Franchising Terminologies

Franchising can be highly complicated, especially for beginners. But having the proper knowledge and understanding of the basic franchising terminologies will help anyone to get started. This article will discuss the most common terms encountered in the franchising world.


It is a method where franchisors distribute products or services to franchisees under proven successful business systems.


The entity that owns the franchise. Franchisors spent a lot of time and money building the brand trademark, trade name, and business system to make it successful.


Someone who pays a franchise fee for rights to use and operate the franchisor’s business.

Franchise fee

It is the one-time fee paid by the franchisee to the franchisor upon agreeing to the franchise agreement.

Franchise agreement

It is a contract between the franchisee and the franchisor that outlines all responsibilities for both parties to each other during the agreement period.

Royalty fee

In addition to the one-time franchise fee, franchisees need to pay a recurring monthly royalty fee to cover services like training, accounting, technology, and everything else that the franchisor provides on an ongoing basis. Usually, this fee runs from 6 to 10%, depending on the franchisor.

Advertising fund fee

Since the franchisor advertises the brand, which benefits the franchisee, they will require the franchisee to pay an additional 2% recurring fee.

Franchise disclosure document

This is a legal document required by the federal trade commission to be presented to each franchisee. It protects the franchisee and will hold the franchisor accountable for anything they don’t do properly.

Due diligence

Is the act of investigating all aspects of the franchisor; the market that you are entering, the competition in that market, and your own capability of running the business.

Without proper knowledge of these terminologies, you might find yourself lost when negotiating with a franchisor. Understanding what you are getting into before investing your hard-earned money is imperative.


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