, and grants you the right to use both.

The franchisor writes the agreement, sets the standards, collects the royalties, and decides what support exists. Its financial health matters directly to you: Item 21 of the FDD contains its audited financial statements.

**Example.** You sign with a home-services brand. The franchisor supplies the trademark, the call center, the pricing model and the training academy — and audits your work quality twice a year.

**Related:** [Franchisee](https://www.franchisegrade.com/tools/franchise-glossary#franchisee) · [Parent Company](https://www.franchisegrade.com/tools/franchise-glossary#parent-company) · [Affiliate](https://www.franchisegrade.com/tools/franchise-glossary#affiliate) · [Franchise Agreement](https://www.franchisegrade.com/tools/franchise-glossary#franchise-agreement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchisor*

### Franchisee

The franchisee is the person or company that buys the right to operate a franchised business, and owns the business they build with it.

Most franchisees sign as a legal entity — an LLC or corporation — while personally guaranteeing the obligations. That is why the entity limits some risk but the personal guaranty follows you.

**Example.** You form Riverside Services LLC, sign the franchise agreement as the entity, and personally guarantee the royalty and lease obligations. The LLC owns the vans and the customer contracts; you own the LLC.

**Related:** [Franchisor](https://www.franchisegrade.com/tools/franchise-glossary#franchisor) · [Personal Guaranty](https://www.franchisegrade.com/tools/franchise-glossary#personal-guaranty) · [Owner-Operator](https://www.franchisegrade.com/tools/franchise-glossary#owner-operator) · [Single-Unit Franchise](https://www.franchisegrade.com/tools/franchise-glossary#single-unit-franchise)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchisee*

### Business Format Franchising

Business format franchising licenses the whole operating model — brand, methods, training, marketing and procedures — not just the right to sell a product.

This is what almost everyone means today when they say franchise. The franchisor's real product is the system: the manual, the supply chain and the playbook for running the unit.

**Example.** A gym franchise supplies the layout, the equipment list, the membership pricing tiers, the sales scripts, the software and the staffing plan. You are buying the operating method, not equipment.

**Related:** [Product Distribution Franchising](https://www.franchisegrade.com/tools/franchise-glossary#product-distribution-franchising) · [Operations Manual](https://www.franchisegrade.com/tools/franchise-glossary#operations-manual) · [Franchise System](https://www.franchisegrade.com/tools/franchise-glossary#franchise-system)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#business-format-franchising*

### Product Distribution Franchising

Product distribution franchising grants the right to sell a manufacturer's product under its brand, with far less control over how you run the business.

**Also called:** Product Format Franchise, Trade Name Franchise

The relationship centers on the product and the trademark rather than a full operating system. Car dealerships, soft-drink bottlers and fuel retailers are the classic examples.

**Example.** A bottler buys the right to produce and distribute a soft-drink brand in a defined region. The brand dictates the formula and the packaging, not the staffing or the office hours.

**Related:** [Business Format Franchising](https://www.franchisegrade.com/tools/franchise-glossary#business-format-franchising) · [Distributorship](https://www.franchisegrade.com/tools/franchise-glossary#distributorship) · [License](https://www.franchisegrade.com/tools/franchise-glossary#license)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#product-distribution-franchising*

### Franchise System

A franchise system is the whole network — the franchisor, every franchised unit, every company-owned unit, and the standards that hold them together.

**Example.** A brand with 480 franchised locations, 22 company-owned locations and one franchisor entity is a 502-unit system. When people quote unit counts, they are describing the system, not one owner's business.

**Related:** [Unit (Outlet)](https://www.franchisegrade.com/tools/franchise-glossary#unit) · [Company-Owned Outlet](https://www.franchisegrade.com/tools/franchise-glossary#company-owned-outlet) · [System-Wide Sales](https://www.franchisegrade.com/tools/franchise-glossary#system-wide-sales) · [Unit Growth](https://www.franchisegrade.com/tools/franchise-glossary#unit-growth)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchise-system*

### Unit (Outlet)

A unit, or outlet, is one operating location in a franchise system, whether it is franchised or company-owned.

**Also called:** Outlet, Location

Item 20 of the FDD counts them for you, split by type and by year, which is why unit tables are the most useful pages in the whole document.

**Example.** You buy the rights to three units under one development agreement. You open your first unit in March, your second the following January, and your third two years later.

**Related:** [Franchised Outlet](https://www.franchisegrade.com/tools/franchise-glossary#franchised-outlet) · [Company-Owned Outlet](https://www.franchisegrade.com/tools/franchise-glossary#company-owned-outlet) · [Multi-Unit Franchise](https://www.franchisegrade.com/tools/franchise-glossary#multi-unit-franchise) · [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#unit*

### Franchised Outlet

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

**Example.** Of a brand's 300 locations, 285 are franchised outlets run by 190 different owners. The other 15 are run by the franchisor itself.

**Related:** [Company-Owned Outlet](https://www.franchisegrade.com/tools/franchise-glossary#company-owned-outlet) · [Unit (Outlet)](https://www.franchisegrade.com/tools/franchise-glossary#unit) · [Reacquired Franchise](https://www.franchisegrade.com/tools/franchise-glossary#reacquired-franchise)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchised-outlet*

### Company-Owned Outlet

A company-owned outlet is a location the franchisor operates itself, with its own capital and staff.

**Also called:** Corporate Location, Company-Operated Unit

A healthy number of company-owned units is usually a good sign: it means the franchisor still operates the model it sells and has its own money at risk. A franchisor with none has no direct exposure to the economics it asks you to accept.

**Example.** A franchisor runs six company cafes as training sites and test kitchens. New menu items launch there before rolling out to franchisees.

**Related:** [Franchised Outlet](https://www.franchisegrade.com/tools/franchise-glossary#franchised-outlet) · [Reacquired Franchise](https://www.franchisegrade.com/tools/franchise-glossary#reacquired-franchise) · [Pilot Operation](https://www.franchisegrade.com/tools/franchise-glossary#pilot-operation)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#company-owned-outlet*

### Single-Unit Franchise

A single-unit franchise is the right to open and operate one location — the standard entry point into franchise ownership.

**Example.** You sign one agreement for one bakery in one town. If it works and you want a second, you negotiate a new agreement then, often with a reduced fee for existing owners.

**Related:** [Multi-Unit Franchise](https://www.franchisegrade.com/tools/franchise-glossary#multi-unit-franchise) · [Multi-Unit Discount](https://www.franchisegrade.com/tools/franchise-glossary#multi-unit-discount) · [Area Development Agreement](https://www.franchisegrade.com/tools/franchise-glossary#area-development-agreement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#single-unit-franchise*

### Multi-Unit Franchise

A multi-unit franchisee owns more than one location in the same system, either bought one at a time or committed to up front under a development agreement.

Multi-unit ownership changes the job. One unit is an operating role; five units is a management role, with a district manager layer, shared overhead and higher fixed costs.

**Example.** You run four car-wash locations with a general manager at each and one operations manager above them. You spend your week on hiring, numbers and local marketing rather than on the wash bays.

**Related:** [Area Development Agreement](https://www.franchisegrade.com/tools/franchise-glossary#area-development-agreement) · [Development Schedule](https://www.franchisegrade.com/tools/franchise-glossary#development-schedule) · [Single-Unit Franchise](https://www.franchisegrade.com/tools/franchise-glossary#single-unit-franchise) · [Multi-Unit Discount](https://www.franchisegrade.com/tools/franchise-glossary#multi-unit-discount)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#multi-unit-franchise*

### Area Development Agreement

An area development agreement gives you the right — and the obligation — to open an agreed number of units in a defined area on an agreed timetable.

**Also called:** Multi-Unit Development Agreement, Area Development Rights

You normally pay part of the franchise fees up front for all the units, and the area is reserved for you only as long as you keep hitting the schedule.

**Example.** You commit to five units in a metro area over six years, paying $30,000 per unit up front instead of $45,000, with unit one open within twelve months.

**Related:** [Development Schedule](https://www.franchisegrade.com/tools/franchise-glossary#development-schedule) · [Area Developer](https://www.franchisegrade.com/tools/franchise-glossary#area-developer) · [Multi-Unit Franchise](https://www.franchisegrade.com/tools/franchise-glossary#multi-unit-franchise) · [Territory Fee](https://www.franchisegrade.com/tools/franchise-glossary#territory-fee)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#area-development-agreement*

### Area Developer

An area developer takes on a large region and helps the franchisor build it out — recruiting, training and supporting franchisees there in exchange for a share of the fees and royalties.

**Also called:** AD, Regional Developer, Area Representative

Definitions vary by brand. In some systems the area developer also owns units; in others the role is purely recruitment and support. Read Item 1 and Item 11 to see which one you are actually dealing with.

**Example.** A brand appoints an area developer for the Carolinas. She signs eleven franchisees over four years, provides their local support visits, and keeps a share of every royalty from her region.

**Related:** [Master Franchise](https://www.franchisegrade.com/tools/franchise-glossary#master-franchise) · [Area Development Agreement](https://www.franchisegrade.com/tools/franchise-glossary#area-development-agreement) · [Field Representative](https://www.franchisegrade.com/tools/franchise-glossary#field-representative) · [Sub-Franchising](https://www.franchisegrade.com/tools/franchise-glossary#sub-franchising)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#area-developer*

### Master Franchise

A master franchisee buys the exclusive right to develop a whole territory and to sell franchises within it, effectively acting as the franchisor in that market.

**Also called:** Master Franchisee, Sub-Franchisor

The master signs the franchise agreements with local owners, delivers the training and support, and splits fees and royalties with the brand owner. It is used most often to enter another country.

**Example.** A brand grants the master franchise for Spain. The master opens two flagship stores, then signs and supports 30 Spanish franchisees under its own agreements.

**Related:** [Area Developer](https://www.franchisegrade.com/tools/franchise-glossary#area-developer) · [Sub-Franchising](https://www.franchisegrade.com/tools/franchise-glossary#sub-franchising) · [Franchisor](https://www.franchisegrade.com/tools/franchise-glossary#franchisor)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#master-franchise*

### Sub-Franchising

Sub-franchising is a structure where a middle party — a master franchisee or sub-franchisor — sells and supports franchises on the brand owner's behalf.

**Example.** The brand owner signs one agreement with a national master. The master then signs 45 individual sub-franchise agreements with local owners and collects their royalties, passing a share upward.

**Related:** [Master Franchise](https://www.franchisegrade.com/tools/franchise-glossary#master-franchise) · [Area Developer](https://www.franchisegrade.com/tools/franchise-glossary#area-developer)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#sub-franchising*

### Conversion Franchise

A conversion franchise is an existing independent business that rebrands and joins a franchise system, usually at a reduced initial fee.

Conversions are attractive to franchisors because the owner already has revenue, staff and a site. They are attractive to owners who want buying power and a recognized brand without starting over.

**Example.** An independent print shop with $600,000 in revenue joins a national print franchise. The franchise fee is discounted to $15,000 because the location and customer base already exist.

**Related:** [Franchise Resale](https://www.franchisegrade.com/tools/franchise-glossary#franchise-resale) · [Initial Franchise Fee](https://www.franchisegrade.com/tools/franchise-glossary#initial-franchise-fee) · [Brand Standards](https://www.franchisegrade.com/tools/franchise-glossary#brand-standards)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#conversion-franchise*

### Distributorship

A distributorship is the right to resell a manufacturer's products, without the operating system, ongoing royalties or brand-standard control that define a franchise.

**Also called:** Dealership

It is not automatically a franchise — but if the arrangement adds significant operational control plus a required payment, regulators may treat it as one and require an FDD.

**Example.** You buy wholesale from an equipment maker and resell in your region under your own company name. Nobody dictates your hours, your pricing or your staffing.

**Related:** [Franchise](https://www.franchisegrade.com/tools/franchise-glossary#franchise) · [License](https://www.franchisegrade.com/tools/franchise-glossary#license) · [Product Distribution Franchising](https://www.franchisegrade.com/tools/franchise-glossary#product-distribution-franchising)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#distributorship*

### License

A license is permission to use someone's intellectual property. Every franchise is a license, but most licenses are not franchises.

The difference is control and payment. A trademark license with no operating system and no required fee is just a license. Add significant control plus a required payment and you are in franchise territory, whatever the contract is titled.

**Example.** A clothing maker licenses a cartoon character for a T-shirt range. It pays a royalty on sales but runs its own business however it likes.

**Related:** [Franchise](https://www.franchisegrade.com/tools/franchise-glossary#franchise) · [Trademark](https://www.franchisegrade.com/tools/franchise-glossary#trademark) · [Distributorship](https://www.franchisegrade.com/tools/franchise-glossary#distributorship)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#license*

### Brand Standards

Brand standards are the rules every location must follow so the customer experience stays consistent across the system — from signage and uniforms to product specs and response times.

**Example.** A quick-service brand requires a 90-second drive-through time, a set fryer temperature, a specific uniform supplier and a monthly deep-clean log.

**Related:** [Operations Manual](https://www.franchisegrade.com/tools/franchise-glossary#operations-manual) · [Quality Control Audit](https://www.franchisegrade.com/tools/franchise-glossary#quality-control-audit) · [Compliance](https://www.franchisegrade.com/tools/franchise-glossary#compliance) · [Remodel Requirement](https://www.franchisegrade.com/tools/franchise-glossary#remodel-requirement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#brand-standards*

### Owner-Operator

An owner-operator works in the business full time, and many franchisors require it for at least the first year or two.

**Also called:** Hands-On Owner, Full-Time Owner

Item 15 of the FDD states whether personal participation is required. Where it is, buying the franchise means buying a job as well as an asset.

**Example.** A childcare franchise requires the owner on site during operating hours until the center reaches full enrollment. You cannot hire a director and stay at your day job.

**Related:** [Semi-Absentee Ownership](https://www.franchisegrade.com/tools/franchise-glossary#semi-absentee-ownership) · [Absentee Ownership](https://www.franchisegrade.com/tools/franchise-glossary#absentee-ownership) · [Designated Manager](https://www.franchisegrade.com/tools/franchise-glossary#designated-manager)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#owner-operator*

### Semi-Absentee Ownership

Semi-absentee ownership means the model is designed to run with a manager in place and roughly 10 to 20 hours a week from you, so you can keep another job or another business.

**Also called:** Semi-Passive

Semi-absentee is a design intention, not a guarantee. It works when the unit economics genuinely support a paid manager from early on — which is exactly what to test with current owners.

**Example.** A fitness studio is marketed as semi-absentee. You hire a studio manager at $58,000 and spend evenings on membership sales and payroll, keeping your corporate role.

**Related:** [Owner-Operator](https://www.franchisegrade.com/tools/franchise-glossary#owner-operator) · [Absentee Ownership](https://www.franchisegrade.com/tools/franchise-glossary#absentee-ownership) · [Designated Manager](https://www.franchisegrade.com/tools/franchise-glossary#designated-manager) · [Validation Calls](https://www.franchisegrade.com/tools/franchise-glossary#validation-calls)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#semi-absentee-ownership*

### Absentee Ownership

Absentee ownership means you invest in a franchise and never work in it, relying entirely on hired management.

**Also called:** Passive Ownership, Investor Model

Genuinely absentee franchises are rare, and most franchisors that permit them require an approved manager who completes the same training you would.

**Example.** An investor owns three car-wash locations run by a regional manager and reviews monthly financials. She has no operational role.

**Related:** [Semi-Absentee Ownership](https://www.franchisegrade.com/tools/franchise-glossary#semi-absentee-ownership) · [Owner-Operator](https://www.franchisegrade.com/tools/franchise-glossary#owner-operator) · [Designated Manager](https://www.franchisegrade.com/tools/franchise-glossary#designated-manager)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#absentee-ownership*

### Home-Based Franchise

A home-based franchise runs from your home rather than a commercial site, which removes rent, build-out and most of the fixed cost of opening.

**Example.** A residential-cleaning franchise is run from a spare room with a laptop, a scheduling system and four field staff. Total investment is $48,000 with no lease.

**Related:** [Mobile Franchise](https://www.franchisegrade.com/tools/franchise-glossary#mobile-franchise) · [Brick-and-Mortar](https://www.franchisegrade.com/tools/franchise-glossary#brick-and-mortar) · [Total Initial Investment](https://www.franchisegrade.com/tools/franchise-glossary#total-initial-investment)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#home-based-franchise*

### Mobile Franchise

A mobile franchise operates from a vehicle rather than a fixed site — a van, a trailer or a truck serving customers across a territory.

**Example.** A mobile pet-grooming franchise runs two fitted vans covering 90,000 households, with all bookings handled by a central call center.

**Related:** [Home-Based Franchise](https://www.franchisegrade.com/tools/franchise-glossary#home-based-franchise) · [Brick-and-Mortar](https://www.franchisegrade.com/tools/franchise-glossary#brick-and-mortar) · [Equipment Financing](https://www.franchisegrade.com/tools/franchise-glossary#equipment-financing)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#mobile-franchise*

### Brick-and-Mortar

A brick-and-mortar franchise operates from a leased or owned commercial property, which adds rent, build-out and site-selection risk to the model.

**Example.** A 2,200 square foot restaurant with a ten-year lease, a $420,000 build-out and a personal guaranty on the rent.

**Related:** [Build-Out Cost](https://www.franchisegrade.com/tools/franchise-glossary#build-out-cost) · [Approved Site](https://www.franchisegrade.com/tools/franchise-glossary#approved-site) · [Site Selection](https://www.franchisegrade.com/tools/franchise-glossary#site-selection) · [Home-Based Franchise](https://www.franchisegrade.com/tools/franchise-glossary#home-based-franchise)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#brick-and-mortar*

### Turnkey

Turnkey means the location is handed to you finished and equipped, ready to trade from day one, with the franchisor or a contractor managing the build.

**Example.** The franchisor manages the fit-out, installs the equipment, stocks the opening inventory and hands you the keys ten days before opening for staff training.

**Related:** [Build-Out Cost](https://www.franchisegrade.com/tools/franchise-glossary#build-out-cost) · [Build-Out](https://www.franchisegrade.com/tools/franchise-glossary#build-out) · [Total Initial Investment](https://www.franchisegrade.com/tools/franchise-glossary#total-initial-investment) · [Footprint](https://www.franchisegrade.com/tools/franchise-glossary#footprint)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#turnkey*

### Franchise Resale

A franchise resale is buying an existing franchised location from its current owner rather than opening a new one.

**Also called:** Existing Unit Purchase

You inherit revenue, staff, customers and a trading history — plus the remaining term of the agreement and whatever problems came with it. The franchisor must approve you and usually charges a transfer fee.

**Example.** You buy a nine-year-old franchised restaurant doing $1.1m a year for $520,000, assume the lease with four years left, and pay the franchisor a $12,000 transfer fee.

**Related:** [Transfer](https://www.franchisegrade.com/tools/franchise-glossary#transfer) · [Transfer Fee](https://www.franchisegrade.com/tools/franchise-glossary#transfer-fee) · [Right of First Refusal (ROFR)](https://www.franchisegrade.com/tools/franchise-glossary#right-of-first-refusal) · [Renewal](https://www.franchisegrade.com/tools/franchise-glossary#renewal)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchise-resale*

### Emerging Franchise

An emerging franchise is a young system — often under 50 units and only a few years into franchising — where the model is proven but the support infrastructure is still being built.

Emerging brands can offer better territory and lower fees. They also carry more risk: fewer franchisees to validate with, thinner franchisor financials, and standards that are still moving.

**Example.** A brand franchising for three years with 22 open units offers a whole metro area for one unit fee — something an established brand would never do.

**Related:** [Pilot Operation](https://www.franchisegrade.com/tools/franchise-glossary#pilot-operation) · [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20) · [Franchisor](https://www.franchisegrade.com/tools/franchise-glossary#franchisor) · [Validation Calls](https://www.franchisegrade.com/tools/franchise-glossary#validation-calls)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#emerging-franchise*

### Pilot Operation

A pilot operation is a franchisor-run test location used to prove the model works before franchises are sold, and to trial changes afterwards.

**Also called:** Prototype Unit

**Example.** Before franchising, a brand runs two pilot stores for eighteen months across a good and a difficult market to establish real staffing and sales figures.

**Related:** [Company-Owned Outlet](https://www.franchisegrade.com/tools/franchise-glossary#company-owned-outlet) · [Emerging Franchise](https://www.franchisegrade.com/tools/franchise-glossary#emerging-franchise) · [Market Introduction Program](https://www.franchisegrade.com/tools/franchise-glossary#market-introduction-program)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#pilot-operation*

## Legal & Documents

The FDD, the franchise agreement, and the clauses that decide what happens when things go well — and when they do not.

### Franchise Disclosure Document (FDD)

The Franchise Disclosure Document is the 23-part disclosure a franchisor must give you at least 14 calendar days before you sign anything or pay any money. It is the single most useful document in the entire process.

**Also called:** FDD, Disclosure Document

The FDD is disclosure, not a sales brochure and not a contract. It contains the franchisor's litigation and bankruptcy history, every fee, the estimated investment range, the territory terms, the unit counts and closures, audited financials, and copies of every agreement you will be asked to sign.

**Example.** You receive a 210-page FDD on 1 March. The earliest you can legally sign the franchise agreement or pay a deposit is 15 March — and you use those two weeks to read Items 7, 19, 20 and 21 with an attorney.

**Related:** [Franchise Agreement](https://www.franchisegrade.com/tools/franchise-glossary#franchise-agreement) · [Acknowledgement of Receipt](https://www.franchisegrade.com/tools/franchise-glossary#acknowledgement-of-receipt) · [FTC Franchise Rule](https://www.franchisegrade.com/tools/franchise-glossary#ftc-franchise-rule) · [Item 19 — Financial Performance Representation](https://www.franchisegrade.com/tools/franchise-glossary#item-19) · [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20) · [Item 21 — Financial Statements](https://www.franchisegrade.com/tools/franchise-glossary#item-21)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchise-disclosure-document*

### Franchise Agreement

The franchise agreement is the binding contract that creates the relationship — your rights, your obligations, the term, and what happens on default, transfer, renewal or exit.

**Also called:** Franchise Contract

A copy sits inside the FDD as an exhibit, so you can read it well before you are asked to sign. It usually arrives with a set of ancillary documents: personal guaranty, non-compete, confidentiality agreement, and sometimes a lease assignment.

**Example.** A ten-year agreement setting a 6% royalty, a 2% advertising contribution, a protected radius of two miles, and the franchisor's right to approve your general manager.

**Related:** [Franchise Disclosure Document (FDD)](https://www.franchisegrade.com/tools/franchise-glossary#franchise-disclosure-document) · [Personal Guaranty](https://www.franchisegrade.com/tools/franchise-glossary#personal-guaranty) · [Item 17 — Renewal, Termination, Transfer & Dispute Resolution](https://www.franchisegrade.com/tools/franchise-glossary#item-17) · [Non-Compete Clause](https://www.franchisegrade.com/tools/franchise-glossary#non-compete-clause)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchise-agreement*

### Acknowledgement of Receipt

The acknowledgement of receipt is the page you sign to record the date you received the FDD, which is what starts the mandatory 14-day waiting period.

**Also called:** Receipt Page

**Example.** You sign the receipt dated 1 March. That signature is the evidence that the disclosure clock started, and it is the reason a franchisor cannot take your deposit on 5 March.

**Related:** [Franchise Disclosure Document (FDD)](https://www.franchisegrade.com/tools/franchise-glossary#franchise-disclosure-document) · [FTC Franchise Rule](https://www.franchisegrade.com/tools/franchise-glossary#ftc-franchise-rule)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#acknowledgement-of-receipt*

### FTC Franchise Rule

The FTC Franchise Rule is the federal regulation that requires franchisors to deliver a standard-format FDD at least 14 days before a sale, and prohibits earnings claims outside Item 19.

**Also called:** Franchise Rule, 16 CFR Part 436

It sets the format and the 23 Items so that every franchise in the country discloses the same things in the same order — which is exactly what makes comparing two brands possible.

**Example.** A franchisor tells you on a call that owners average $95,000 in profit. If that figure is not in Item 19, the statement violates the Rule — and that tells you something about the franchisor.

**Related:** [Federal Trade Commission (FTC)](https://www.franchisegrade.com/tools/franchise-glossary#federal-trade-commission) · [Franchise Disclosure Document (FDD)](https://www.franchisegrade.com/tools/franchise-glossary#franchise-disclosure-document) · [Earnings Claim](https://www.franchisegrade.com/tools/franchise-glossary#earnings-claim) · [Item 19 — Financial Performance Representation](https://www.franchisegrade.com/tools/franchise-glossary#item-19)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#ftc-franchise-rule*

### Federal Trade Commission (FTC)

The FTC is the federal agency that regulates franchise sales nationwide and enforces the Franchise Rule.

**Also called:** FTC

The FTC governs disclosure. It does not register, approve or vet franchises — no franchisor is ever FTC-approved, and any seller implying otherwise is misrepresenting the regulator.

**Example.** A franchisor must comply with the FTC's disclosure timing in all 50 states, and additionally register with the state regulator in around a dozen states before offering franchises there.

**Related:** [FTC Franchise Rule](https://www.franchisegrade.com/tools/franchise-glossary#ftc-franchise-rule) · [NASAA](https://www.franchisegrade.com/tools/franchise-glossary#nasaa) · [Franchise Registration State](https://www.franchisegrade.com/tools/franchise-glossary#franchise-registration-state)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#federal-trade-commission*

### NASAA

NASAA is the association of state securities regulators that writes the FDD format guidelines the states enforce, working alongside the FTC.

**Also called:** North American Securities Administrators Association

**Example.** When the FDD's required format changes, it is usually because NASAA published revised guidelines that state examiners then apply during registration review.

**Related:** [Federal Trade Commission (FTC)](https://www.franchisegrade.com/tools/franchise-glossary#federal-trade-commission) · [Franchise Registration State](https://www.franchisegrade.com/tools/franchise-glossary#franchise-registration-state) · [Franchise Filing State](https://www.franchisegrade.com/tools/franchise-glossary#franchise-filing-state)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#nasaa*

### Franchise Registration State

A registration state requires the franchisor to submit its FDD to a state regulator and be registered there before it can legally offer or sell franchises in that state.

**Also called:** Registration State

Roughly a dozen states operate registration regimes, and a few of them review the document substantively. The exact list and the requirements change, so confirm current status with a franchise attorney rather than a brand's website.

**Example.** A franchisor cannot present an offer to a New York resident until its FDD is registered in New York — even if the location will be built in a neighboring state.

**Related:** [Franchise Filing State](https://www.franchisegrade.com/tools/franchise-glossary#franchise-filing-state) · [Franchise Exemption](https://www.franchisegrade.com/tools/franchise-glossary#franchise-exemption) · [NASAA](https://www.franchisegrade.com/tools/franchise-glossary#nasaa)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchise-registration-state*

### Franchise Filing State

A filing state requires the franchisor to file a notice of its intent to sell franchises, but does not review or approve the FDD.

**Also called:** Notice State

**Example.** A franchisor files a one-page notice and a fee with the state, then may begin offering franchises there immediately — no review period.

**Related:** [Franchise Registration State](https://www.franchisegrade.com/tools/franchise-glossary#franchise-registration-state) · [NASAA](https://www.franchisegrade.com/tools/franchise-glossary#nasaa)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchise-filing-state*

### Franchise Exemption

An exemption is a legal basis on which a seller can skip some or all franchise disclosure requirements — for example a large-investment exemption or a sophisticated-investor exemption.

**Example.** A seller relies on a fractional-franchise exemption because the new line will be a small share of an existing business's revenue, and provides no FDD.

**Related:** [Franchise Disclosure Document (FDD)](https://www.franchisegrade.com/tools/franchise-glossary#franchise-disclosure-document) · [Franchise Registration State](https://www.franchisegrade.com/tools/franchise-glossary#franchise-registration-state) · [Franchise Attorney](https://www.franchisegrade.com/tools/franchise-glossary#franchise-attorney)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchise-exemption*

### Item 5 — Initial Fees

Item 5 discloses every fee payable to the franchisor before you open, including the initial franchise fee, and states whether any part of it is refundable.

**Also called:** Item 5

**Example.** Item 5 shows a $49,500 franchise fee, a $7,500 territory fee for a second protected zone, and a non-refundable $2,500 site-review deposit.

**Related:** [Initial Franchise Fee](https://www.franchisegrade.com/tools/franchise-glossary#initial-franchise-fee) · [Item 6 — Other Fees](https://www.franchisegrade.com/tools/franchise-glossary#item-6) · [Item 7 — Estimated Initial Investment](https://www.franchisegrade.com/tools/franchise-glossary#item-7) · [Territory Fee](https://www.franchisegrade.com/tools/franchise-glossary#territory-fee)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#item-5*

### Item 6 — Other Fees

Item 6 lists every recurring and situational fee for the life of the agreement: royalties, advertising, technology, training, transfer, renewal, audit and late fees.

**Also called:** Item 6

This is the most under-read table in the FDD and the one that decides your ongoing margin. Add every percentage together to get your true fee load, not just the royalty.

**Example.** Item 6 shows 6% royalty, 2% national advertising, 1% local advertising minimum, $329 a month technology, plus a $500 fee if the franchisor has to audit your books.

**Related:** [Royalty](https://www.franchisegrade.com/tools/franchise-glossary#royalty) · [Advertising Fee](https://www.franchisegrade.com/tools/franchise-glossary#advertising-fee) · [Technology Fee](https://www.franchisegrade.com/tools/franchise-glossary#technology-fee) · [Item 5 — Initial Fees](https://www.franchisegrade.com/tools/franchise-glossary#item-5)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#item-6*

### Item 7 — Estimated Initial Investment

Item 7 is the franchisor's own low-to-high estimate of everything it takes to open and run the business for its first stated period, usually about three months.

**Also called:** Item 7

It is an estimate the franchisor stands behind, broken into line items — fee, build-out, equipment, signage, inventory, deposits, insurance and additional working capital. The high end of the range is the number to plan against.

**Example.** Item 7 shows $310,000 to $565,000, including a $45,000 fee, $180,000 to $340,000 of build-out, and $30,000 to $60,000 of additional working capital for the first three months.

**Related:** [Total Initial Investment](https://www.franchisegrade.com/tools/franchise-glossary#total-initial-investment) · [Working Capital](https://www.franchisegrade.com/tools/franchise-glossary#working-capital) · [Build-Out Cost](https://www.franchisegrade.com/tools/franchise-glossary#build-out-cost) · [Item 6 — Other Fees](https://www.franchisegrade.com/tools/franchise-glossary#item-6)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#item-7*

### Item 8 — Restrictions on Sources of Products & Services

Item 8 discloses what you must buy, who you must buy it from, and — critically — whether the franchisor or its affiliates make money on those purchases.

**Also called:** Item 8

It is the section that explains supplier pricing complaints. A franchisor earning a rebate on every case you buy has an interest in the price you pay that is not aligned with yours.

**Example.** Item 8 states that 22% of the franchisor's revenue came from required product sales to franchisees, and that it receives a 3% allowance from the approved distributor.

**Related:** [Required Supplier](https://www.franchisegrade.com/tools/franchise-glossary#required-supplier) · [Approved Supplier](https://www.franchisegrade.com/tools/franchise-glossary#approved-supplier) · [Rebates & Supplier Allowances](https://www.franchisegrade.com/tools/franchise-glossary#rebates-and-supplier-allowances) · [Tying](https://www.franchisegrade.com/tools/franchise-glossary#tying)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#item-8*

### Item 11 — Franchisor Assistance & Training

Item 11 states exactly what the franchisor is obligated to provide — pre-opening help, training hours, ongoing support, advertising commitments and the technology you must use.

**Also called:** Item 11

Read it as a contract, not a brochure. If a support promise made in a sales conversation does not appear in Item 11 or the agreement, it is not an obligation.

**Example.** Item 11 promises five days of classroom training for two people, three days of on-site support at opening, and an annual visit — and says travel and lodging are your cost.

**Related:** [Initial Training](https://www.franchisegrade.com/tools/franchise-glossary#initial-training) · [Continuous Training](https://www.franchisegrade.com/tools/franchise-glossary#continuous-training) · [Field Representative](https://www.franchisegrade.com/tools/franchise-glossary#field-representative) · [Operations Manual](https://www.franchisegrade.com/tools/franchise-glossary#operations-manual)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#item-11*

### Item 12 — Territory

Item 12 defines the territory you get, how it is measured, whether it is exclusive, and what the franchisor reserves the right to do inside it.

**Also called:** Item 12

If no exclusive territory is granted, the Rule requires a plain statement to that effect — which is one of the clearest, most useful sentences in the whole document.

**Example.** Item 12 grants a territory of 40,000 residents measured by ZIP code, states it is protected but not exclusive, and reserves the franchisor's right to sell the same products online and through grocery.

**Related:** [Exclusive Territory](https://www.franchisegrade.com/tools/franchise-glossary#exclusive-territory) · [Protected Territory](https://www.franchisegrade.com/tools/franchise-glossary#protected-territory) · [Reserved Rights](https://www.franchisegrade.com/tools/franchise-glossary#reserved-rights) · [Alternative Channels of Distribution](https://www.franchisegrade.com/tools/franchise-glossary#alternative-channels-of-distribution)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#item-12*

### Item 17 — Renewal, Termination, Transfer & Dispute Resolution

Item 17 is the exit table: how long the term runs, whether you can renew, what causes termination, whether you can sell, and where disputes get resolved.

**Also called:** Item 17

This is where the answers to the questions people only ask too late live — what happens if you get sick, want out, want to sell to your daughter, or want to leave the brand.

**Example.** Item 17 shows a ten-year term with one five-year renewal, arbitration in the franchisor's home state, a two-year non-compete within ten miles, and franchisor approval required for any transfer.

**Related:** [Termination](https://www.franchisegrade.com/tools/franchise-glossary#termination) · [Renewal](https://www.franchisegrade.com/tools/franchise-glossary#renewal) · [Transfer](https://www.franchisegrade.com/tools/franchise-glossary#transfer) · [Arbitration](https://www.franchisegrade.com/tools/franchise-glossary#arbitration) · [Non-Compete Clause](https://www.franchisegrade.com/tools/franchise-glossary#non-compete-clause)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#item-17*

### Item 19 — Financial Performance Representation

Item 19 is the only place a franchisor may legally publish figures about what its franchisees earn. It is optional to include — and its presence, scope and honesty tell you a great deal.

**Also called:** Item 19, FPR, Financial Performance Representation

The quality varies enormously. A strong Item 19 reports revenue, cost lines and profit for a clearly defined group of units, states how many units are in the group, and shows how many hit the average. A weak one reports top-quartile revenue only, with no costs.

**Example.** An Item 19 states that the 84 franchised units open the whole year averaged $842,000 in revenue, that 31 of them exceeded that average, and reports food and labor cost ranges but no owner earnings.

**Related:** [Earnings Claim](https://www.franchisegrade.com/tools/franchise-glossary#earnings-claim) · [FTC Franchise Rule](https://www.franchisegrade.com/tools/franchise-glossary#ftc-franchise-rule) · [Average Unit Volume (AUV)](https://www.franchisegrade.com/tools/franchise-glossary#average-unit-volume) · [Pro Forma](https://www.franchisegrade.com/tools/franchise-glossary#pro-forma) · [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#item-19*

### Item 20 — Outlets & Franchisee Information

Item 20 is the three-year unit table: how many outlets opened, closed, were terminated, were not renewed, were reacquired or were transferred — plus contact details for current and former franchisees.

**Also called:** Item 20

It is the most objective section in the FDD because the numbers are counts, not claims. The former-franchisee list at the end is the most valuable phone list you will ever be handed.

**Example.** Item 20 shows 41 openings, 9 terminations, 14 transfers and 6 non-renewals in one year on a base of 260 units — a 11% churn rate worth asking about.

**Related:** [Franchisee Turnover](https://www.franchisegrade.com/tools/franchise-glossary#franchisee-turnover) · [Termination](https://www.franchisegrade.com/tools/franchise-glossary#termination) · [Transfer](https://www.franchisegrade.com/tools/franchise-glossary#transfer) · [Ceased Operations](https://www.franchisegrade.com/tools/franchise-glossary#ceased-operations) · [Validation Calls](https://www.franchisegrade.com/tools/franchise-glossary#validation-calls)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#item-20*

### Item 21 — Financial Statements

Item 21 contains the franchisor's audited financial statements for its last three years — the evidence of whether it can fund the support it has promised you.

**Also called:** Item 21

**Example.** Item 21 shows a franchisor with $3.1m in revenue, positive operating income and $1.4m in cash. A different brand shows negative equity and an auditor's going-concern note.

**Related:** [Franchisor](https://www.franchisegrade.com/tools/franchise-glossary#franchisor) · [Balance Sheet](https://www.franchisegrade.com/tools/franchise-glossary#balance-sheet) · [Profit & Loss Statement (P&L)](https://www.franchisegrade.com/tools/franchise-glossary#profit-and-loss-statement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#item-21*

### Item 3 — Litigation History

Item 3 discloses the franchisor's material litigation, including cases brought by or against its franchisees.

**Also called:** Item 3

Volume matters less than pattern. A large mature system will have some litigation. Repeated suits by franchisees on the same theme — territory encroachment, misrepresented earnings, supplier pricing — is the signal.

**Example.** Item 3 lists four franchisee suits in three years, all alleging the franchisor placed new units inside protected territories. That is a specific question for your validation calls.

**Related:** [Arbitration](https://www.franchisegrade.com/tools/franchise-glossary#arbitration) · [Encroachment](https://www.franchisegrade.com/tools/franchise-glossary#encroachment) · [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20) · [Franchise Attorney](https://www.franchisegrade.com/tools/franchise-glossary#franchise-attorney)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#item-3*

### Earnings Claim

An earnings claim is any statement — written, spoken or implied — about how much a franchisee can make. Franchisors may only make one if the figures are disclosed in Item 19.

**Example.** A development rep says most owners clear six figures by year two. Unless that is supported in Item 19, it is a prohibited earnings claim and should be treated as a red flag rather than as data.

**Related:** [Item 19 — Financial Performance Representation](https://www.franchisegrade.com/tools/franchise-glossary#item-19) · [FTC Franchise Rule](https://www.franchisegrade.com/tools/franchise-glossary#ftc-franchise-rule) · [Pro Forma](https://www.franchisegrade.com/tools/franchise-glossary#pro-forma)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#earnings-claim*

### Non-Compete Clause

A non-compete prevents you from operating a competing business for a defined period and within a defined area, both during the agreement and usually for one to three years after it ends.

**Also called:** Noncompetition Covenant, Restrictive Covenant

Enforceability varies sharply by state, and courts read these clauses narrowly. In-term restrictions are generally upheld; post-term restrictions are tested for reasonable scope, duration and geography.

**Example.** A two-year, ten-mile post-term non-compete means that if you leave a hair-salon franchise, you cannot open an independent salon in the same trade area for two years.

**Related:** [Non-Solicitation Agreement](https://www.franchisegrade.com/tools/franchise-glossary#non-solicitation-agreement) · [Item 17 — Renewal, Termination, Transfer & Dispute Resolution](https://www.franchisegrade.com/tools/franchise-glossary#item-17) · [Termination](https://www.franchisegrade.com/tools/franchise-glossary#termination) · [Franchise Attorney](https://www.franchisegrade.com/tools/franchise-glossary#franchise-attorney)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#non-compete-clause*

### Non-Solicitation Agreement

A non-solicitation clause stops you approaching the system's employees, other franchisees or customers for a set period, usually after you exit.

**Example.** After selling your unit you cannot hire your former assistant manager, who now works at another franchisee's location, for twelve months.

**Related:** [Non-Compete Clause](https://www.franchisegrade.com/tools/franchise-glossary#non-compete-clause) · [Non-Disclosure Agreement (NDA)](https://www.franchisegrade.com/tools/franchise-glossary#non-disclosure-agreement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#non-solicitation-agreement*

### Non-Disclosure Agreement (NDA)

An NDA obliges you to keep the franchisor's confidential material — manuals, recipes, pricing models, supplier terms — private, and it usually survives the end of the agreement.

**Also called:** NDA, Confidentiality Agreement

**Example.** You sign an NDA before receiving the operations manual, so the staffing model and margin structure inside it cannot be shared with a competitor.

**Related:** [Trade Secret](https://www.franchisegrade.com/tools/franchise-glossary#trade-secret) · [Operations Manual](https://www.franchisegrade.com/tools/franchise-glossary#operations-manual) · [Non-Solicitation Agreement](https://www.franchisegrade.com/tools/franchise-glossary#non-solicitation-agreement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#non-disclosure-agreement*

### Personal Guaranty

A personal guaranty makes you personally responsible for the business's obligations, so forming an LLC does not shield you from the royalties, the lease or the loan.

**Example.** Your LLC signs the franchise agreement and the ten-year lease. You personally guarantee both. If the unit closes in year three, you still owe the remaining rent.

**Related:** [Franchisee](https://www.franchisegrade.com/tools/franchise-glossary#franchisee) · [Franchise Agreement](https://www.franchisegrade.com/tools/franchise-glossary#franchise-agreement) · [Collateral](https://www.franchisegrade.com/tools/franchise-glossary#collateral) · [Indemnification](https://www.franchisegrade.com/tools/franchise-glossary#indemnification)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#personal-guaranty*

### Indemnification

An indemnification clause makes you cover the franchisor's losses, legal costs and damages arising from how you run your business.

**Example.** A customer is injured at your location and sues both you and the brand. The indemnity means you pay the franchisor's legal costs as well as your own.

**Related:** [Insurance Requirements](https://www.franchisegrade.com/tools/franchise-glossary#insurance-requirements) · [Personal Guaranty](https://www.franchisegrade.com/tools/franchise-glossary#personal-guaranty) · [Franchise Agreement](https://www.franchisegrade.com/tools/franchise-glossary#franchise-agreement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#indemnification*

### Arbitration

Arbitration resolves disputes before a private arbitrator instead of in court. It is usually faster and cheaper than litigation, and the decision is binding.

Most franchise agreements require it. The details that matter are where it happens, who pays, whether claims can be combined with other franchisees', and whether the arbitrator can award the same remedies a court could.

**Example.** Your agreement requires arbitration in the franchisor's home state, each party bearing its own costs, with class claims waived. A $40,000 dispute may cost more to arbitrate than to absorb.

**Related:** [Mediation](https://www.franchisegrade.com/tools/franchise-glossary#mediation) · [Item 17 — Renewal, Termination, Transfer & Dispute Resolution](https://www.franchisegrade.com/tools/franchise-glossary#item-17) · [Litigation History](https://www.franchisegrade.com/tools/franchise-glossary#litigation-history) · [Franchise Attorney](https://www.franchisegrade.com/tools/franchise-glossary#franchise-attorney)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#arbitration*

### Mediation

Mediation is a facilitated negotiation where a neutral third party helps both sides reach a voluntary settlement. Nothing is imposed and nothing is binding unless you agree to it.

**Example.** Before arbitration is allowed, your agreement requires one day of mediation. The dispute over a disputed advertising charge settles there for half the amount claimed.

**Related:** [Arbitration](https://www.franchisegrade.com/tools/franchise-glossary#arbitration) · [Item 17 — Renewal, Termination, Transfer & Dispute Resolution](https://www.franchisegrade.com/tools/franchise-glossary#item-17)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#mediation*

### Litigation History

A franchisor's litigation history is the record of material lawsuits it discloses in Item 3 — and the fastest way to see how it behaves when a relationship goes wrong.

**Example.** Two brands each have 400 units. One discloses one lawsuit in three years; the other discloses eleven, nine brought by franchisees. That difference is worth more than any brochure.

**Related:** [Item 3 — Litigation History](https://www.franchisegrade.com/tools/franchise-glossary#item-3) · [Arbitration](https://www.franchisegrade.com/tools/franchise-glossary#arbitration) · [Franchise Attorney](https://www.franchisegrade.com/tools/franchise-glossary#franchise-attorney)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#litigation-history*

### Cure Period

A cure period is the window you get to fix a breach before the franchisor can terminate — commonly 10 to 30 days, and sometimes zero for serious breaches.

**Also called:** Right to Cure

**Example.** You miss a royalty payment and receive a default notice giving ten days to pay. Pay inside the window and the default is cured; miss it and termination becomes available.

**Related:** [Default](https://www.franchisegrade.com/tools/franchise-glossary#default) · [Event of Default](https://www.franchisegrade.com/tools/franchise-glossary#event-of-default) · [Termination](https://www.franchisegrade.com/tools/franchise-glossary#termination)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#cure-period*

### Default

A default is any failure to meet an obligation in the franchise agreement — late royalties, missed standards, an unapproved supplier, or an unopened unit under a development schedule.

**Example.** Using a non-approved supplier for a core product is a default, even if the product is identical and cheaper.

**Related:** [Cure Period](https://www.franchisegrade.com/tools/franchise-glossary#cure-period) · [Event of Default](https://www.franchisegrade.com/tools/franchise-glossary#event-of-default) · [Termination](https://www.franchisegrade.com/tools/franchise-glossary#termination) · [Compliance](https://www.franchisegrade.com/tools/franchise-glossary#compliance)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#default*

### Event of Default

An event of default is one of the specific breaches your agreement names as triggering the franchisor's remedies, including termination.

**Example.** The agreement lists nine events of default: non-payment, under-reporting sales, failing two consecutive audits, losing your lease, bankruptcy, abandoning the unit, and three others.

**Related:** [Default](https://www.franchisegrade.com/tools/franchise-glossary#default) · [Cure Period](https://www.franchisegrade.com/tools/franchise-glossary#cure-period) · [Termination](https://www.franchisegrade.com/tools/franchise-glossary#termination)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#event-of-default*

### Termination

Termination is the franchisor ending the agreement before its term expires, normally after an uncured default. The brand rights stop immediately and the post-term obligations begin.

Termination is not the same as an agreement expiring or a franchisee choosing not to renew, even though all three show up as closures in Item 20. The distinction tells you whether owners are being removed or simply leaving.

**Example.** After three failed quality audits and an uncured default notice, a franchisor terminates. The owner must remove all signage, stop using the systems, and observe a two-year non-compete.

**Related:** [Non-Renewal](https://www.franchisegrade.com/tools/franchise-glossary#non-renewal) · [Expiration of Franchise Agreement](https://www.franchisegrade.com/tools/franchise-glossary#expiration-of-franchise-agreement) · [Cure Period](https://www.franchisegrade.com/tools/franchise-glossary#cure-period) · [Non-Compete Clause](https://www.franchisegrade.com/tools/franchise-glossary#non-compete-clause) · [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#termination*

### Non-Renewal

Non-renewal is the end of a term where one side chooses not to continue — usually the franchisee deciding not to sign on for another term.

**Example.** At the end of a ten-year term an owner declines to renew rather than fund the $180,000 remodel the renewal requires, and converts the site to an independent business where permitted.

**Related:** [Renewal](https://www.franchisegrade.com/tools/franchise-glossary#renewal) · [Termination](https://www.franchisegrade.com/tools/franchise-glossary#termination) · [Expiration of Franchise Agreement](https://www.franchisegrade.com/tools/franchise-glossary#expiration-of-franchise-agreement) · [Remodel Requirement](https://www.franchisegrade.com/tools/franchise-glossary#remodel-requirement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#non-renewal*

### Renewal

Renewal is signing on for another term at the end of your current one — usually conditional on being in good standing, paying a renewal fee, refreshing the location and signing the franchisor's current agreement.

**Also called:** Successor Term

The current agreement is the key phrase. You renew onto today's terms, which may carry a higher royalty and stricter standards than the deal you originally signed.

**Example.** A renewal costs $18,000, requires a $150,000 remodel and moves your royalty from 5% to the current 6.5%.

**Related:** [Successor Franchise Agreement](https://www.franchisegrade.com/tools/franchise-glossary#successor-franchise-agreement) · [Renewal Fee](https://www.franchisegrade.com/tools/franchise-glossary#renewal-fee) · [Remodel Requirement](https://www.franchisegrade.com/tools/franchise-glossary#remodel-requirement) · [Non-Renewal](https://www.franchisegrade.com/tools/franchise-glossary#non-renewal)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#renewal*

### Expiration of Franchise Agreement

Expiration is the natural end of the term on its stated date, with no fault by either side.

**Example.** A ten-year agreement signed on 1 June 2026 expires on 31 May 2036. What happens next depends entirely on the renewal terms in Item 17.

**Related:** [Renewal](https://www.franchisegrade.com/tools/franchise-glossary#renewal) · [Termination](https://www.franchisegrade.com/tools/franchise-glossary#termination) · [Initial Term](https://www.franchisegrade.com/tools/franchise-glossary#initial-term)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#expiration-of-franchise-agreement*

### Initial Term

The initial term is the first period of the franchise agreement, commonly five to twenty years, and it should be long enough to recover your investment.

**Example.** A restaurant with a $500,000 build-out on a ten-year lease and a five-year franchise term creates a mismatch: you would be renegotiating the brand terms with half the lease left to run.

**Related:** [Renewal](https://www.franchisegrade.com/tools/franchise-glossary#renewal) · [Expiration of Franchise Agreement](https://www.franchisegrade.com/tools/franchise-glossary#expiration-of-franchise-agreement) · [Payback Period](https://www.franchisegrade.com/tools/franchise-glossary#payback-period)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#initial-term*

### Transfer

A transfer is the sale or assignment of your franchise to someone else, and it almost always needs the franchisor's written approval plus a fee.

**Also called:** Assignment

The franchisor typically has the right to approve the buyer, require them to train, take a transfer fee, and in many systems to buy the unit itself on the same terms first.

**Example.** You agree to sell your unit for $340,000. The franchisor approves the buyer, charges a $15,000 transfer fee, requires the buyer to attend training, and requires you to sign a general release.

**Related:** [Right of First Refusal (ROFR)](https://www.franchisegrade.com/tools/franchise-glossary#right-of-first-refusal) · [Transfer Fee](https://www.franchisegrade.com/tools/franchise-glossary#transfer-fee) · [Franchise Resale](https://www.franchisegrade.com/tools/franchise-glossary#franchise-resale) · [General Release](https://www.franchisegrade.com/tools/franchise-glossary#general-release)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#transfer*

### Right of First Refusal (ROFR)

A right of first refusal lets the franchisor step into any sale of your unit and buy it on the same terms your buyer offered.

**Also called:** ROFR

**Example.** You produce a signed offer at $340,000. The franchisor has 30 days to match it and take the unit itself instead.

**Related:** [Transfer](https://www.franchisegrade.com/tools/franchise-glossary#transfer) · [Franchise Resale](https://www.franchisegrade.com/tools/franchise-glossary#franchise-resale) · [Reacquired Franchise](https://www.franchisegrade.com/tools/franchise-glossary#reacquired-franchise)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#right-of-first-refusal*

### Successor Franchise Agreement

A successor agreement is the new contract you sign when you renew — the franchisor's current form, not a continuation of your original terms.

**Example.** Your 2016 agreement had a 5% royalty and no technology fee. The 2026 successor agreement carries 6.5% plus $329 a month for the platform.

**Related:** [Renewal](https://www.franchisegrade.com/tools/franchise-glossary#renewal) · [Renewal Fee](https://www.franchisegrade.com/tools/franchise-glossary#renewal-fee) · [Franchise Agreement](https://www.franchisegrade.com/tools/franchise-glossary#franchise-agreement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#successor-franchise-agreement*

### General Release

A general release is a document giving up your right to bring claims against the franchisor, commonly required as a condition of renewal or transfer.

**Example.** To approve your sale, the franchisor requires a signed release covering all claims to date — including a territory dispute you had been documenting for two years.

**Related:** [Transfer](https://www.franchisegrade.com/tools/franchise-glossary#transfer) · [Renewal](https://www.franchisegrade.com/tools/franchise-glossary#renewal) · [Franchise Attorney](https://www.franchisegrade.com/tools/franchise-glossary#franchise-attorney)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#general-release*

### Franchise Attorney

A franchise attorney is a lawyer who specializes in franchise law and reviews the FDD and agreement on your behalf before you sign.

A general business lawyer will read the contract; a franchise lawyer will tell you how its terms compare with what other systems ask for, which is the part you cannot get anywhere else.

**Example.** For $2,500 to $5,000 an attorney reviews the FDD, flags the venue clause and the uncapped remodel obligation, and tells you which two of your six concerns are actually negotiable.

**Related:** [Franchise Disclosure Document (FDD)](https://www.franchisegrade.com/tools/franchise-glossary#franchise-disclosure-document) · [Franchise Agreement](https://www.franchisegrade.com/tools/franchise-glossary#franchise-agreement) · [Item 17 — Renewal, Termination, Transfer & Dispute Resolution](https://www.franchisegrade.com/tools/franchise-glossary#item-17) · [General Release](https://www.franchisegrade.com/tools/franchise-glossary#general-release)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchise-attorney*

### Trade Secret

A trade secret is commercially valuable information that is not public and is kept confidential — recipes, formulas, processes, supplier terms, margin models.

**Example.** The seasoning blend and the labor-scheduling model in the operations manual are trade secrets. You may use them while you are a franchisee and must stop when you are not.

**Related:** [Non-Disclosure Agreement (NDA)](https://www.franchisegrade.com/tools/franchise-glossary#non-disclosure-agreement) · [Operations Manual](https://www.franchisegrade.com/tools/franchise-glossary#operations-manual) · [Trademark](https://www.franchisegrade.com/tools/franchise-glossary#trademark)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#trade-secret*

### Trademark

A trademark is the legally protected brand identity — name, logo and slogans — that the franchisor licenses to you and that you may only use as the standards allow.

**Also called:** Marks, Service Mark

**Example.** You may put the logo on your building, your vans and your uniforms exactly as specified. You may not create your own version for a local promotion.

**Related:** [Trade Name](https://www.franchisegrade.com/tools/franchise-glossary#trade-name) · [License](https://www.franchisegrade.com/tools/franchise-glossary#license) · [Brand Standards](https://www.franchisegrade.com/tools/franchise-glossary#brand-standards)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#trademark*

### Trade Name

The trade name is the name customers know the business by — usually the most valuable asset in the entire system, because it is what generates walk-in demand.

**Example.** Your legal entity is Riverside Services LLC, but every sign, invoice and van carries the franchisor's trade name.

**Related:** [Trademark](https://www.franchisegrade.com/tools/franchise-glossary#trademark) · [Legal Name](https://www.franchisegrade.com/tools/franchise-glossary#legal-name)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#trade-name*

### Legal Name

The legal name is the registered entity that actually signs the franchise agreement and holds the licenses — distinct from the trade name on the door.

**Example.** Riverside Services LLC, doing business as a national home-services brand, holds the contractor license, the lease and the payroll accounts.

**Related:** [Trade Name](https://www.franchisegrade.com/tools/franchise-glossary#trade-name) · [Franchisee](https://www.franchisegrade.com/tools/franchise-glossary#franchisee)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#legal-name*

### Force Majeure

A force majeure clause excuses both sides from certain obligations during events beyond their control — natural disasters, war, government closures.

It rarely excuses payment. In most franchise agreements royalties keep accruing even when performance obligations are suspended.

**Example.** A hurricane closes your location for three weeks. Force majeure excuses the required operating hours; it does not usually excuse the royalty.

**Related:** [Default](https://www.franchisegrade.com/tools/franchise-glossary#default) · [Franchise Agreement](https://www.franchisegrade.com/tools/franchise-glossary#franchise-agreement) · [Insurance Requirements](https://www.franchisegrade.com/tools/franchise-glossary#insurance-requirements)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#force-majeure*

### Tying

Tying is requiring you to buy one product as a condition of getting another. It is lawful in franchising when justified by quality control, and unlawful when it exists only to extract a margin.

**Example.** Requiring the franchisor's proprietary sauce is normally defensible. Requiring you to buy generic paper towels from the franchisor at twice market price is the kind of arrangement that gets challenged.

**Related:** [Required Supplier](https://www.franchisegrade.com/tools/franchise-glossary#required-supplier) · [Sherman Antitrust Act](https://www.franchisegrade.com/tools/franchise-glossary#sherman-antitrust-act) · [Rebates & Supplier Allowances](https://www.franchisegrade.com/tools/franchise-glossary#rebates-and-supplier-allowances)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#tying*

### Sherman Antitrust Act

The Sherman Act is the federal law against restraint of trade. In franchising it shapes what franchisors may do about price fixing, market allocation and tying arrangements.

**Example.** A franchisor can set a maximum price for a national promotion but generally cannot dictate the minimum price you charge for every item.

**Related:** [Tying](https://www.franchisegrade.com/tools/franchise-glossary#tying) · [Restrictions on Goods & Services](https://www.franchisegrade.com/tools/franchise-glossary#restrictions-on-goods-and-services) · [Franchise Attorney](https://www.franchisegrade.com/tools/franchise-glossary#franchise-attorney)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#sherman-antitrust-act*

### Restrictions on Goods & Services

These are the limits on what you may sell and where you may buy it — the menu you must offer, the products you may not add, and the suppliers you must use.

**Example.** Item 16 says you may sell only approved menu items. Adding a local speciality coffee, however popular, requires written approval.

**Related:** [Required Supplier](https://www.franchisegrade.com/tools/franchise-glossary#required-supplier) · [Approved Supplier](https://www.franchisegrade.com/tools/franchise-glossary#approved-supplier) · [Brand Standards](https://www.franchisegrade.com/tools/franchise-glossary#brand-standards) · [Tying](https://www.franchisegrade.com/tools/franchise-glossary#tying)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#restrictions-on-goods-and-services*

### State Franchise Relationship Laws

Around twenty states have relationship laws that limit how a franchisor may terminate, refuse to renew or transfer a franchise, regardless of what the agreement says.

**Example.** A state relationship law requires good cause and 90 days' notice before termination, overriding a contract clause allowing 30 days.

**Related:** [Termination](https://www.franchisegrade.com/tools/franchise-glossary#termination) · [Non-Renewal](https://www.franchisegrade.com/tools/franchise-glossary#non-renewal) · [Arbitration](https://www.franchisegrade.com/tools/franchise-glossary#arbitration) · [Franchise Attorney](https://www.franchisegrade.com/tools/franchise-glossary#franchise-attorney)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#state-franchise-relationship-laws*

## Fees & Money

Every fee you pay to buy in and stay in, plus the accounting terms you need to read a franchise's numbers.

### Initial Franchise Fee

The initial franchise fee is the one-time payment for the right to join the system — the entry ticket, not the cost of opening.

**Also called:** Franchise Fee, IFF

It buys the license, the initial training and the right to a territory. It does not build the store, buy the equipment or fund the first payroll. Typical ranges run from about $20,000 for service and mobile models to $75,000 or more for large-format concepts.

**Example.** A $45,000 franchise fee on a project with a $310,000 total investment. The fee is 15% of what you actually need to open.

**Related:** [Total Initial Investment](https://www.franchisegrade.com/tools/franchise-glossary#total-initial-investment) · [Item 5 — Initial Fees](https://www.franchisegrade.com/tools/franchise-glossary#item-5) · [Item 7 — Estimated Initial Investment](https://www.franchisegrade.com/tools/franchise-glossary#item-7) · [Multi-Unit Discount](https://www.franchisegrade.com/tools/franchise-glossary#multi-unit-discount) · [Veteran Discount](https://www.franchisegrade.com/tools/franchise-glossary#veteran-discount)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#initial-franchise-fee*

### Royalty

The royalty is the ongoing fee you pay the franchisor for continuing use of the brand and system — usually a percentage of gross sales, paid weekly or monthly for the life of the agreement.

**Also called:** Royalty Fee

It comes off the top line, before your costs, which is why a small difference in the rate is large in profit terms. Some systems use a fixed monthly amount instead, which favors high-volume units.

**Example.** At 6% of gross sales on $800,000 of revenue, the royalty is $48,000 a year — paid whether or not the unit made a profit.

**Related:** [Royalty Base](https://www.franchisegrade.com/tools/franchise-glossary#royalty-base) · [Advertising Fee](https://www.franchisegrade.com/tools/franchise-glossary#advertising-fee) · [Item 6 — Other Fees](https://www.franchisegrade.com/tools/franchise-glossary#item-6) · [Minimum Royalty](https://www.franchisegrade.com/tools/franchise-glossary#minimum-royalty) · [Gross Sales](https://www.franchisegrade.com/tools/franchise-glossary#gross-sales)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#royalty*

### Royalty Base

The royalty base is the exact revenue figure the royalty percentage is applied to — and the definition, not the percentage, decides what you actually pay.

**Example.** Two brands both charge 6%. One charges it on gross sales including delivery-app revenue at menu price; the other on net revenue after the app's 25% commission. On $200,000 of delivery sales that is a $3,000 annual difference.

**Related:** [Royalty](https://www.franchisegrade.com/tools/franchise-glossary#royalty) · [Gross Sales](https://www.franchisegrade.com/tools/franchise-glossary#gross-sales) · [Item 6 — Other Fees](https://www.franchisegrade.com/tools/franchise-glossary#item-6)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#royalty-base*

### Gross Sales

Gross sales are all the revenue the business takes in before any deductions for taxes, discounts, refunds or expenses. It is the most common royalty base.

**Also called:** Gross Revenue, Top Line

**Example.** A unit rings $845,000 through the till. After $22,000 of refunds and promotional discounts, net revenue is $823,000 — but if the royalty is on gross sales, it is calculated on the $845,000.

**Related:** [Royalty Base](https://www.franchisegrade.com/tools/franchise-glossary#royalty-base) · [Royalty](https://www.franchisegrade.com/tools/franchise-glossary#royalty) · [Average Unit Volume (AUV)](https://www.franchisegrade.com/tools/franchise-glossary#average-unit-volume) · [System-Wide Sales](https://www.franchisegrade.com/tools/franchise-glossary#system-wide-sales)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#gross-sales*

### Advertising Fee

The advertising fee is a recurring contribution — commonly 1% to 4% of sales — paid into a fund the franchisor spends on marketing for the brand.

**Also called:** Marketing Fee, Brand Fund Contribution

It is separate from the royalty and separate from any local advertising minimum you must spend yourself. Well-run funds publish an annual accounting of where the money went.

**Example.** 2% of $800,000 is $16,000 a year into the national fund, plus a further 1% you must spend locally in your own market.

**Related:** [National Advertising Fund](https://www.franchisegrade.com/tools/franchise-glossary#national-advertising-fund) · [Local Advertising Requirement](https://www.franchisegrade.com/tools/franchise-glossary#local-advertising-requirement) · [Advertising Cooperative](https://www.franchisegrade.com/tools/franchise-glossary#advertising-cooperative) · [Item 6 — Other Fees](https://www.franchisegrade.com/tools/franchise-glossary#item-6)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#advertising-fee*

### National Advertising Fund

The national advertising fund is the pooled account holding every franchisee's advertising contributions, spent by the franchisor on system-wide marketing.

**Also called:** Brand Fund, Ad Fund

**Example.** 400 units contributing 2% of an $800,000 average produce a $6.4m fund, spent on national digital, brand creative and a loyalty app.

**Related:** [Advertising Fee](https://www.franchisegrade.com/tools/franchise-glossary#advertising-fee) · [Advertising Cooperative](https://www.franchisegrade.com/tools/franchise-glossary#advertising-cooperative) · [Local Advertising Requirement](https://www.franchisegrade.com/tools/franchise-glossary#local-advertising-requirement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#national-advertising-fund*

### Advertising Cooperative

An advertising cooperative is a group of franchisees in one market who pool money for regional advertising, usually with the spend decided by a vote of the members.

**Also called:** Ad Co-op, DMA Co-op

**Example.** Nine owners in a metro area each contribute 1% of sales to a co-op that buys regional radio and outdoor advertising the national fund does not cover.

**Related:** [Advertising Fee](https://www.franchisegrade.com/tools/franchise-glossary#advertising-fee) · [National Advertising Fund](https://www.franchisegrade.com/tools/franchise-glossary#national-advertising-fund) · [Local Advertising Requirement](https://www.franchisegrade.com/tools/franchise-glossary#local-advertising-requirement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#advertising-cooperative*

### Local Advertising Requirement

A local advertising requirement is a minimum you must spend promoting your own location, on top of what you contribute to the national fund.

**Also called:** Local Marketing Minimum

**Example.** A 1% local minimum on $800,000 means $8,000 a year you must document spending in your own market, with receipts available on audit.

**Related:** [Advertising Fee](https://www.franchisegrade.com/tools/franchise-glossary#advertising-fee) · [Advertising Cooperative](https://www.franchisegrade.com/tools/franchise-glossary#advertising-cooperative) · [Grand Opening Cost](https://www.franchisegrade.com/tools/franchise-glossary#grand-opening-cost)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#local-advertising-requirement*

### Technology Fee

A technology fee covers the systems you are required to use — point of sale, scheduling, CRM, reporting, the customer app — usually charged as a fixed monthly amount.

**Also called:** Software Fee, Platform Fee

Because it is fixed rather than a percentage, it hits low-volume units hardest. It has also been the fastest-growing fee category in franchising for a decade.

**Example.** $329 a month is $3,948 a year. On a unit doing $400,000 that is roughly 1% of sales; on one doing $1.2m it is 0.3%.

**Related:** [Item 6 — Other Fees](https://www.franchisegrade.com/tools/franchise-glossary#item-6) · [POS System](https://www.franchisegrade.com/tools/franchise-glossary#pos-system) · [Royalty](https://www.franchisegrade.com/tools/franchise-glossary#royalty)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#technology-fee*

### Transfer Fee

A transfer fee is what the franchisor charges to approve the sale of your franchise to a new owner, typically a fixed amount or a share of the initial fee.

**Example.** A $15,000 transfer fee on a $340,000 sale, plus the buyer's training costs, comes off your proceeds at closing.

**Related:** [Transfer](https://www.franchisegrade.com/tools/franchise-glossary#transfer) · [Franchise Resale](https://www.franchisegrade.com/tools/franchise-glossary#franchise-resale) · [Right of First Refusal (ROFR)](https://www.franchisegrade.com/tools/franchise-glossary#right-of-first-refusal)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#transfer-fee*

### Renewal Fee

A renewal fee is paid to extend into a new term, usually a fraction of the current initial franchise fee.

**Example.** A renewal fee of 25% of the current $52,000 franchise fee is $13,000 — before the remodel the renewal also requires.

**Related:** [Renewal](https://www.franchisegrade.com/tools/franchise-glossary#renewal) · [Successor Franchise Agreement](https://www.franchisegrade.com/tools/franchise-glossary#successor-franchise-agreement) · [Remodel Requirement](https://www.franchisegrade.com/tools/franchise-glossary#remodel-requirement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#renewal-fee*

### Territory Fee

A territory fee buys additional or larger protected geography, either at signing or later when you want to expand.

**Example.** Your base territory covers 40,000 residents. A second adjacent zone costs a $7,500 territory fee and comes with an obligation to open there within 24 months.

**Related:** [Protected Territory](https://www.franchisegrade.com/tools/franchise-glossary#protected-territory) · [Area Development Agreement](https://www.franchisegrade.com/tools/franchise-glossary#area-development-agreement) · [Item 5 — Initial Fees](https://www.franchisegrade.com/tools/franchise-glossary#item-5)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#territory-fee*

### Training Fee

A training fee covers instruction beyond what the initial franchise fee includes — extra attendees, replacement managers, or refresher courses.

**Example.** Initial training covers two people. Your third manager costs $1,500 plus travel, and every replacement manager after a resignation costs the same again.

**Related:** [Initial Training](https://www.franchisegrade.com/tools/franchise-glossary#initial-training) · [Continuous Training](https://www.franchisegrade.com/tools/franchise-glossary#continuous-training) · [Item 11 — Franchisor Assistance & Training](https://www.franchisegrade.com/tools/franchise-glossary#item-11)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#training-fee*

### Late Fee

A late fee is charged when a royalty, advertising contribution or other payment is not received on time, often with interest on top.

**Example.** A weekly ACH draw fails because of a short balance. The agreement adds a $150 late fee plus 1.5% monthly interest, and a repeated failure becomes a default.

**Related:** [ACH (Automated Clearing House)](https://www.franchisegrade.com/tools/franchise-glossary#ach) · [Default](https://www.franchisegrade.com/tools/franchise-glossary#default) · [Item 6 — Other Fees](https://www.franchisegrade.com/tools/franchise-glossary#item-6)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#late-fee*

### ACH (Automated Clearing House)

ACH is the bank-to-bank transfer system most franchisors use to draw royalties and fees automatically from your operating account, usually weekly.

**Also called:** ACH, Auto-Draft

**Example.** Every Tuesday the franchisor draws 6% of the prior week's sales plus the 2% advertising contribution directly from your account, based on the figures your POS reported.

**Related:** [Royalty](https://www.franchisegrade.com/tools/franchise-glossary#royalty) · [Late Fee](https://www.franchisegrade.com/tools/franchise-glossary#late-fee) · [Cash Flow](https://www.franchisegrade.com/tools/franchise-glossary#cash-flow)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#ach*

### Management Service Fee (MSF)

A management service fee is an ongoing charge for franchisor-provided back-office services — bookkeeping, payroll, call handling or central invoicing — typically based on turnover.

**Also called:** MSF

**Example.** A commercial-cleaning franchisor bills customers centrally, keeps a 10% management service fee, and remits the balance to you.

**Related:** [Royalty](https://www.franchisegrade.com/tools/franchise-glossary#royalty) · [Item 6 — Other Fees](https://www.franchisegrade.com/tools/franchise-glossary#item-6)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#management-service-fee*

### Minimum Royalty

A minimum royalty is a floor payment you owe regardless of sales, so a slow ramp-up or a bad year does not reduce what the franchisor collects.

**Also called:** Minimum Performance Requirement

**Example.** Your agreement sets a $2,000 monthly minimum. At 6% that assumes about $400,000 in annual sales — so a unit doing $250,000 pays as if it did $400,000.

**Related:** [Royalty](https://www.franchisegrade.com/tools/franchise-glossary#royalty) · [Breakeven](https://www.franchisegrade.com/tools/franchise-glossary#breakeven) · [Item 6 — Other Fees](https://www.franchisegrade.com/tools/franchise-glossary#item-6)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#minimum-royalty*

### Grand Opening Cost

The grand opening cost is the required launch marketing spend for your first weeks of trading, and it is usually mandatory rather than optional.

**Also called:** Grand Opening Marketing

**Example.** A required $12,000 grand opening program covering local digital, direct mail to 20,000 households, and an opening-weekend promotion.

**Related:** [Market Introduction Program](https://www.franchisegrade.com/tools/franchise-glossary#market-introduction-program) · [Local Advertising Requirement](https://www.franchisegrade.com/tools/franchise-glossary#local-advertising-requirement) · [Item 7 — Estimated Initial Investment](https://www.franchisegrade.com/tools/franchise-glossary#item-7)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#grand-opening-cost*

### Total Initial Investment

The total initial investment is everything it takes to open and reach the franchisor's stated early operating point — the franchise fee, the build, the equipment, the inventory, the deposits and the working capital.

**Also called:** Total Investment, Initial Investment

**Example.** Item 7 puts the range at $310,000 to $565,000. Planning at the top of the range plus a further three months of working capital is the realistic budget.

**Related:** [Item 7 — Estimated Initial Investment](https://www.franchisegrade.com/tools/franchise-glossary#item-7) · [Working Capital](https://www.franchisegrade.com/tools/franchise-glossary#working-capital) · [Build-Out Cost](https://www.franchisegrade.com/tools/franchise-glossary#build-out-cost) · [Capital Required](https://www.franchisegrade.com/tools/franchise-glossary#capital-required) · [Initial Franchise Fee](https://www.franchisegrade.com/tools/franchise-glossary#initial-franchise-fee)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#total-initial-investment*

### Working Capital

Working capital is the cash you hold to run the business before it funds itself — payroll, rent, inventory and your own living costs through the ramp-up.

It is the single most common thing buyers under-fund, because Item 7 usually only covers the first three months and most units take longer than that to reach breakeven.

**Example.** Item 7 shows $30,000 of additional funds for three months. Owners report reaching breakeven in month eight — so the realistic requirement is closer to $80,000.

**Related:** [Item 7 — Estimated Initial Investment](https://www.franchisegrade.com/tools/franchise-glossary#item-7) · [Breakeven](https://www.franchisegrade.com/tools/franchise-glossary#breakeven) · [Cash Flow](https://www.franchisegrade.com/tools/franchise-glossary#cash-flow) · [Capital Required](https://www.franchisegrade.com/tools/franchise-glossary#capital-required) · [Liquid Capital](https://www.franchisegrade.com/tools/franchise-glossary#liquid-capital)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#working-capital*

### Build-Out Cost

Build-out cost is what it takes to turn an empty commercial space into a compliant location — construction, fit-out, fixtures, signage, permits and design fees.

**Also called:** Construction Cost, Leasehold Improvements

It is the largest and most volatile line in Item 7, because it depends on local labor rates, the condition of the space, and whether the landlord contributes.

**Example.** A $340,000 build-out on a 2,200 square foot restaurant, reduced to $250,000 net by a $90,000 tenant improvement allowance negotiated into the lease.

**Related:** [Item 7 — Estimated Initial Investment](https://www.franchisegrade.com/tools/franchise-glossary#item-7) · [Build-Out](https://www.franchisegrade.com/tools/franchise-glossary#build-out) · [Turnkey](https://www.franchisegrade.com/tools/franchise-glossary#turnkey) · [FF&E (Furniture, Fixtures & Equipment)](https://www.franchisegrade.com/tools/franchise-glossary#ffe) · [Footprint](https://www.franchisegrade.com/tools/franchise-glossary#footprint)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#build-out-cost*

### FF&E (Furniture, Fixtures & Equipment)

FF&E is the tangible kit a location needs to trade — ovens, chairs, shelving, computers, vehicles — usually bought to the franchisor's specification.

**Also called:** FF&E

**Example.** $120,000 of FF&E financed over five years through an equipment lender, keeping cash free for working capital.

**Related:** [Build-Out Cost](https://www.franchisegrade.com/tools/franchise-glossary#build-out-cost) · [Equipment Financing](https://www.franchisegrade.com/tools/franchise-glossary#equipment-financing) · [Depreciation](https://www.franchisegrade.com/tools/franchise-glossary#depreciation) · [Item 7 — Estimated Initial Investment](https://www.franchisegrade.com/tools/franchise-glossary#item-7)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#ffe*

### Capital Required

Capital required is the total funding you need to open and operate until the business supports itself — investment plus a genuine reserve, not just the opening cost.

**Example.** $565,000 to open plus $80,000 of reserve is $645,000 of capital required, financed as $200,000 of your own cash and a $445,000 SBA loan.

**Related:** [Total Initial Investment](https://www.franchisegrade.com/tools/franchise-glossary#total-initial-investment) · [Working Capital](https://www.franchisegrade.com/tools/franchise-glossary#working-capital) · [Liquid Capital](https://www.franchisegrade.com/tools/franchise-glossary#liquid-capital) · [Net Worth](https://www.franchisegrade.com/tools/franchise-glossary#net-worth)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#capital-required*

### Liquid Capital

Liquid capital is money you can access within days — cash, savings, marketable securities. Franchisors and lenders both set a minimum, and home equity does not count.

**Also called:** Liquid Assets, Cash Requirement

**Example.** A brand requires $150,000 liquid and $500,000 net worth. You have $90,000 in cash and $400,000 of home equity, so you meet the net-worth test but not the liquidity test.

**Related:** [Net Worth](https://www.franchisegrade.com/tools/franchise-glossary#net-worth) · [Working Capital](https://www.franchisegrade.com/tools/franchise-glossary#working-capital) · [ROBS (Rollovers as Business Start-ups)](https://www.franchisegrade.com/tools/franchise-glossary#robs) · [SBA Loan](https://www.franchisegrade.com/tools/franchise-glossary#sba-loan)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#liquid-capital*

### Net Worth

Net worth is everything you own minus everything you owe, and franchisors use it as a proxy for whether you can absorb a slow start.

**Example.** A $700,000 house with a $300,000 mortgage, $120,000 in retirement accounts and $60,000 in cash, against $25,000 of other debt, gives a net worth of $555,000.

**Related:** [Liquid Capital](https://www.franchisegrade.com/tools/franchise-glossary#liquid-capital) · [Balance Sheet](https://www.franchisegrade.com/tools/franchise-glossary#balance-sheet) · [Owner's Equity](https://www.franchisegrade.com/tools/franchise-glossary#owners-equity) · [Capital Required](https://www.franchisegrade.com/tools/franchise-glossary#capital-required)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#net-worth*

### Veteran Discount

Many franchisors offer honourably discharged military veterans a reduced initial franchise fee, commonly 10% to 25%, and some waive it entirely.

**Also called:** VetFran

**Example.** A 20% veteran discount takes a $45,000 franchise fee to $36,000. On a multi-unit deal that difference compounds across every unit.

**Related:** [Initial Franchise Fee](https://www.franchisegrade.com/tools/franchise-glossary#initial-franchise-fee) · [Multi-Unit Discount](https://www.franchisegrade.com/tools/franchise-glossary#multi-unit-discount) · [International Franchise Association (IFA)](https://www.franchisegrade.com/tools/franchise-glossary#ifa)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#veteran-discount*

### Multi-Unit Discount

A multi-unit discount reduces the franchise fee on additional units, either committed up front in a development agreement or bought later as an existing owner in good standing.

**Also called:** Discount for Multiple Outlets

**Example.** The first unit costs the full $45,000. Units two through five cost $22,500 each under a development agreement — a $90,000 saving in exchange for a binding opening schedule.

**Related:** [Area Development Agreement](https://www.franchisegrade.com/tools/franchise-glossary#area-development-agreement) · [Initial Franchise Fee](https://www.franchisegrade.com/tools/franchise-glossary#initial-franchise-fee) · [Development Schedule](https://www.franchisegrade.com/tools/franchise-glossary#development-schedule)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#multi-unit-discount*

### Rebates & Supplier Allowances

Rebates are payments suppliers make to the franchisor based on what franchisees buy. Whether they are shared with owners, and how they are disclosed, varies widely.

**Also called:** Vendor Rebates

**Example.** A franchisor receives 3% back from the approved food distributor on all system purchases. In one system that money funds the advertising fund; in another it is franchisor revenue.

**Related:** [Required Supplier](https://www.franchisegrade.com/tools/franchise-glossary#required-supplier) · [Approved Supplier](https://www.franchisegrade.com/tools/franchise-glossary#approved-supplier) · [Purchasing Cooperative](https://www.franchisegrade.com/tools/franchise-glossary#purchasing-cooperative) · [Tying](https://www.franchisegrade.com/tools/franchise-glossary#tying)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#rebates-and-supplier-allowances*

### Breakeven

Breakeven is the revenue level at which the business covers all its costs — including your royalty, your rent and your debt service — with nothing left over.

**Example.** With $18,000 of monthly fixed costs and a 62% gross margin, breakeven is about $29,000 of monthly sales. Below that you are funding the business from reserves.

**Related:** [Working Capital](https://www.franchisegrade.com/tools/franchise-glossary#working-capital) · [Cash Flow](https://www.franchisegrade.com/tools/franchise-glossary#cash-flow) · [Minimum Royalty](https://www.franchisegrade.com/tools/franchise-glossary#minimum-royalty) · [Gross Margin](https://www.franchisegrade.com/tools/franchise-glossary#gross-margin) · [Payback Period](https://www.franchisegrade.com/tools/franchise-glossary#payback-period)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#breakeven*

### EBITDA

EBITDA is earnings before interest, tax, depreciation and amortization — a measure of operating performance that strips out financing and accounting choices so two businesses can be compared.

**Also called:** EBITDA

In franchising it is mainly used to value units for resale, often as a multiple. It is not the same as your take-home: it excludes debt service and, in owner-operated businesses, is usually quoted before a market-rate salary for you.

**Example.** A unit with $845,000 in revenue and $118,000 of EBITDA might trade at a 3x multiple, or roughly $354,000 — before the buyer's loan payments.

**Related:** [Profit & Loss Statement (P&L)](https://www.franchisegrade.com/tools/franchise-glossary#profit-and-loss-statement) · [Cash Flow](https://www.franchisegrade.com/tools/franchise-glossary#cash-flow) · [Business Appraisal](https://www.franchisegrade.com/tools/franchise-glossary#business-appraisal) · [Return on Investment (ROI)](https://www.franchisegrade.com/tools/franchise-glossary#return-on-investment)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#ebitda*

### Profit & Loss Statement (P&L)

A P&L shows revenue, costs and profit over a period. In franchise diligence, a real P&L from a current owner is worth more than any projection.

**Also called:** P&L, Income Statement

**Example.** A franchisee shares a trailing twelve-month P&L: $845,000 revenue, 31% cost of goods, 28% labor, 8% occupancy, 9% total franchise fees, leaving 12% before debt service.

**Related:** [Balance Sheet](https://www.franchisegrade.com/tools/franchise-glossary#balance-sheet) · [Cash Flow](https://www.franchisegrade.com/tools/franchise-glossary#cash-flow) · [EBITDA](https://www.franchisegrade.com/tools/franchise-glossary#ebitda) · [Item 19 — Financial Performance Representation](https://www.franchisegrade.com/tools/franchise-glossary#item-19) · [Pro Forma](https://www.franchisegrade.com/tools/franchise-glossary#pro-forma)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#profit-and-loss-statement*

### Balance Sheet

A balance sheet is a snapshot of what a business owns, what it owes and what is left for the owner at a single point in time.

**Example.** Assets of $410,000 (equipment, inventory, cash) against liabilities of $290,000 (loan, payables) leaves $120,000 of owner's equity.

**Related:** [Profit & Loss Statement (P&L)](https://www.franchisegrade.com/tools/franchise-glossary#profit-and-loss-statement) · [Owner's Equity](https://www.franchisegrade.com/tools/franchise-glossary#owners-equity) · [Assets](https://www.franchisegrade.com/tools/franchise-glossary#assets) · [Item 21 — Financial Statements](https://www.franchisegrade.com/tools/franchise-glossary#item-21)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#balance-sheet*

### Assets

Assets are what the business owns and can use or sell — equipment, inventory, cash, receivables, vehicles, and intangibles like the franchise rights themselves.

**Example.** Your assets are two fitted vans, $18,000 of inventory, $26,000 in the bank, $31,000 owed by commercial customers, and the value of the franchise agreement.

**Related:** [Balance Sheet](https://www.franchisegrade.com/tools/franchise-glossary#balance-sheet) · [Collateral](https://www.franchisegrade.com/tools/franchise-glossary#collateral) · [FF&E (Furniture, Fixtures & Equipment)](https://www.franchisegrade.com/tools/franchise-glossary#ffe) · [Owner's Equity](https://www.franchisegrade.com/tools/franchise-glossary#owners-equity)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#assets*

### Owner's Equity

Owner's equity is what would be left for you if the business sold its assets and paid every debt: assets minus liabilities.

**Also called:** Equity, Book Value

**Example.** Four years in, $410,000 of assets less $290,000 of debt leaves $120,000 of equity — the accounting value you have built, which is separate from what a buyer would pay.

**Related:** [Balance Sheet](https://www.franchisegrade.com/tools/franchise-glossary#balance-sheet) · [Net Worth](https://www.franchisegrade.com/tools/franchise-glossary#net-worth) · [Business Appraisal](https://www.franchisegrade.com/tools/franchise-glossary#business-appraisal)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#owners-equity*

### Pro Forma

A pro forma is a forward-looking financial model of how the business might perform. It is an assumption set, not evidence.

**Also called:** Projection, Financial Model

Franchisors are limited in what they may project outside Item 19, so the pro forma is usually yours to build — which is better anyway, because you can use your own rent, wages and ramp-up.

**Example.** You build a three-year pro forma using the franchisor's Item 19 revenue, your actual quoted rent, local wage rates and a nine-month ramp — and it produces a very different answer than the sales deck.

**Related:** [Item 19 — Financial Performance Representation](https://www.franchisegrade.com/tools/franchise-glossary#item-19) · [Earnings Claim](https://www.franchisegrade.com/tools/franchise-glossary#earnings-claim) · [Breakeven](https://www.franchisegrade.com/tools/franchise-glossary#breakeven) · [Cash Flow](https://www.franchisegrade.com/tools/franchise-glossary#cash-flow) · [Profit & Loss Statement (P&L)](https://www.franchisegrade.com/tools/franchise-glossary#profit-and-loss-statement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#pro-forma*

### Cash Flow

Cash flow is the actual money moving in and out of the business each period. A profitable business with bad cash flow still fails.

**Example.** A commercial-services unit invoices $60,000 in a month but collects on 45-day terms, while payroll runs weekly. Profitable on paper, short of cash in practice.

**Related:** [Working Capital](https://www.franchisegrade.com/tools/franchise-glossary#working-capital) · [Breakeven](https://www.franchisegrade.com/tools/franchise-glossary#breakeven) · [ACH (Automated Clearing House)](https://www.franchisegrade.com/tools/franchise-glossary#ach) · [Profit & Loss Statement (P&L)](https://www.franchisegrade.com/tools/franchise-glossary#profit-and-loss-statement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#cash-flow*

### Return on Investment (ROI)

ROI expresses annual return as a percentage of what you put in, and lets you compare a franchise against any other use of the same money.

**Also called:** ROI

**Example.** $200,000 of your own cash producing $56,000 of annual owner earnings is a 28% cash-on-cash return — before you value your own labor.

**Related:** [Payback Period](https://www.franchisegrade.com/tools/franchise-glossary#payback-period) · [EBITDA](https://www.franchisegrade.com/tools/franchise-glossary#ebitda) · [Owner's Equity](https://www.franchisegrade.com/tools/franchise-glossary#owners-equity) · [Pro Forma](https://www.franchisegrade.com/tools/franchise-glossary#pro-forma)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#return-on-investment*

### Payback Period

The payback period is how long it takes for the business's cash generation to return your original investment.

**Example.** A $310,000 investment producing $78,000 a year of free cash pays back in about four years — which needs to sit comfortably inside your franchise term and your lease.

**Related:** [Return on Investment (ROI)](https://www.franchisegrade.com/tools/franchise-glossary#return-on-investment) · [Breakeven](https://www.franchisegrade.com/tools/franchise-glossary#breakeven) · [Initial Term](https://www.franchisegrade.com/tools/franchise-glossary#initial-term)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#payback-period*

### Amortization

Amortization is repaying a loan in regular installments of principal and interest, and in accounting also means writing off an intangible asset over time.

**Example.** A $445,000 SBA loan amortized over ten years at 10.5% costs about $6,000 a month, every month, regardless of what the unit sells.

**Related:** [SBA Loan](https://www.franchisegrade.com/tools/franchise-glossary#sba-loan) · [Depreciation](https://www.franchisegrade.com/tools/franchise-glossary#depreciation) · [Cash Flow](https://www.franchisegrade.com/tools/franchise-glossary#cash-flow) · [Debt Service Coverage Ratio (DSCR)](https://www.franchisegrade.com/tools/franchise-glossary#debt-service-coverage-ratio)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#amortization*

### Depreciation

Depreciation spreads the cost of physical assets across their useful life, reducing taxable profit without reducing cash.

**Example.** $120,000 of equipment depreciated over seven years reduces reported profit by about $17,000 a year while the cash left the business at purchase.

**Related:** [FF&E (Furniture, Fixtures & Equipment)](https://www.franchisegrade.com/tools/franchise-glossary#ffe) · [EBITDA](https://www.franchisegrade.com/tools/franchise-glossary#ebitda) · [Profit & Loss Statement (P&L)](https://www.franchisegrade.com/tools/franchise-glossary#profit-and-loss-statement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#depreciation*

### Cost of Goods Sold (COGS)

COGS is the direct cost of what you sell — ingredients, materials, product. In food franchising it is usually the largest controllable line after labor.

**Also called:** COGS, Food Cost

**Example.** 31% food cost on $845,000 of sales is $262,000. A two-point improvement through waste control is $17,000 of profit.

**Related:** [Gross Margin](https://www.franchisegrade.com/tools/franchise-glossary#gross-margin) · [Required Supplier](https://www.franchisegrade.com/tools/franchise-glossary#required-supplier) · [Profit & Loss Statement (P&L)](https://www.franchisegrade.com/tools/franchise-glossary#profit-and-loss-statement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#cost-of-goods-sold*

### Gross Margin

Gross margin is revenue minus the direct cost of delivering it, expressed as a percentage — what is left to cover rent, fees, overheads and profit.

**Example.** A service franchise at 68% gross margin has $0.68 of every dollar available for overheads and fees; a food franchise at 30% has $0.30.

**Related:** [Cost of Goods Sold (COGS)](https://www.franchisegrade.com/tools/franchise-glossary#cost-of-goods-sold) · [Breakeven](https://www.franchisegrade.com/tools/franchise-glossary#breakeven) · [Profit & Loss Statement (P&L)](https://www.franchisegrade.com/tools/franchise-glossary#profit-and-loss-statement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#gross-margin*

### Average Unit Volume (AUV)

AUV is the average annual revenue of a location in the system. It is the headline number in most Item 19 disclosures — and averages hide the spread.

**Also called:** AUV

The useful questions are how many units are in the average, how many beat it, and what the bottom quartile does. A mean pulled up by a handful of flagship units describes almost nobody.

**Example.** An AUV of $842,000 across 84 units, where only 31 units exceed it, tells you the distribution is skewed and the median is lower.

**Related:** [Item 19 — Financial Performance Representation](https://www.franchisegrade.com/tools/franchise-glossary#item-19) · [Gross Sales](https://www.franchisegrade.com/tools/franchise-glossary#gross-sales) · [Same-Store Sales](https://www.franchisegrade.com/tools/franchise-glossary#same-store-sales) · [System-Wide Sales](https://www.franchisegrade.com/tools/franchise-glossary#system-wide-sales)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#average-unit-volume*

### Same-Store Sales

Same-store sales compare revenue at locations open for the whole of both periods, stripping out the effect of new openings.

**Also called:** Comparable Sales, Comps

It is the cleanest read on whether the concept is getting stronger or weaker, because total system sales can rise on new units alone while every existing owner declines.

**Example.** A system reports 14% growth in total sales but negative 3% same-store sales. It is growing by opening units, not by improving them.

**Related:** [System-Wide Sales](https://www.franchisegrade.com/tools/franchise-glossary#system-wide-sales) · [Average Unit Volume (AUV)](https://www.franchisegrade.com/tools/franchise-glossary#average-unit-volume) · [Unit Growth](https://www.franchisegrade.com/tools/franchise-glossary#unit-growth)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#same-store-sales*

### System-Wide Sales

System-wide sales are the combined revenue of every location in the network, franchised and company-owned.

**Example.** 300 units averaging $842,000 produce about $253m in system-wide sales — a number that says a lot about the brand and nothing about one unit's profitability.

**Related:** [Same-Store Sales](https://www.franchisegrade.com/tools/franchise-glossary#same-store-sales) · [Average Unit Volume (AUV)](https://www.franchisegrade.com/tools/franchise-glossary#average-unit-volume) · [Franchise System](https://www.franchisegrade.com/tools/franchise-glossary#franchise-system)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#system-wide-sales*

### Business Appraisal

A business appraisal is a professional estimate of what a business is worth, used in resales, financing, partner buyouts and disputes.

**Also called:** Business Valuation

**Example.** Before selling, an appraiser values the unit at 3.2x adjusted EBITDA, giving $378,000 — a defensible number to negotiate against rather than an asking price.

**Related:** [EBITDA](https://www.franchisegrade.com/tools/franchise-glossary#ebitda) · [Franchise Resale](https://www.franchisegrade.com/tools/franchise-glossary#franchise-resale) · [Fair Market Value](https://www.franchisegrade.com/tools/franchise-glossary#fair-market-value) · [Owner's Equity](https://www.franchisegrade.com/tools/franchise-glossary#owners-equity)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#business-appraisal*

### Fair Market Value

Fair market value is the price a willing buyer and a willing seller would agree on, with neither under pressure and both properly informed.

In franchising it matters at exit and in disputes. Note that goodwill attached to the franchisor's brand generally belongs to the franchisor, not to you — which is why franchised units often appraise below comparable independents.

**Example.** Two similar service businesses: the independent sells on a higher multiple because the buyer acquires the brand and customer relationships outright.

**Related:** [Business Appraisal](https://www.franchisegrade.com/tools/franchise-glossary#business-appraisal) · [Franchise Resale](https://www.franchisegrade.com/tools/franchise-glossary#franchise-resale) · [EBITDA](https://www.franchisegrade.com/tools/franchise-glossary#ebitda)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#fair-market-value*

## Funding & Financing

How buyers fund a franchise purchase, what lenders look at, and the structures that turn savings into capital.

### SBA Loan

An SBA loan is a bank loan partially guaranteed by the U.S. Small Business Administration, which is why lenders will fund franchise purchases they would otherwise decline.

**Also called:** SBA, Small Business Administration Loan

The SBA does not lend to you; a bank or non-bank lender does, and the guarantee reduces its risk. Franchise buyers use it most often for build-out, equipment and the franchise fee.

**Example.** A $645,000 project funded with $200,000 of your equity and a $445,000 SBA 7(a) loan over ten years, secured against business assets and personally guaranteed.

**Related:** [SBA 7(a) Loan](https://www.franchisegrade.com/tools/franchise-glossary#sba-7a-loan) · [Personal Guaranty](https://www.franchisegrade.com/tools/franchise-glossary#personal-guaranty) · [Collateral](https://www.franchisegrade.com/tools/franchise-glossary#collateral) · [Debt Service Coverage Ratio (DSCR)](https://www.franchisegrade.com/tools/franchise-glossary#debt-service-coverage-ratio) · [ROBS (Rollovers as Business Start-ups)](https://www.franchisegrade.com/tools/franchise-glossary#robs)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#sba-loan*

### SBA 7(a) Loan

The 7(a) is the SBA's main general-purpose program and the one most franchise buyers use — flexible on use of proceeds, with terms up to ten years for a business acquisition or working capital.

**Also called:** 7(a)

**Example.** A $445,000 7(a) covering the franchise fee, build-out, equipment and $60,000 of working capital, at a variable rate tied to prime.

**Related:** [SBA Loan](https://www.franchisegrade.com/tools/franchise-glossary#sba-loan) · [Amortization](https://www.franchisegrade.com/tools/franchise-glossary#amortization) · [Debt Service Coverage Ratio (DSCR)](https://www.franchisegrade.com/tools/franchise-glossary#debt-service-coverage-ratio)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#sba-7a-loan*

### ROBS (Rollovers as Business Start-ups)

ROBS is an IRS-recognized structure that lets you fund a business with retirement savings without an early-withdrawal penalty or income tax, by having a new company retirement plan buy stock in your own corporation.

**Also called:** ROBS, 401(k) Rollover, Retirement Rollover

It requires a C corporation, a compliant plan and ongoing administration, and it puts retirement money at business risk. It is legitimate and widely used, and it is also the transaction most often executed badly.

**Example.** You roll $150,000 from a former employer's 401(k) into a new plan, which buys stock in your C corporation. The corporation now has $150,000 of equity — and no debt service.

**Related:** [SBA Loan](https://www.franchisegrade.com/tools/franchise-glossary#sba-loan) · [Liquid Capital](https://www.franchisegrade.com/tools/franchise-glossary#liquid-capital) · [Lender Pre-Qualification](https://www.franchisegrade.com/tools/franchise-glossary#lender-prequalification)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#robs*

### HELOC (Home Equity Line of Credit)

A HELOC borrows against the equity in your home, giving flexible access to cash at a lower rate than most business debt — secured on where you live.

**Also called:** HELOC, Home Equity Line

**Example.** A $100,000 HELOC used as working capital and drawn only as needed, so interest accrues on the balance rather than the full facility.

**Related:** [Collateral](https://www.franchisegrade.com/tools/franchise-glossary#collateral) · [Liquid Capital](https://www.franchisegrade.com/tools/franchise-glossary#liquid-capital) · [Working Capital](https://www.franchisegrade.com/tools/franchise-glossary#working-capital) · [Unsecured Business Loan](https://www.franchisegrade.com/tools/franchise-glossary#unsecured-business-loan)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#heloc*

### Unsecured Business Loan

An unsecured loan is funded on your credit profile rather than on pledged assets — faster to close and lighter on paperwork, at a higher rate and a shorter term.

**Also called:** Unsecured Financing

**Example.** $75,000 of unsecured funding approved in two weeks to bridge a build-out delay, repaid over three years at a materially higher rate than an SBA loan.

**Related:** [Personal Credit Score](https://www.franchisegrade.com/tools/franchise-glossary#personal-credit-score) · [Bridge Loan](https://www.franchisegrade.com/tools/franchise-glossary#bridge-loan) · [SBA Loan](https://www.franchisegrade.com/tools/franchise-glossary#sba-loan)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#unsecured-business-loan*

### Equipment Financing

Equipment financing funds specific assets using the equipment itself as collateral, which keeps your cash available for working capital.

**Also called:** Equipment Lease

**Example.** $120,000 of kitchen equipment financed over five years, leaving your $200,000 of cash for the build-out and reserve instead.

**Related:** [FF&E (Furniture, Fixtures & Equipment)](https://www.franchisegrade.com/tools/franchise-glossary#ffe) · [Collateral](https://www.franchisegrade.com/tools/franchise-glossary#collateral) · [Mobile Franchise](https://www.franchisegrade.com/tools/franchise-glossary#mobile-franchise) · [Cash Flow](https://www.franchisegrade.com/tools/franchise-glossary#cash-flow)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#equipment-financing*

### Bridge Loan

A bridge loan is short-term finance covering a gap until permanent funding arrives, then repaid from it.

**Example.** Your SBA approval is four weeks behind the landlord's deadline. A 90-day bridge loan funds the deposit and is repaid the day the SBA loan closes.

**Related:** [SBA Loan](https://www.franchisegrade.com/tools/franchise-glossary#sba-loan) · [Unsecured Business Loan](https://www.franchisegrade.com/tools/franchise-glossary#unsecured-business-loan) · [Cash Flow](https://www.franchisegrade.com/tools/franchise-glossary#cash-flow)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#bridge-loan*

### Collateral

Collateral is the asset a lender can take if you do not repay — business equipment, receivables, and very often a lien on your home.

**Example.** A $445,000 SBA loan secured by all business assets plus a second lien on your house, alongside your personal guaranty.

**Related:** [Personal Guaranty](https://www.franchisegrade.com/tools/franchise-glossary#personal-guaranty) · [Assets](https://www.franchisegrade.com/tools/franchise-glossary#assets) · [HELOC (Home Equity Line of Credit)](https://www.franchisegrade.com/tools/franchise-glossary#heloc) · [SBA Loan](https://www.franchisegrade.com/tools/franchise-glossary#sba-loan)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#collateral*

### Debt Service Coverage Ratio (DSCR)

DSCR measures how comfortably projected cash flow covers loan payments. Most lenders want at least 1.15 to 1.25 times, so the business must generate more than the loan requires.

**Also called:** DSCR

**Example.** $92,000 of projected cash flow against $72,000 of annual loan payments is a 1.28 DSCR — enough for most franchise lenders.

**Related:** [SBA Loan](https://www.franchisegrade.com/tools/franchise-glossary#sba-loan) · [Cash Flow](https://www.franchisegrade.com/tools/franchise-glossary#cash-flow) · [Amortization](https://www.franchisegrade.com/tools/franchise-glossary#amortization) · [Pro Forma](https://www.franchisegrade.com/tools/franchise-glossary#pro-forma)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#debt-service-coverage-ratio*

### Personal Credit Score

Your personal credit score is a primary input in franchise lending decisions, because most franchise loans are personally guaranteed regardless of the entity that borrows.

**Example.** A 760 score opens SBA and unsecured options at better pricing. A 620 score usually means a larger equity contribution or a co-borrower.

**Related:** [SBA Loan](https://www.franchisegrade.com/tools/franchise-glossary#sba-loan) · [Unsecured Business Loan](https://www.franchisegrade.com/tools/franchise-glossary#unsecured-business-loan) · [Lender Pre-Qualification](https://www.franchisegrade.com/tools/franchise-glossary#lender-prequalification) · [Personal Guaranty](https://www.franchisegrade.com/tools/franchise-glossary#personal-guaranty)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#personal-credit-score*

### Franchisor Financing

Some franchisors finance part of the purchase directly, or arrange third-party lending relationships. Item 10 discloses exactly what is offered and on what terms.

**Also called:** In-House Financing

**Example.** A franchisor defers half the $45,000 franchise fee over 24 months at 8%, and introduces a lender panel already familiar with the concept.

**Related:** [SBA Loan](https://www.franchisegrade.com/tools/franchise-glossary#sba-loan) · [Initial Franchise Fee](https://www.franchisegrade.com/tools/franchise-glossary#initial-franchise-fee) · [Default](https://www.franchisegrade.com/tools/franchise-glossary#default)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchisor-financing*

### Angel Investor

An angel investor is an individual who puts personal capital into a business, usually for equity, and in franchising is most often a partner funding a multi-unit build-out.

**Example.** A silent partner contributes $150,000 for 30% of the operating entity while you run the units — a structure the franchisor must usually approve.

**Related:** [Owner's Equity](https://www.franchisegrade.com/tools/franchise-glossary#owners-equity) · [Transfer](https://www.franchisegrade.com/tools/franchise-glossary#transfer) · [ROBS (Rollovers as Business Start-ups)](https://www.franchisegrade.com/tools/franchise-glossary#robs)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#angel-investor*

### Lender Pre-Qualification

Pre-qualification is an early read on how much you can realistically borrow, based on your capital, credit and net worth — before you commit to a brand.

**Also called:** Pre-Qualification, Funding Assessment

Doing it first changes the whole search, because it tells you which investment ranges are real for you. It is a soft review and does not affect your credit score.

**Example.** A pre-qualification shows $200,000 of usable equity supporting roughly $600,000 of total project cost, which immediately rules out two of the four brands on your shortlist.

**Related:** [Personal Credit Score](https://www.franchisegrade.com/tools/franchise-glossary#personal-credit-score) · [Liquid Capital](https://www.franchisegrade.com/tools/franchise-glossary#liquid-capital) · [SBA Loan](https://www.franchisegrade.com/tools/franchise-glossary#sba-loan) · [ROBS (Rollovers as Business Start-ups)](https://www.franchisegrade.com/tools/franchise-glossary#robs)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#lender-prequalification*

## Territory & Rights

What geography you actually get, what the franchisor keeps, and the difference between the two.

### Exclusive Territory

An exclusive territory means neither another franchisee nor the franchisor itself may operate a location of the brand inside your defined area.

True exclusivity is rarer than the phrase suggests. Even genuine exclusivity is usually limited to physical locations, leaving the franchisor free to sell into your area through other channels.

**Example.** Your agreement grants an exclusive territory of three ZIP codes. The franchisor cannot open a company store or sell another franchise there for your whole term.

**Related:** [Protected Territory](https://www.franchisegrade.com/tools/franchise-glossary#protected-territory) · [Reserved Rights](https://www.franchisegrade.com/tools/franchise-glossary#reserved-rights) · [Encroachment](https://www.franchisegrade.com/tools/franchise-glossary#encroachment) · [Item 12 — Territory](https://www.franchisegrade.com/tools/franchise-glossary#item-12) · [Alternative Channels of Distribution](https://www.franchisegrade.com/tools/franchise-glossary#alternative-channels-of-distribution)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#exclusive-territory*

### Protected Territory

A protected territory limits what the franchisor may do inside your area but stops short of full exclusivity — most commonly, it agrees not to open a comparable location there.

The difference from an exclusive territory is what the franchisor keeps. Protection is usually narrower: it may cover new franchised units but not company units, or new bricks-and-mortar but not new channels.

**Example.** You get a two-mile protected radius. The franchisor will not place another franchise inside it, but may sell the same products through a supermarket two blocks away.

**Related:** [Exclusive Territory](https://www.franchisegrade.com/tools/franchise-glossary#exclusive-territory) · [Open Territory](https://www.franchisegrade.com/tools/franchise-glossary#open-territory) · [Encroachment](https://www.franchisegrade.com/tools/franchise-glossary#encroachment) · [Reserved Rights](https://www.franchisegrade.com/tools/franchise-glossary#reserved-rights)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#protected-territory*

### Open Territory

An open or non-exclusive territory means you get no geographic protection at all — the franchisor may place other units wherever it chooses, including next to you.

**Also called:** Non-Exclusive Territory, No Territory

The Franchise Rule requires this to be stated plainly in Item 12 when it applies, which makes it one of the easiest important facts to verify.

**Example.** Item 12 states you will not receive an exclusive territory and may face competition from other franchisees, from franchisor-owned outlets, and from other channels the franchisor controls.

**Related:** [Protected Territory](https://www.franchisegrade.com/tools/franchise-glossary#protected-territory) · [Exclusive Territory](https://www.franchisegrade.com/tools/franchise-glossary#exclusive-territory) · [Encroachment](https://www.franchisegrade.com/tools/franchise-glossary#encroachment) · [Item 12 — Territory](https://www.franchisegrade.com/tools/franchise-glossary#item-12)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#open-territory*

### Territory Definition

The territory definition is the method used to draw your area — a radius, a population count, a set of ZIP codes, a drive time, or a named list of streets.

Method changes value enormously. A two-mile radius downtown may hold 90,000 people; the same radius in a rural county may hold 4,000. Population-based territories are usually fairer to the buyer.

**Example.** A territory defined as 40,000 residents holds its value if the area is redrawn; a territory defined as a two-mile radius does not change even if the population halves.

**Related:** [Exclusive Territory](https://www.franchisegrade.com/tools/franchise-glossary#exclusive-territory) · [Protected Territory](https://www.franchisegrade.com/tools/franchise-glossary#protected-territory) · [Site Selection](https://www.franchisegrade.com/tools/franchise-glossary#site-selection) · [Relocation Rights](https://www.franchisegrade.com/tools/franchise-glossary#relocation-rights)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#territory-definition*

### Encroachment

Encroachment is the franchisor allowing a new location or channel to take sales from your territory — the single most common source of franchise disputes.

**Example.** A new franchise opens 2.4 miles away, just outside your two-mile protection, and takes 15% of your customers. Contractually permitted, commercially damaging.

**Related:** [Protected Territory](https://www.franchisegrade.com/tools/franchise-glossary#protected-territory) · [Exclusive Territory](https://www.franchisegrade.com/tools/franchise-glossary#exclusive-territory) · [Item 3 — Litigation History](https://www.franchisegrade.com/tools/franchise-glossary#item-3) · [Reserved Rights](https://www.franchisegrade.com/tools/franchise-glossary#reserved-rights)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#encroachment*

### Reserved Rights

Reserved rights are everything the franchisor keeps for itself inside your territory — channels, account types and location formats your protection does not cover.

**Example.** The franchisor reserves the right to sell through supermarkets, airports, hospitals, universities, national accounts and its own e-commerce site, all inside your protected area.

**Related:** [Item 12 — Territory](https://www.franchisegrade.com/tools/franchise-glossary#item-12) · [Alternative Channels of Distribution](https://www.franchisegrade.com/tools/franchise-glossary#alternative-channels-of-distribution) · [Exclusive Territory](https://www.franchisegrade.com/tools/franchise-glossary#exclusive-territory) · [Encroachment](https://www.franchisegrade.com/tools/franchise-glossary#encroachment)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#reserved-rights*

### Alternative Channels of Distribution

Alternative channels are the ways a brand reaches customers without a standard franchised location — e-commerce, delivery apps, grocery, kiosks, airports, stadiums and institutional contracts.

**Also called:** Non-Traditional Channels

**Example.** A brand launches direct-to-consumer shipping nationwide. Every franchisee's territory now contains a competitor owned by their own franchisor.

**Related:** [Reserved Rights](https://www.franchisegrade.com/tools/franchise-glossary#reserved-rights) · [Exclusive Territory](https://www.franchisegrade.com/tools/franchise-glossary#exclusive-territory) · [Gray Marketing](https://www.franchisegrade.com/tools/franchise-glossary#gray-marketing) · [Item 12 — Territory](https://www.franchisegrade.com/tools/franchise-glossary#item-12)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#alternative-channels-of-distribution*

### Approved Site

An approved site is a specific location the franchisor has accepted as meeting its criteria — and you generally cannot sign a lease before you have that approval.

**Example.** You find a 2,200 square foot unit with 42 parking spaces and 18,000 vehicles a day. The franchisor's real-estate team reviews the demographics and approves it in writing.

**Related:** [Site Selection](https://www.franchisegrade.com/tools/franchise-glossary#site-selection) · [Brick-and-Mortar](https://www.franchisegrade.com/tools/franchise-glossary#brick-and-mortar) · [Footprint](https://www.franchisegrade.com/tools/franchise-glossary#footprint) · [Territory Definition](https://www.franchisegrade.com/tools/franchise-glossary#territory-definition)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#approved-site*

### Site Selection

Site selection is the process of finding and securing a location that meets the franchisor's criteria — and in retail and food formats it matters more than the brand you pick.

Item 11 states how much help the franchisor actually provides. It ranges from a full real-estate team and a demographic model to a checklist and a phone number.

**Example.** The franchisor supplies a demographic model requiring 30,000 residents within a three-mile drive time, a median household income floor, and a co-tenancy list.

**Related:** [Approved Site](https://www.franchisegrade.com/tools/franchise-glossary#approved-site) · [Territory Definition](https://www.franchisegrade.com/tools/franchise-glossary#territory-definition) · [Item 11 — Franchisor Assistance & Training](https://www.franchisegrade.com/tools/franchise-glossary#item-11) · [Brick-and-Mortar](https://www.franchisegrade.com/tools/franchise-glossary#brick-and-mortar)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#site-selection*

### Development Schedule

A development schedule is the binding timetable for opening the units you committed to, with dates you must hit to keep your rights to the area.

**Also called:** Schedule to Open

**Example.** Five units in six years: unit one within twelve months, then one every eighteen months. Miss two deadlines and the franchisor may release your undeveloped area.

**Related:** [Area Development Agreement](https://www.franchisegrade.com/tools/franchise-glossary#area-development-agreement) · [Multi-Unit Franchise](https://www.franchisegrade.com/tools/franchise-glossary#multi-unit-franchise) · [Default](https://www.franchisegrade.com/tools/franchise-glossary#default) · [Territory Fee](https://www.franchisegrade.com/tools/franchise-glossary#territory-fee)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#development-schedule*

### Relocation Rights

Relocation rights determine whether you may move your location — and on what terms — if the lease ends, the trade area shifts, or the site stops working.

**Example.** An anchor tenant closes and footfall drops 40%. Your agreement allows one relocation inside the territory with franchisor approval and a $5,000 administration fee.

**Related:** [Approved Site](https://www.franchisegrade.com/tools/franchise-glossary#approved-site) · [Territory Definition](https://www.franchisegrade.com/tools/franchise-glossary#territory-definition) · [Brick-and-Mortar](https://www.franchisegrade.com/tools/franchise-glossary#brick-and-mortar)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#relocation-rights*

### Gray Marketing

Gray marketing is buying through the system's supply chain and then selling those products outside the franchise — under another business name, to another company, or into someone else's territory.

**Example.** A franchisee uses system pricing to buy inventory, then resells it wholesale to unrelated retailers. It breaches the agreement and undercuts other owners.

**Related:** [Alternative Channels of Distribution](https://www.franchisegrade.com/tools/franchise-glossary#alternative-channels-of-distribution) · [Restrictions on Goods & Services](https://www.franchisegrade.com/tools/franchise-glossary#restrictions-on-goods-and-services) · [Encroachment](https://www.franchisegrade.com/tools/franchise-glossary#encroachment)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#gray-marketing*

## Operations & Support

Training, manuals, suppliers, audits, and the day-to-day obligations that define the job you are buying.

### Operations Manual

The operations manual is the documented system you are buying — how to open, staff, order, price, market, clean, report and close. Following it is a contractual obligation.

**Also called:** Franchise Operations Manual, Manual

It is also a living document: the franchisor can amend it, and the agreement usually binds you to the current version. That is how standards change mid-term without renegotiating the contract.

**Example.** A 400-page manual covering opening checklists, recipe specifications, labor matrices by daypart, approved suppliers, complaint handling and the required reporting cadence.

**Related:** [Brand Standards](https://www.franchisegrade.com/tools/franchise-glossary#brand-standards) · [Compliance](https://www.franchisegrade.com/tools/franchise-glossary#compliance) · [Quality Control Audit](https://www.franchisegrade.com/tools/franchise-glossary#quality-control-audit) · [Trade Secret](https://www.franchisegrade.com/tools/franchise-glossary#trade-secret) · [Item 11 — Franchisor Assistance & Training](https://www.franchisegrade.com/tools/franchise-glossary#item-11)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#operations-manual*

### Initial Training

Initial training is the pre-opening program the franchisor delivers — classroom, online and in-unit — and Item 11 states exactly how many hours, for how many people, and who pays for travel.

**Example.** Ten days: four days at head office, four days in a certified training store, two days on site at your opening. Two attendees included; travel and lodging are yours.

**Related:** [Continuous Training](https://www.franchisegrade.com/tools/franchise-glossary#continuous-training) · [Training Fee](https://www.franchisegrade.com/tools/franchise-glossary#training-fee) · [Item 11 — Franchisor Assistance & Training](https://www.franchisegrade.com/tools/franchise-glossary#item-11) · [Designated Manager](https://www.franchisegrade.com/tools/franchise-glossary#designated-manager)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#initial-training*

### Continuous Training

Continuous training is the ongoing education the franchisor provides — and usually requires — after opening: new products, new systems, compliance refreshers and annual conferences.

**Also called:** Ongoing Training

**Example.** Quarterly online modules, a mandatory annual convention with registration and travel at your cost, and a two-day retraining requirement after any failed audit.

**Related:** [Initial Training](https://www.franchisegrade.com/tools/franchise-glossary#initial-training) · [Training Fee](https://www.franchisegrade.com/tools/franchise-glossary#training-fee) · [Quality Control Audit](https://www.franchisegrade.com/tools/franchise-glossary#quality-control-audit)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#continuous-training*

### Field Representative

A field representative is the franchisor employee who visits your location, coaches on performance, and audits compliance — the person your support actually comes from.

**Also called:** Field Consultant, Business Coach

The ratio matters more than the title. One field consultant covering 90 units cannot give meaningful support; one covering 25 can.

**Example.** Your field consultant visits quarterly, reviews your P&L against system benchmarks, works a shift, and files a compliance report.

**Related:** [Quality Control Audit](https://www.franchisegrade.com/tools/franchise-glossary#quality-control-audit) · [Item 11 — Franchisor Assistance & Training](https://www.franchisegrade.com/tools/franchise-glossary#item-11) · [Continuous Training](https://www.franchisegrade.com/tools/franchise-glossary#continuous-training) · [Area Developer](https://www.franchisegrade.com/tools/franchise-glossary#area-developer)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#field-representative*

### Quality Control Audit

A quality control audit is the franchisor's inspection of whether you are operating to standard, sometimes announced and sometimes conducted as an anonymous mystery shop.

**Also called:** QA Audit, Brand Standards Audit, Mystery Shop

**Example.** A scored 120-point inspection covering cleanliness, food safety, uniform compliance, service times and required signage. Below 80% triggers a re-inspection and a remediation plan.

**Related:** [Brand Standards](https://www.franchisegrade.com/tools/franchise-glossary#brand-standards) · [Compliance](https://www.franchisegrade.com/tools/franchise-glossary#compliance) · [Event of Default](https://www.franchisegrade.com/tools/franchise-glossary#event-of-default) · [Field Representative](https://www.franchisegrade.com/tools/franchise-glossary#field-representative)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#quality-control-audit*

### Approved Supplier

An approved supplier is a vendor the franchisor has vetted and permitted you to buy from. You may use any of them — but generally not one that is not on the list.

**Also called:** Authorized Supplier

**Example.** Three approved distributors serve your region. You may choose on price and service between them, but you cannot use a cheaper local wholesaler.

**Related:** [Required Supplier](https://www.franchisegrade.com/tools/franchise-glossary#required-supplier) · [Key Supplier](https://www.franchisegrade.com/tools/franchise-glossary#key-supplier) · [Item 8 — Restrictions on Sources of Products & Services](https://www.franchisegrade.com/tools/franchise-glossary#item-8) · [Purchasing Cooperative](https://www.franchisegrade.com/tools/franchise-glossary#purchasing-cooperative)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#approved-supplier*

### Required Supplier

A required supplier is one you must buy from, with no alternative — usually for proprietary products, and sometimes for commodities where the franchisor earns a rebate.

**Also called:** Designated Supplier, Mandated Supplier

**Example.** The proprietary sauce base must come from the franchisor's affiliate. Paper goods must come from one national distributor at prices set annually.

**Related:** [Approved Supplier](https://www.franchisegrade.com/tools/franchise-glossary#approved-supplier) · [Rebates & Supplier Allowances](https://www.franchisegrade.com/tools/franchise-glossary#rebates-and-supplier-allowances) · [Tying](https://www.franchisegrade.com/tools/franchise-glossary#tying) · [Item 8 — Restrictions on Sources of Products & Services](https://www.franchisegrade.com/tools/franchise-glossary#item-8)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#required-supplier*

### Key Supplier

A key supplier is one the franchisor has negotiated system pricing or availability with, and whose products are central to running the business.

**Example.** A single national equipment supplier holds a stocking agreement for the brand, so replacement parts arrive in 48 hours instead of three weeks.

**Related:** [Approved Supplier](https://www.franchisegrade.com/tools/franchise-glossary#approved-supplier) · [Required Supplier](https://www.franchisegrade.com/tools/franchise-glossary#required-supplier) · [Supply Chain](https://www.franchisegrade.com/tools/franchise-glossary#supply-chain) · [Purchasing Cooperative](https://www.franchisegrade.com/tools/franchise-glossary#purchasing-cooperative)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#key-supplier*

### Purchasing Cooperative

A purchasing cooperative is an entity jointly owned by the franchisor and franchisees that buys for the whole system, using scale to lower input costs.

**Also called:** Co-op, Buying Group

Because franchisees hold shares and board seats, a genuine co-op aligns supplier margin with owner profitability rather than with franchisor revenue. Its existence is a meaningful positive signal.

**Example.** A co-op with a franchisee-majority board negotiates food contracts for 400 units and rebates surplus back to members at year end.

**Related:** [Required Supplier](https://www.franchisegrade.com/tools/franchise-glossary#required-supplier) · [Rebates & Supplier Allowances](https://www.franchisegrade.com/tools/franchise-glossary#rebates-and-supplier-allowances) · [Franchisee Advisory Council (FAC)](https://www.franchisegrade.com/tools/franchise-glossary#franchisee-advisory-council) · [Supply Chain](https://www.franchisegrade.com/tools/franchise-glossary#supply-chain)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#purchasing-cooperative*

### Supply Chain

The supply chain is the route products take from manufacturer to your location, and how well it is run shows up directly in your food cost, your stockouts and your margin.

**Example.** Two distribution centers, twice-weekly deliveries, and a 98% fill rate. A weaker system with one center and weekly deliveries forces higher inventory and more waste.

**Related:** [Key Supplier](https://www.franchisegrade.com/tools/franchise-glossary#key-supplier) · [Required Supplier](https://www.franchisegrade.com/tools/franchise-glossary#required-supplier) · [Cost of Goods Sold (COGS)](https://www.franchisegrade.com/tools/franchise-glossary#cost-of-goods-sold) · [Purchasing Cooperative](https://www.franchisegrade.com/tools/franchise-glossary#purchasing-cooperative)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#supply-chain*

### POS System

The point-of-sale system records every transaction — and in franchising it also reports your sales to the franchisor, which is how royalties are calculated.

**Also called:** Point of Sale, POS

**Example.** The mandated POS transmits daily sales to the franchisor, which draws 6% by ACH each Tuesday. It also feeds the benchmarking reports your field consultant reviews.

**Related:** [Technology Fee](https://www.franchisegrade.com/tools/franchise-glossary#technology-fee) · [ACH (Automated Clearing House)](https://www.franchisegrade.com/tools/franchise-glossary#ach) · [Royalty](https://www.franchisegrade.com/tools/franchise-glossary#royalty) · [Gross Sales](https://www.franchisegrade.com/tools/franchise-glossary#gross-sales)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#pos-system*

### Footprint

The footprint is the physical size and layout a location requires — square footage, equipment placement, seating, and the specification your build must follow.

**Example.** A brand offers three footprints: 2,400 square feet in-line, 1,200 square feet express, and a 400 square foot kiosk, each with a different investment range.

**Related:** [Build-Out Cost](https://www.franchisegrade.com/tools/franchise-glossary#build-out-cost) · [Approved Site](https://www.franchisegrade.com/tools/franchise-glossary#approved-site) · [Build-Out](https://www.franchisegrade.com/tools/franchise-glossary#build-out) · [Turnkey](https://www.franchisegrade.com/tools/franchise-glossary#turnkey)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#footprint*

### Build-Out

Build-out is the construction phase that turns an approved space into a trading location, and its length directly determines how long you pay rent before earning revenue.

**Also called:** Fit-Out, Construction

**Example.** Four months of build-out on a lease that started at signing means four months of rent, insurance and loan interest with no sales.

**Related:** [Build-Out Cost](https://www.franchisegrade.com/tools/franchise-glossary#build-out-cost) · [Footprint](https://www.franchisegrade.com/tools/franchise-glossary#footprint) · [Turnkey](https://www.franchisegrade.com/tools/franchise-glossary#turnkey) · [Working Capital](https://www.franchisegrade.com/tools/franchise-glossary#working-capital)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#build-out*

### Remodel Requirement

A remodel requirement obliges you to update the location to the current brand specification at your own cost, typically at renewal or on a set cycle.

**Also called:** Refresh Requirement, Reimaging

**Example.** A required refresh every seven years and a full remodel at renewal, quoted at $150,000 — a cost that has to be saved for from year one.

**Related:** [Renewal](https://www.franchisegrade.com/tools/franchise-glossary#renewal) · [Brand Standards](https://www.franchisegrade.com/tools/franchise-glossary#brand-standards) · [Non-Renewal](https://www.franchisegrade.com/tools/franchise-glossary#non-renewal) · [Item 17 — Renewal, Termination, Transfer & Dispute Resolution](https://www.franchisegrade.com/tools/franchise-glossary#item-17)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#remodel-requirement*

### Market Introduction Program

A market introduction program is the structured launch plan for a new location — the pre-opening marketing, community outreach and opening promotions the franchisor requires.

**Also called:** Launch Program

**Example.** Six weeks of pre-opening activity: local digital, 20,000 direct-mail pieces, three community partnerships, and a soft-opening week for staff training.

**Related:** [Grand Opening Cost](https://www.franchisegrade.com/tools/franchise-glossary#grand-opening-cost) · [Local Advertising Requirement](https://www.franchisegrade.com/tools/franchise-glossary#local-advertising-requirement) · [Pilot Operation](https://www.franchisegrade.com/tools/franchise-glossary#pilot-operation)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#market-introduction-program*

### Discovery Day

Discovery Day is the visit — to head office or a training location — where you meet the leadership team and they decide whether to award you a franchise.

It is a two-way interview, and the mistake buyers make is treating it as a sales event to be impressed by rather than an opportunity to interrogate. Bring your Item 19, Item 20 and Item 21 questions in writing.

**Example.** A full day meeting the operations, marketing and real-estate leads, touring a unit, and asking why nine units were terminated last year.

**Related:** [Validation Calls](https://www.franchisegrade.com/tools/franchise-glossary#validation-calls) · [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20) · [Franchisor](https://www.franchisegrade.com/tools/franchise-glossary#franchisor) · [Franchise Development Representative](https://www.franchisegrade.com/tools/franchise-glossary#franchise-development-representative)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#discovery-day*

### Validation Calls

Validation calls are your conversations with current and former franchisees — the highest-value diligence available to you, and the reason Item 20 lists their contact details.

**Also called:** Franchisee Validation, Reference Calls

Call widely, not just the names the franchisor supplies. Ask about revenue ramp, months to breakeven, hours worked, real manager cost, support quality and whether they would do it again.

**Example.** You call 14 current owners and 5 former ones. Three separately mention that year-one revenue came in 25% under the sales projection — a pattern no brochure would show you.

**Related:** [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20) · [Discovery Day](https://www.franchisegrade.com/tools/franchise-glossary#discovery-day) · [Franchisee Turnover](https://www.franchisegrade.com/tools/franchise-glossary#franchisee-turnover) · [Item 19 — Financial Performance Representation](https://www.franchisegrade.com/tools/franchise-glossary#item-19)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#validation-calls*

### Franchisee Advisory Council (FAC)

A franchisee advisory council is a representative group of owners who advise the franchisor on standards, marketing spend and system decisions. It advises; it does not govern.

**Also called:** FAC, Advisory Council

An FAC is created and usually funded by the franchisor, which is what distinguishes it from an independent franchisee association.

**Example.** Nine elected owners meet quarterly with leadership to review the advertising fund, new product tests and the technology roadmap.

**Related:** [Independent Franchisee Association](https://www.franchisegrade.com/tools/franchise-glossary#franchisee-association) · [National Advertising Fund](https://www.franchisegrade.com/tools/franchise-glossary#national-advertising-fund) · [Purchasing Cooperative](https://www.franchisegrade.com/tools/franchise-glossary#purchasing-cooperative)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchisee-advisory-council*

### Independent Franchisee Association

An independent franchisee association is a legal entity owned and funded by franchisees themselves, operating under its own rules rather than the franchisor's.

**Also called:** Franchisee Association, Independent Association

Its independence is the point: it can hire counsel, negotiate collectively and take positions the franchisor dislikes. A healthy system usually has a functioning one and does not fear it.

**Example.** An association funded by member dues retains its own attorney to negotiate the terms of a system-wide technology mandate.

**Related:** [Franchisee Advisory Council (FAC)](https://www.franchisegrade.com/tools/franchise-glossary#franchisee-advisory-council) · [State Franchise Relationship Laws](https://www.franchisegrade.com/tools/franchise-glossary#state-franchise-relationship-laws)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchisee-association*

### Compliance

Compliance is meeting every standard and obligation in the agreement and manual. Falling out of compliance, even after fixing individual issues, can put your franchise rights at risk.

Many agreements allow termination for repeated breaches within a period, even where each one was cured on time. Being habitually late is itself a breach in those systems.

**Example.** You cure four separate standards notices inside their cure periods over twelve months. The agreement allows termination after three in any twelve-month window.

**Related:** [Default](https://www.franchisegrade.com/tools/franchise-glossary#default) · [Cure Period](https://www.franchisegrade.com/tools/franchise-glossary#cure-period) · [Quality Control Audit](https://www.franchisegrade.com/tools/franchise-glossary#quality-control-audit) · [Brand Standards](https://www.franchisegrade.com/tools/franchise-glossary#brand-standards)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#compliance*

### Designated Manager

A designated manager is the trained, franchisor-approved person who may run the location when the owner is not there — the requirement that makes semi-absentee ownership possible.

**Also called:** Approved Manager, Certified Manager

**Example.** Your general manager completes the same ten-day training you did and is certified by the franchisor, which lets you keep your other job.

**Related:** [Semi-Absentee Ownership](https://www.franchisegrade.com/tools/franchise-glossary#semi-absentee-ownership) · [Owner-Operator](https://www.franchisegrade.com/tools/franchise-glossary#owner-operator) · [Initial Training](https://www.franchisegrade.com/tools/franchise-glossary#initial-training) · [Training Fee](https://www.franchisegrade.com/tools/franchise-glossary#training-fee)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#designated-manager*

### Staffing Model

The staffing model is the franchisor's prescribed labor plan — how many people, in what roles, at what hours — and it drives your largest ongoing cost in most concepts.

**Example.** A labor matrix requiring 2.5 staff per hour at lunch and 1.5 off-peak. At local wage rates that is $236,000 a year, or 28% of an $845,000 unit.

**Related:** [Operations Manual](https://www.franchisegrade.com/tools/franchise-glossary#operations-manual) · [Breakeven](https://www.franchisegrade.com/tools/franchise-glossary#breakeven) · [Designated Manager](https://www.franchisegrade.com/tools/franchise-glossary#designated-manager) · [Profit & Loss Statement (P&L)](https://www.franchisegrade.com/tools/franchise-glossary#profit-and-loss-statement)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#staffing-model*

### Hours of Operation Requirement

Most agreements set minimum trading hours, so you cannot cut back to protect margin without the franchisor's approval.

**Example.** A required 7am to 9pm, seven days. The last two hours lose money in your market, but closing early without written consent is a breach.

**Related:** [Brand Standards](https://www.franchisegrade.com/tools/franchise-glossary#brand-standards) · [Compliance](https://www.franchisegrade.com/tools/franchise-glossary#compliance) · [Staffing Model](https://www.franchisegrade.com/tools/franchise-glossary#staffing-model) · [Default](https://www.franchisegrade.com/tools/franchise-glossary#default)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#hours-of-operation-requirement*

### Insurance Requirements

The agreement sets minimum insurance you must carry — general liability, property, workers' compensation, sometimes business interruption — usually naming the franchisor as an additional insured.

**Example.** $2m general liability, $1m umbrella, property cover at replacement value, and proof of coverage filed with the franchisor annually.

**Related:** [Indemnification](https://www.franchisegrade.com/tools/franchise-glossary#indemnification) · [Item 7 — Estimated Initial Investment](https://www.franchisegrade.com/tools/franchise-glossary#item-7) · [Force Majeure](https://www.franchisegrade.com/tools/franchise-glossary#force-majeure)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#insurance-requirements*

## People & Roles

Who is who in a franchise transaction, who is paid by whom, and whose interests each party represents.

### Franchise Broker

A franchise broker is a salesperson paid a commission by the franchisor when you sign. They can be genuinely helpful, but they are paid by the seller, not by you.

**Also called:** Broker

Brokers typically represent a portfolio of brands that pay into their network, which means the brands they present are the ones that compensate them — not necessarily the best fit in the market.

**Example.** A broker presents four brands and earns $18,000 to $25,000 from whichever one you sign with. None of the several hundred brands outside their network appear on the list.

**Related:** [Franchise Consultant](https://www.franchisegrade.com/tools/franchise-glossary#franchise-consultant) · [Franchise Development Representative](https://www.franchisegrade.com/tools/franchise-glossary#franchise-development-representative) · [Franchise Advisor](https://www.franchisegrade.com/tools/franchise-glossary#franchise-advisor) · [Prospect](https://www.franchisegrade.com/tools/franchise-glossary#prospect)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchise-broker*

### Franchise Consultant

Franchise consultant is an unregulated title. Some are independent advisers paid by you; most are franchise brokers paid by the franchisor.

**Example.** Two people both use the title. One charges you a flat $3,500 fee and recommends brands from the whole market. The other is free to you and earns a commission from the brand you pick.

**Related:** [Franchise Broker](https://www.franchisegrade.com/tools/franchise-glossary#franchise-broker) · [Franchise Advisor](https://www.franchisegrade.com/tools/franchise-glossary#franchise-advisor) · [Franchise Attorney](https://www.franchisegrade.com/tools/franchise-glossary#franchise-attorney)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchise-consultant*

### Franchise Development Representative

A franchise development representative works directly for the franchisor and is responsible for awarding franchises — which means selling them.

**Also called:** Development Rep, Franchise Sales Rep

**Example.** Your development rep guides you through discovery calls, the FDD review and Discovery Day. She is measured on signed agreements.

**Related:** [Franchise Broker](https://www.franchisegrade.com/tools/franchise-glossary#franchise-broker) · [Earnings Claim](https://www.franchisegrade.com/tools/franchise-glossary#earnings-claim) · [Discovery Day](https://www.franchisegrade.com/tools/franchise-glossary#discovery-day) · [Franchisor](https://www.franchisegrade.com/tools/franchise-glossary#franchisor)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchise-development-representative*

### Franchise Advisor

A franchise advisor guides a buyer through evaluation and due diligence. Whether the advice is independent depends entirely on who pays them.

Franchise Grade's advisors work from disclosure data across more than 3,000 systems rather than from a brand portfolio, so the comparison starts with evidence rather than with whoever pays a commission.

**Example.** An advisor helps you read three FDDs side by side, points out that one brand's Item 19 excludes its weakest 40 units, and tells you which questions to put to former franchisees.

**Related:** [Franchise Broker](https://www.franchisegrade.com/tools/franchise-glossary#franchise-broker) · [Franchise Consultant](https://www.franchisegrade.com/tools/franchise-glossary#franchise-consultant) · [Validation Calls](https://www.franchisegrade.com/tools/franchise-glossary#validation-calls) · [Franchise Attorney](https://www.franchisegrade.com/tools/franchise-glossary#franchise-attorney)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchise-advisor*

### Prospect

A prospect is someone who has expressed interest in a franchise and entered the franchisor's discovery process — the stage before any agreement exists.

**Also called:** Candidate, Franchise Candidate

**Example.** You request information, take a qualification call, receive the FDD and attend Discovery Day. Through all of it you are a prospect, with no obligation.

**Related:** [Franchise Development Representative](https://www.franchisegrade.com/tools/franchise-glossary#franchise-development-representative) · [Discovery Day](https://www.franchisegrade.com/tools/franchise-glossary#discovery-day) · [Franchise Disclosure Document (FDD)](https://www.franchisegrade.com/tools/franchise-glossary#franchise-disclosure-document)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#prospect*

### Affiliate

An affiliate is a company under common ownership or control with the franchisor — often the entity that supplies products, holds the trademarks, or owns the real estate.

Affiliates matter because money can move between them. An affiliate supplier means the franchisor's group profits from your purchases as well as your royalties.

**Example.** The franchisor's affiliate manufactures the proprietary mix all franchisees must buy, and a second affiliate holds the master leases.

**Related:** [Parent Company](https://www.franchisegrade.com/tools/franchise-glossary#parent-company) · [Required Supplier](https://www.franchisegrade.com/tools/franchise-glossary#required-supplier) · [Rebates & Supplier Allowances](https://www.franchisegrade.com/tools/franchise-glossary#rebates-and-supplier-allowances) · [Franchisor](https://www.franchisegrade.com/tools/franchise-glossary#franchisor)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#affiliate*

### Parent Company

The parent company owns the franchisor entity. Its identity matters because private-equity ownership, a strategic acquirer and a founder-led parent tend to behave very differently.

**Example.** The franchisor is a subsidiary of a multi-brand platform that has acquired six concepts in four years. The platform's return timeline shapes what happens to fees and standards.

**Related:** [Affiliate](https://www.franchisegrade.com/tools/franchise-glossary#affiliate) · [Franchisor](https://www.franchisegrade.com/tools/franchise-glossary#franchisor) · [Item 21 — Financial Statements](https://www.franchisegrade.com/tools/franchise-glossary#item-21)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#parent-company*

### Agent

An agent is a person or company authorised to act on another's behalf — in franchising, most often for service of legal process or for signing on behalf of an entity.

**Example.** The FDD names the franchisor's agent for service of process in each registration state, which is where legal notices are formally delivered.

**Related:** [Franchise Attorney](https://www.franchisegrade.com/tools/franchise-glossary#franchise-attorney) · [Legal Name](https://www.franchisegrade.com/tools/franchise-glossary#legal-name) · [Franchisor](https://www.franchisegrade.com/tools/franchise-glossary#franchisor)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#agent*

### Entrepreneur

An entrepreneur builds a business by creating the model. A franchisee builds a business by executing someone else's — related work, but a different skill set.

The mismatch matters. People who most want to invent and change things are often the least happy inside a system that requires them not to.

**Example.** An entrepreneur who redesigns the menu, the pricing and the marketing is doing exactly what a franchise agreement prohibits.

**Related:** [Franchisee](https://www.franchisegrade.com/tools/franchise-glossary#franchisee) · [Compliance](https://www.franchisegrade.com/tools/franchise-glossary#compliance) · [Brand Standards](https://www.franchisegrade.com/tools/franchise-glossary#brand-standards)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#entrepreneur*

### Multi-Brand Operator

A multi-brand operator owns units in more than one franchise system, spreading risk across concepts and sharing overhead between them.

**Example.** An operator runs eleven quick-service restaurants across two brands and a fitness studio, with one shared back office handling payroll and accounting.

**Related:** [Multi-Unit Franchise](https://www.franchisegrade.com/tools/franchise-glossary#multi-unit-franchise) · [Non-Compete Clause](https://www.franchisegrade.com/tools/franchise-glossary#non-compete-clause)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#multi-brand-operator*

### International Franchise Association (IFA)

The IFA is the main trade association for franchising in the United States, representing franchisors, franchisees and suppliers, and running the VetFran veteran program.

**Also called:** IFA

Membership is a trade affiliation, not a quality rating. It indicates a franchisor participates in the industry; it says nothing about how its franchisees perform.

**Example.** A franchisor's IFA membership and VetFran participation appear on its website. Neither replaces reading Item 20.

**Related:** [Veteran Discount](https://www.franchisegrade.com/tools/franchise-glossary#veteran-discount) · [Franchisor](https://www.franchisegrade.com/tools/franchise-glossary#franchisor)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#ifa*

## Performance & Growth

The metrics that show whether a franchise system is actually working for the people who own its units.

### Unit Growth

Unit growth is the change in the number of open locations over a period. Healthy growth is steady and supported; unhealthy growth outruns the franchisor's ability to support it.

**Example.** A 260-unit system opening 41 units a year with a stable support ratio is growing well. The same system opening 41 while its field team shrinks is not.

**Related:** [Net Unit Change](https://www.franchisegrade.com/tools/franchise-glossary#net-unit-change) · [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20) · [Field Representative](https://www.franchisegrade.com/tools/franchise-glossary#field-representative) · [Same-Store Sales](https://www.franchisegrade.com/tools/franchise-glossary#same-store-sales)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#unit-growth*

### Net Unit Change

Net unit change is openings minus closures. It is the honest growth number, because a brand can announce record openings while shrinking.

**Also called:** Net Unit Growth

**Example.** 41 openings against 29 closures is a net gain of 12 on a 260-unit base — a 4.6% net growth rate, not the 16% the press release implies.

**Related:** [Unit Growth](https://www.franchisegrade.com/tools/franchise-glossary#unit-growth) · [Closure Rate](https://www.franchisegrade.com/tools/franchise-glossary#closure-rate) · [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20) · [Ceased Operations](https://www.franchisegrade.com/tools/franchise-glossary#ceased-operations)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#net-unit-change*

### Franchisee Turnover

Franchisee turnover is the rate at which owners leave the system — through termination, non-renewal, transfer, or the franchisor reacquiring the unit.

**Also called:** Churn

It is the most revealing metric in the FDD, because owners who are doing well rarely leave. High turnover in a growing brand means new owners are replacing departing ones.

**Example.** 9 terminations, 14 transfers and 6 non-renewals on 260 units is 11% turnover in a single year — roughly one owner in nine exiting.

**Related:** [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20) · [Termination Rate](https://www.franchisegrade.com/tools/franchise-glossary#termination-rate) · [Transfer](https://www.franchisegrade.com/tools/franchise-glossary#transfer) · [Validation Calls](https://www.franchisegrade.com/tools/franchise-glossary#validation-calls) · [Net Unit Change](https://www.franchisegrade.com/tools/franchise-glossary#net-unit-change)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchisee-turnover*

### Termination Rate

The termination rate is the share of units the franchisor ended involuntarily in a period — a direct measure of how often the relationship fails outright.

**Example.** 9 terminations on 260 units is 3.5% a year. Sustained across a ten-year term that is a material share of the system.

**Related:** [Termination](https://www.franchisegrade.com/tools/franchise-glossary#termination) · [Franchisee Turnover](https://www.franchisegrade.com/tools/franchise-glossary#franchisee-turnover) · [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20) · [Closure Rate](https://www.franchisegrade.com/tools/franchise-glossary#closure-rate)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#termination-rate*

### Reacquired Franchise

A reacquired franchise is a unit the franchisor has bought back from a franchisee, then either re-sold or operates itself.

Reacquisitions can be strategic — taking a strong unit in a flagship market — or defensive, absorbing a unit that could not be sold. Item 20 counts them but does not distinguish.

**Example.** A franchisor reacquires four units in one year, three in its two largest metros. Whether that is strength or rescue is exactly the question for validation calls.

**Related:** [Company-Owned Outlet](https://www.franchisegrade.com/tools/franchise-glossary#company-owned-outlet) · [Right of First Refusal (ROFR)](https://www.franchisegrade.com/tools/franchise-glossary#right-of-first-refusal) · [Franchisee Turnover](https://www.franchisegrade.com/tools/franchise-glossary#franchisee-turnover) · [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#reacquired-franchise*

### Ceased Operations

Ceased operations means a location closed and is no longer trading, for any reason — failure, a lost lease, a relocation, or an owner exit.

**Also called:** Closure

**Example.** Item 20 shows 29 units ceasing operations in a year. The franchisor attributes eleven to lease expirations, which is worth verifying with former owners.

**Related:** [Closure Rate](https://www.franchisegrade.com/tools/franchise-glossary#closure-rate) · [Net Unit Change](https://www.franchisegrade.com/tools/franchise-glossary#net-unit-change) · [Termination](https://www.franchisegrade.com/tools/franchise-glossary#termination) · [Survival Rate](https://www.franchisegrade.com/tools/franchise-glossary#survival-rate)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#ceased-operations*

### Closure Rate

The closure rate is the percentage of units that stopped trading in a period, and it is the plainest available read on operating risk.

**Example.** 29 closures on a 260-unit base is an 11% annual closure rate — far above a healthy system's typical low single digits.

**Related:** [Ceased Operations](https://www.franchisegrade.com/tools/franchise-glossary#ceased-operations) · [Net Unit Change](https://www.franchisegrade.com/tools/franchise-glossary#net-unit-change) · [Survival Rate](https://www.franchisegrade.com/tools/franchise-glossary#survival-rate) · [Termination Rate](https://www.franchisegrade.com/tools/franchise-glossary#termination-rate)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#closure-rate*

### Survival Rate

The survival rate is the share of units still trading after a given number of years — the metric buyers most want and the one no FDD reports directly.

It has to be reconstructed by tracking cohorts across several years of Item 20 tables, which is precisely the kind of analysis independent research exists to do.

**Example.** By tracking three consecutive FDDs you find that of 60 units opened four years ago, 47 are still trading — a 78% four-year survival rate.

**Related:** [Closure Rate](https://www.franchisegrade.com/tools/franchise-glossary#closure-rate) · [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20) · [Franchisee Turnover](https://www.franchisegrade.com/tools/franchise-glossary#franchisee-turnover) · [Franchise Grade Rating](https://www.franchisegrade.com/tools/franchise-glossary#franchise-grade-rating)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#survival-rate*

### Signed But Not Opened

Signed but not opened counts franchises that have been sold and paid for but are not yet trading — the pipeline, and sometimes the queue of stalled projects.

**Also called:** Sold Not Open, Pipeline Units

A large and persistent balance is a warning. It can mean site selection is failing, financing is not closing, or buyers are having second thoughts after signing.

**Example.** A 260-unit system shows 58 signed but not opened, with 22 of them signed more than two years ago. That second number is the one that matters.

**Related:** [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20) · [Development Schedule](https://www.franchisegrade.com/tools/franchise-glossary#development-schedule) · [Site Selection](https://www.franchisegrade.com/tools/franchise-glossary#site-selection) · [Projected New Outlets](https://www.franchisegrade.com/tools/franchise-glossary#projected-new-outlets)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#signed-but-not-opened*

### Projected New Outlets

Projected new outlets is the franchisor's own estimate of how many units it expects to open in the coming year, disclosed by state.

**Example.** A franchisor projects 45 openings next year having opened 41 this year — credible. One projecting 120 having opened 18 is telling you about its sales targets, not its capacity.

**Related:** [Signed But Not Opened](https://www.franchisegrade.com/tools/franchise-glossary#signed-but-not-opened) · [Unit Growth](https://www.franchisegrade.com/tools/franchise-glossary#unit-growth) · [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#projected-new-outlets*

### Year First Franchised

The year first franchised is when the brand began selling franchises, which is often much later than when the business itself started.

The gap matters. A concept trading since 2005 that began franchising in 2024 has twenty years of operating history and one year of franchising history — and franchising is the part you are buying.

**Example.** Founded 2005, first franchised 2024, with 22 units open. Treat it as a two-year-old franchisor with a well-tested product.

**Related:** [Emerging Franchise](https://www.franchisegrade.com/tools/franchise-glossary#emerging-franchise) · [Pilot Operation](https://www.franchisegrade.com/tools/franchise-glossary#pilot-operation) · [Franchisor](https://www.franchisegrade.com/tools/franchise-glossary#franchisor)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#year-first-franchised*

### Franchise Grade Rating

The Franchise Grade rating is an independent grade derived from disclosure data across more than 3,000 franchise systems — growth, franchisee turnover, fee structure, investment range and how transparently financial performance is reported.

**Also called:** Franchise Grade, Grade

A grade is a starting point, not a verdict. It narrows the field so the slower work — reading the FDD, speaking with current and former owners, and testing the numbers against your own market — goes into the opportunities that deserve it.

**Example.** Two brands in the same category and price band grade differently, largely because one publishes a full Item 19 with cost lines and has half the franchisee turnover.

**Related:** [Item 19 — Financial Performance Representation](https://www.franchisegrade.com/tools/franchise-glossary#item-19) · [Item 20 — Outlets & Franchisee Information](https://www.franchisegrade.com/tools/franchise-glossary#item-20) · [Franchisee Turnover](https://www.franchisegrade.com/tools/franchise-glossary#franchisee-turnover) · [Survival Rate](https://www.franchisegrade.com/tools/franchise-glossary#survival-rate) · [Franchise Advisor](https://www.franchisegrade.com/tools/franchise-glossary#franchise-advisor)

*Anchor: https://www.franchisegrade.com/tools/franchise-glossary#franchise-grade-rating*

## Commonly confused terms, compared

### Exclusive vs Protected Territory

An exclusive territory bars the franchisor itself from operating in your area; a protected territory only limits what it will do there, and the limits are usually narrower than buyers assume.

Compare in full: [Exclusive Territory](https://www.franchisegrade.com/tools/franchise-glossary#exclusive-territory) vs [Protected Territory](https://www.franchisegrade.com/tools/franchise-glossary#protected-territory)

### Franchise Fee vs Royalty

The franchise fee is a one-time payment to join the system; the royalty is a percentage of your sales paid for the entire term. Over ten years the royalty is almost always the far larger number.

Compare in full: [Initial Franchise Fee](https://www.franchisegrade.com/tools/franchise-glossary#initial-franchise-fee) vs [Royalty](https://www.franchisegrade.com/tools/franchise-glossary#royalty)

### FDD vs Franchise Agreement

The FDD is disclosure you receive at least 14 days before signing; the franchise agreement is the contract that actually binds you. The agreement sits inside the FDD as an exhibit.

Compare in full: [Franchise Disclosure Document (FDD)](https://www.franchisegrade.com/tools/franchise-glossary#franchise-disclosure-document) vs [Franchise Agreement](https://www.franchisegrade.com/tools/franchise-glossary#franchise-agreement)

### Franchisor vs Franchisee

The franchisor owns the brand and the system and collects the fees; the franchisee buys the right to use both and owns the business built with them.

Compare in full: [Franchisor](https://www.franchisegrade.com/tools/franchise-glossary#franchisor) vs [Franchisee](https://www.franchisegrade.com/tools/franchise-glossary#franchisee)

### Area Developer vs Master Franchise

An area developer recruits and supports franchisees for a region and shares in their fees; a master franchisee holds the rights to a whole territory and signs the franchise agreements itself, acting as the franchisor there.

Compare in full: [Area Developer](https://www.franchisegrade.com/tools/franchise-glossary#area-developer) vs [Master Franchise](https://www.franchisegrade.com/tools/franchise-glossary#master-franchise)

### Item 19 vs Earnings Claim

An earnings claim is any statement about what franchisees make. Item 19 is the only place a franchisor may legally make one — so a figure quoted outside Item 19 is a compliance problem, not data.

Compare in full: [Item 19 — Financial Performance Representation](https://www.franchisegrade.com/tools/franchise-glossary#item-19) vs [Earnings Claim](https://www.franchisegrade.com/tools/franchise-glossary#earnings-claim)

### Approved vs Required Supplier

You may choose freely among approved suppliers; you have no alternative to a required one. Check which of your major inputs fall into each category before you model your margin.

Compare in full: [Approved Supplier](https://www.franchisegrade.com/tools/franchise-glossary#approved-supplier) vs [Required Supplier](https://www.franchisegrade.com/tools/franchise-glossary#required-supplier)

### Registration vs Filing State

A registration state reviews and registers the FDD before franchises may be sold there; a filing state only wants notice that they will be. Neither amounts to state approval of the opportunity.

Compare in full: [Franchise Registration State](https://www.franchisegrade.com/tools/franchise-glossary#franchise-registration-state) vs [Franchise Filing State](https://www.franchisegrade.com/tools/franchise-glossary#franchise-filing-state)

### Broker vs Advisor

A broker earns a commission from the franchisor when you sign, so the brands presented are the ones that pay into their network. Ask anyone advising you who pays them and how much.

Compare in full: [Franchise Broker](https://www.franchisegrade.com/tools/franchise-glossary#franchise-broker) vs [Franchise Advisor](https://www.franchisegrade.com/tools/franchise-glossary#franchise-advisor)

### Company-Owned vs Franchised Outlet

A company-owned outlet is run by the franchisor with its own capital; a franchised outlet is run by an owner like you. Item 19 figures drawn from company outlets describe a business with different costs than yours.

Compare in full: [Company-Owned Outlet](https://www.franchisegrade.com/tools/franchise-glossary#company-owned-outlet) vs [Franchised Outlet](https://www.franchisegrade.com/tools/franchise-glossary#franchised-outlet)

### Business Format vs Product Distribution

Business format franchising licenses the whole operating system and is what almost every modern franchise sells; product distribution franchising licenses the right to sell a product, with far less control over how you operate.

Compare in full: [Business Format Franchising](https://www.franchisegrade.com/tools/franchise-glossary#business-format-franchising) vs [Product Distribution Franchising](https://www.franchisegrade.com/tools/franchise-glossary#product-distribution-franchising)

### Termination vs Non-Renewal

Termination is the franchisor ending the agreement early, normally after an uncured default; non-renewal is a term simply running out without either side continuing. Both appear as closures in Item 20, but they mean very different things.

Compare in full: [Termination](https://www.franchisegrade.com/tools/franchise-glossary#termination) vs [Non-Renewal](https://www.franchisegrade.com/tools/franchise-glossary#non-renewal)

### Liquid Capital vs Net Worth

Liquid capital is money you can access within days; net worth is everything you own minus everything you owe. Home equity counts toward net worth and not toward liquidity, which is where most buyers fall short of a brand's minimum.

Compare in full: [Liquid Capital](https://www.franchisegrade.com/tools/franchise-glossary#liquid-capital) vs [Net Worth](https://www.franchisegrade.com/tools/franchise-glossary#net-worth)

### Owner-Operator vs Semi-Absentee

An owner-operator works in the business full time; semi-absentee assumes a paid manager and roughly 10 to 20 hours a week from you. Semi-absentee only works if the unit economics genuinely support that manager from early on.

Compare in full: [Owner-Operator](https://www.franchisegrade.com/tools/franchise-glossary#owner-operator) vs [Semi-Absentee Ownership](https://www.franchisegrade.com/tools/franchise-glossary#semi-absentee-ownership)

### Non-Compete vs Non-Solicitation

A non-compete stops you running a competing business for a period and within an area; a non-solicitation only stops you approaching the system's staff, owners or customers. The non-compete is the one that can keep you out of your industry.

Compare in full: [Non-Compete Clause](https://www.franchisegrade.com/tools/franchise-glossary#non-compete-clause) vs [Non-Solicitation Agreement](https://www.franchisegrade.com/tools/franchise-glossary#non-solicitation-agreement)

### Total Investment vs Franchise Fee

The franchise fee is usually 10% to 20% of what it actually costs to open. Item 7's total initial investment range is the number to plan against, and the high end of it is the realistic figure.

Compare in full: [Total Initial Investment](https://www.franchisegrade.com/tools/franchise-glossary#total-initial-investment) vs [Initial Franchise Fee](https://www.franchisegrade.com/tools/franchise-glossary#initial-franchise-fee)

### Gross Sales vs AUV

Gross sales are what one location takes in; average unit volume is the system average across locations. An AUV tells you nothing about the spread, so always ask how many units beat it.

Compare in full: [Gross Sales](https://www.franchisegrade.com/tools/franchise-glossary#gross-sales) vs [Average Unit Volume (AUV)](https://www.franchisegrade.com/tools/franchise-glossary#average-unit-volume)

### Transfer vs Reacquired

A transfer is a sale to another owner; a reacquisition is the franchisor buying the unit back. Both leave the departing franchisee out of the system, but only one puts money in their pocket on good terms.

Compare in full: [Transfer](https://www.franchisegrade.com/tools/franchise-glossary#transfer) vs [Reacquired Franchise](https://www.franchisegrade.com/tools/franchise-glossary#reacquired-franchise)

### SBA Loan vs ROBS

An SBA loan is debt: you get bank diligence and a repayment schedule, plus a personal guaranty. ROBS is equity from your own retirement savings: no debt service, no lender scrutiny, and no safety net if the business fails.

Compare in full: [SBA Loan](https://www.franchisegrade.com/tools/franchise-glossary#sba-loan) vs [ROBS (Rollovers as Business Start-ups)](https://www.franchisegrade.com/tools/franchise-glossary#robs)

### Turnkey vs Build-Out Cost

Turnkey describes who manages the construction, not who pays for it. The build-out cost in Item 7 is yours either way, so confirm exactly what a quoted turnkey price includes.

Compare in full: [Turnkey](https://www.franchisegrade.com/tools/franchise-glossary#turnkey) vs [Build-Out Cost](https://www.franchisegrade.com/tools/franchise-glossary#build-out-cost)

## Frequently asked questions

### What is a franchise, in plain English?

A franchise is a license to run a business using someone else's brand, system and know-how, in exchange for fees and an agreement to operate the way that owner requires. Under the FTC Franchise Rule three things have to be present for it to be a franchise at all: you use the franchisor's trademark, the franchisor exerts significant control over or gives significant assistance to how you operate, and you pay them money to get started. Remove any one of the three and the arrangement is legally something else, such as a license or a distributorship.

### Which franchise terms cost buyers the most money when they are misunderstood?

Four, consistently. The difference between an exclusive and a protected territory, because protection is usually much narrower than buyers assume. The difference between the franchise fee and the total initial investment, because the fee is typically only 10% to 20% of what it takes to open. The royalty base, because two brands charging the same percentage can cost very different amounts depending on what that percentage applies to. And working capital, because Item 7 usually funds about three months while many units take longer than that to reach breakeven.

### What is the difference between the FDD and the franchise agreement?

The Franchise Disclosure Document is disclosure: 23 standard sections a franchisor must give you at least 14 calendar days before you sign anything or pay any money. The franchise agreement is the contract that actually binds you, and a copy of it sits inside the FDD as an exhibit so you can read it early. Where the two differ in emphasis, the agreement governs. The FDD exists so you can make an informed decision; the agreement is the decision.

### Where do the most important numbers in a franchise sit?

Item 7 gives the franchisor's own estimate of what it costs to open, as a low-to-high range. Item 6 lists every ongoing fee, which together determine your margin. Item 19 is the only place a franchisor may legally publish figures about what franchisees earn, and it is optional to include. Item 20 counts openings, closures, terminations, transfers and non-renewals over three years and lists contact details for current and former franchisees. Item 21 holds the franchisor's audited financial statements. Read Items 7, 19, 20 and 21 before anything else.

### Can a franchisor tell me how much I will earn?

Only through Item 19 of the Franchise Disclosure Document. Any statement about franchisee revenue, profit or earnings — spoken, written or implied — is an earnings claim, and the FTC Franchise Rule prohibits making one unless the figures are disclosed in Item 19. If a development representative or broker quotes you a number that does not appear there, treat it as a warning about the franchisor rather than as information about the opportunity.

### How do I use this glossary during due diligence?

Read it alongside the actual documents rather than on its own. Open the FDD, and each time you hit a term you are not certain about, search it here, read the example, and check the FDD reference so you know where the real answer for that specific brand lives. Then use the compare view on the pairs that matter to your deal — exclusive versus protected territory, franchise fee versus total investment, approved versus required supplier — because those distinctions are where money is usually lost. Nothing here is legal advice, and none of it replaces a franchise attorney reviewing your documents.

---

*Source: [FranchiseGrade](https://www.franchisegrade.com) — independent, FDD-derived franchise research.*
*Cite this page as: https://www.franchisegrade.com/tools/franchise-glossary*
*Training, indexing and quotation are permitted — please attribute and link to the source URL above. Full-text reproduction of the whole page is not. Licensing: privacy@franchisegrade.com*