Derived from the book ‘Franchising in South Africa, The Real Story’ by Eric Parker and Kurt Illetschko and expanded on by Sasha-Lee de Bod

If you are considering franchising your business, is it important to understand franchising and the terminology frequently used within the franchise sector. In an industry that’s steeped in opportunity, franchising has its own language. Getting to grips with the terminology and the explanations is only the first step in your journey into the world of franchising.

We have compiled a A-Z Dictionary for you to read…

Area developer – individual or company holding the right to establish a chain of franchised outlets within a defined territory.  Often linked to a development plan that determines how many units have to be set up within a certain period.

Advertising fund – (also known as the Marketing Fund) administered by the franchisor and funded from contributions by franchisees and company – owned stores.

Benchmarking – is to run a financial analysis and compare the findings to other franchises in order to assess the competitiveness, productivity and efficiency of an outlet. Benchmarking is the process of comparing the performance criteria and business processes of a franchise to other businesses within their trade.

Business format franchise – comprehensive blueprint offered by the franchisor, entitling the franchisee to received access to a brand as well as initial and ongoing support.

Business plan – the document used to project the development of a business into the future.  Within the context of franchising, the franchisor will develop a business plan for the franchise operation known as a franchise plan.  The franchisor will also help prospective franchisees of prepare a business plan for the unit under consideration.

Capital expenditure (CAPEX) – the investment required to set up a business and its infrastructure.

Confidentiality undertaking– also known as a confidentiality agreement or non-disclosure agreement.  This is a formal legal document designed to protect the franchisor against misuse of confidential information by individuals holding themselves out to be prospective franchisees.

Competitions Act – Regulations that need to be adhered to in terms of suppliers, pricing and territories when operating or expanding a business.

Conversion franchise – established businesses in the same industry sector convert to a franchised network’s brand and operating systems.

Consumer Protection Act – Regulation that needs to be adhered to when franchising to ensure compliance of franchise agreements and disclosure document.  Rights bestowed on franchisees and the representation of information.

Disclosure document – contains highly confidential and comprehensive information pertaining to a franchise opportunity.  In terms of the FASA Code of Ethics, such a document must be given to qualified prospects before a franchise agreement can be signed.  A cooling-off period of 14 days needs to be observed. his document gives franchisees insight into whether the franchise is right for them. It uncovers the franchise system and provides detailed information about the franchisor. In South Africa, this document needs to be CPA (Consumer Protection Act) compliant.

Enterprise development – is a standard business format franchise model but with an added focus on mentoring, support and career path development opportunities for capable and performing staff members what have the necessary skills to become a franchisee but not necessarily have access to the capital requirements.  This is recruiting franchisees from within your current network.

Establishment cost – (also known as setup cost). The capital needed to set up the franchise e.g., fixtures and fittings, signage, equipment, shopfitting, rental deposits, start-up stock, systems and software, marketing material, uniforms, etc.

FASA – Franchise Association of South Africa, the industry body established since 1979 that represents the interests of the franchise sector.  Membership is open to franchisors, franchisees and service providers but is voluntary.

Feasibility assessment – the process of determining if a business can be replicate through franchising by conducting a due diligence in terms of the critical success factors contributing to franchise feasibility.

Field service consultant – an individual employed by the franchisor to visit franchisees and provide ongoing onsite support as well as troubleshooting services.

Fractional franchise – franchised unit that operate under the roof of another business that may or may not be a franchise. 

Franchise – A franchise is an agreement that gives the person buying it the ability to use trademarks, fees, and support from an established business and/or brand.

Franchise Agreement – the comprehensive legal document that governs the relationship between franchisor and franchisee.  It is usually a standard document and not negotiable. This sets out the roles and responsibilities of both parties. Although it must be acknowledged that for operational reasons, the franchise agreement will need to be somewhat biased in the franchisor’s favour, it remains vital to the long-term success of the relationship that the agreement protects the legitimate interests of both parties.

Franchise champion – a passionate all-rounder involved in the preparation of the franchise package, handle franchisee recruitment and deliver training and support services to early franchisees.

Franchise Package – Consist of the franchise agreement, operations and procedure manual, franchisee training manual, recruitment pack and disclosure document.

Franchisee – The owner of a business that operates under a formal franchise arrangement, usually within a defined area, under the franchisor’s brand.  Franchisees are obliged to conduct/operate the business in accordance with guidelines issued by the franchisor. The franchisee’s rights are limited to the period during which the franchise agreement remains in force. On expiry of the franchise agreement, they revert back to the franchisor.

Franchisee Representative Committee/Council (FRC) – committee consisting of elected representatives of the franchisees of a network to present franchisees’ interests.

Franchisor – The franchisor is the individual or company who owns the rights to a tried and tested blueprint for business success and has developed the products, services and intellectual property package that underpins its ongoing success.

Funding – Franchise fees can be substantial; some franchisors offer in-house financing options for their potential franchisees. Financing options can cover the franchise fee or other expenses, such as inventory and equipment. There is also third-party financing from whatever other source you can tap into. 

Get-up – (also known as trade dress). Is the description of the appearance of a store etc., also known as the trading style of a network.

Initial fee– (also known as an upfront fee) lump sum payable by the franchisee to the franchisor at the beginning of the franchise relationship.  It pays for access to the network, use of trademarks, access to expertise and initial support.

Intellectual property – the intangibles owned by the franchisor including trademarks, registered names, patents, designs, colour schemes and copyrighted materials.

Joint Venture- these arrangements are similar to a business format franchise with the main differentiating factor being that the franchisor retains equity in the franchised outlets.  Capital requirement and profits are contributed and shared in according to the shareholding structure.

K.I.S.S Principle – Keep It Simple Stupid – not to overlook the simplicity of reality and not to make something more complect than is absolutely necessary.

License agreement – legal agreement granting rights to specified intellectual property for a specified period.  For example, the license to use the franchisors name, trademarks and business know-how forms part of every franchise agreement.

Management services fee – (also known as Royalties) ongoing fee franchisees are compelled to pay to the franchisor. Usually calculated as a percentage of franchisees’ sales payable weekly or monthly in arrears.  Sometimes described as a royalty but this is misleading and should be avoided.

Marketing contribution – ongoing fee franchisees pay onto the advertising/marketing fund that the franchisor utilises for promotional and marketing activities to create awareness and build the brand.  This cannot be used to recruit new franchisees.

Master License agreement – formal legal agreement used to grant a company or an individual the right to a master franchise covering an entire country or even continent.  It would include the right to sell franchises in this country and the master licensee effectively becomes the franchisor in the target country.

Multiple unit franchisee – operates more than one unit of the same franchise.  Frequently used to create a bigger footprint and discourage opposition from establishing itself in an area.

Mystery shopper – individual hired by a franchisor to visit stores pretending to be customers and provide formal feedback on service standards etc.

Network-wide purchase arrangements – initiated by the franchisor to secure bulk purchase benefits for all members of the network.

Operations and procedures manual (OPM) – a comprehensive collection of instructions and binding guidelines.  It is a highly confidential document, often dubbed the “Bible of the network”. The operations manual (OPM) is becoming an extension of the franchise agreement. While the franchise agreement sets out the franchisee’s obligations in broad terms, the OPM explains in detail how these obligations should best be implemented. To retain its relevance, the OPM needs to be periodically updated.

Owner-operator – means the person appointed by the Franchisee who shall be obliged to maintain full responsibility of the Business with “skin in the game”.

Pilot operation – Once a franchise model/concept has been developed, it must be tried, tested and proven in the market before it can be replicated. A pilot operation will establish the viability of the franchise model and product/service offering.

Protection of Personal Information Act – Regulations that need to be adhered to in terms of customer and employee data, i.e., how collect, manage, store and remove personal information.

Profile – the ideal franchisee characteristic and requirements needed for a franchisee and specific to the franchise operation.

Quality control – franchises need to adhere to certain operational standard and quality levels.  The franchisor can induct inspections to ensure franchisees comply to standards as defined in the operations and procedure manual.

Renewal fee – charged by some networks at the point when the franchise agreement comes up for renewal. Generally, 50% of the upfront/initial fee at that point in time.

Restraint of trade – places restrictions on franchisee and sometimes franchisee’s key staff, should they wish to compete with the franchisor and other members of the network.  Must be specific in terms of time and territory covered.

Royalty – fee payable in return for the use of intellectual property, be it a musical or literary work, a trademark, a protected name or a process.  Sometimes used in place of the term management services fee, but this is wrong and can have unintended consequences.

Recruitment process – A process flow chart/programme with clear guidelines, processes, administrative elements and timelines on how to successfully recruit franchisees.

Satellite franchise – additional unit operated by an existing franchisee in close proximity and designed to offer a limited range of services to immediate neighbourhood.

Support Structure – the legal structure and staffing infrastructure to adequate support the franchisees and growth of the network.

Tandem Franchising – is a standard business format franchise model but with an added focus on mentoring, support and long-term cooperation.  The model is ideally suited to BEE initiatives because it enables members of previously disadvantaged population groups to enter the mainstream economy at an accelerated pace yet at significantly reduced risk.

Term of Agreement – The term of agreement is the length of time the franchise agreement is good for. Typically, this term lasts 5 years. Once the term is up, the franchisor can renew the agreement if things are going well, or the contract can be terminated or adjusted.

Territorial rights – a franchisee’s right to an exclusive (or non-exclusive) area.  This could be a province, a town, part of a town or merely a street address.  The trend is to limit territorial rights to the street address of the unit, but this will be governed by the industry sector.  It is generally frowned upon by the Competition Commission.

Total investment – this is the sum 8total of the initial fee (or upfront fee), the required capital expenditure and the necessary working capital.

Trademarks – the registered and unregistered trademark/s, including Trade Names, logos, phrases and brand identification. This need to be registered in the relevant service and product categories for your industry and offering.

Trade names – the registered and unregistered Trade Names, is required for the corporate image of the Business. This need to be registered in the relevant service and product categories for your industry and offering.

Trading style – everything pertaining to the image that the business conveys including store design, fittings, furnishings, logos and colour schemes.

Training Manual – A structured induction and training curriculum to ensure consistency of training of all franchisees and staff regardless of when they’re on-boarded. This included sign off sheets and templates to ensure proper transfer of the skills.

Turnkey franchise – A turnkey franchise is a franchise unit that is ready to operate as soon as the new franchisee is onboarded. The franchisor is responsible for setting up the business and getting it to an operational readiness status for the franchisee.

Unencumbered finance requirement – With financing a franchise opportunity in general, the franchisee needs to have 50% of the total investment available in cash before borrowing the remainder.

Upfront fee – see initial fee.

Valuation – A business valuation is the process whereby one would estimate what a business is worth in terms of monetary value. Often franchised businesses need to be valued for the purposes of resale of the business. Selling the business is the main opportunity for a successful franchisee to create wealth and benefit from years of hard work put into the business. For the buyer, it’s important to know that sound valuation principles were used and to prove this to potential buyers.

Working capital – the amount of money and entrepreneur need to finance the ongoing operating expenses of business up until a point where it reaches breakeven point and shows a profit.  Frequently funded by means of an overdraft.

Waiting period – also known as cooling off period. The Consumer Protection Act imposes two waiting periods for the franchise process. The first waiting period is fourteen calendar days after providing a prospective franchisee with the disclosure document before they are allowed to sign the franchise agreement and the second period is waiting ten business days after the agreement has been signed before commencing with any franchise onboarding procedures.

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