During this week’s blog edition, we’re going to visit seven franchising terms you need to know if you’re going to be involved in the industry. While some may seem pretty straightforward, it’s quite possible that you’ll learn some additional information spelled out in the definition of each entry. In no particular order, Proven Match presents seven franchising terms you need to know:
Franchise Disclosure Document (FDD)
The franchise disclosure document is the Holy Grail of your particular franchise concept. It’s so important that it’s regulated and required by the U.S. Trade Commission in order to be in compliance with the law. Did you know that it’s divided into 23 sections called items? Each has tremendous significance in how the franchise concept does business. What’s most important is that it spells out—in fine detail—exactly how the concept’s rights and responsibilities are divided among franchisor and franchisee. FDD’s are typically updated on an annual basis.
Royalties are a set amount to be paid to the franchisor by the assigned franchisee for use of the brand in general. They may be set up for weekly, monthly or annual payments and sometimes require a separate royalty for value-added services such as advertising. In some cases, royalties can be waived for a period of time as part of a deal sweetener.
As mentioned in the FDD section, there are 23 separate items, but none may have more significance that Item 19. Item 19 is the section that deals with details on earnings, costs, and factors likely to affect a franchisee’s future financial performance. It’s one section in the FDD that deals with firm calculations on earnings claims. Item 19 can help franchisees mitigate business risk and potential return on investment scenarios.
This term describes a particular franchise business model in which it is not necessary for an owner to be on site (or even directly engaged) on a daily basis. It has become an attractive feature for some franchise brands who target those not willing to give up their “day jobs” just yet. It’s also referred to as “managing the manager” in some circles.
Third Party Finance
Many franchisors offer direct options for financing the purchase of one of their businesses. But not all. Those that don’t usually offer third-party financing, in which they have a relationship with a bank or credit union of their own. Often times, new franchisees are directed to the financing options offered through the U.S. Small Business Administration (SBA).
Ah, back to the FDD items again! Item 7 is another vital piece of the puzzle when investigating particular franchise concepts. Item 7 spells out exactly how much capital is necessary to open a franchise—also called the startup or initial investment. It’s broken down into sections like real estate, licenses, equipment, and supplies. In some cases, this should be the first section a franchisee candidate explores within the FDD.
Sounds exciting! That’s because it is. A Discovery Day is one of the final steps taken by franchisee candidates who have already explored the business model, secured financing and are ready to make a decision. They typically include a visit to the franchisor’s headquarters, where they will meet all of the powers that be. Sometimes that includes other franchisees already in the system. The event may include a dinner, tour and other fun activities in which the franchisor hopes to close a deal on its newest owner of the franchise brand.
As a franchisor, you’ll want to know which existing and potential franchisees grasp these concepts and fit your business concept. Proven Match is the proven solution in determining those factors. Through our proven behavioral assessment techniques, predictive analysis becomes a predictive success for your franchise concept. If you’re ready to show your leadership by getting started, give us a call and we’ll put you on the path to a more productive year in 2016.