Franchise Glossary
Franchise
A franchise is a business model in which an individual or entity owns and operates a business using an established brand, proven systems, and ongoing support from a parent company.
Franchisor
The franchisor is the company that owns the brand, trademarks, and operating system and licenses them to franchisees in exchange for fees and ongoing royalties.
Franchisee
A franchisee is the individual or entity that purchases the right to operate a franchise business under the franchisor’s brand and system.
Single-Unit Franchise
A single-unit franchisee owns and operates one franchise location.
Territory: One protected geographic area
Fees Paid: Initial franchise fee, ongoing royalties (typically a percentage of gross revenue), and national advertising fund contributions
Who Gets Paid: The franchisor
Multi-Unit Franchise
A multi-unit franchisee owns and operates multiple franchise locations.
Territory: Multiple protected territories or development rights
Fees Paid: Franchise fee per unit (often discounted), ongoing royalties per location, and advertising fund contributions
Who Gets Paid: The franchisor
Area Developer
An area developer commits to opening multiple franchise locations within a defined territory under a development agreement. Note: Area developers do not receive royalties from other franchisees.
Territory: Exclusive rights to develop a region
Fees Paid: Development fee (often credited toward future franchise fees), ongoing royalties per location, and advertising fund contributions
Who Gets Paid: The franchisor
Master Franchisee
A master franchisee acts as a regional partner who may open locations and recruit, train, and support franchisees.
Territory: State, region, or country
Fees Paid: Master franchise fee
Fees Earned: A portion of initial franchise fees and ongoing royalties from the territory
Who Gets Paid: Royalties are shared between the master franchisee and the franchisor
Territory
A franchise territory defines the geographic area in which a franchisee is authorized to operate and market their business.
Protected Territory
A protected territory is an area where the franchisor agrees not to open another competing franchise location.
Initial Franchise Fee
A one-time payment made when purchasing a franchise that covers brand rights, training, and startup support.
Franchise Royalty
An ongoing payment, usually monthly and based on a percentage of gross revenue, paid for continued use of the franchise brand and system.
National Advertising Fund
A required contribution used to support brand-wide marketing and advertising efforts.
Gross Revenue
Total sales before expenses, commonly used to calculate royalties and marketing fees.
Franchise Disclosure Document (FDD)
A legally required document providing detailed information about the franchise opportunity.
Item 7: The section of the FDD outlining the estimated initial investment.
Item 19: The section of the FDD that may include financial performance representations.
Development Agreement
A contract outlining how many locations must be opened, where they will be located, and the required development timeline.