Due diligence – This refers to the investigation that takes place before an investment or similar business transaction takes place – essentially, it is about establishing facts to ensure unnecessary harm is not inflicted to either party in the deal.
Franchise – A franchise is a licence to use a brand name that is sold to another person for a set time period. The arrangement also includes details of the business model, which must be adhered to, training, support and advertising – all for a fee paid by the franchisee to the franchisor.
Franchise Contract – The legal agreement between the parties which sets out the terms under which the Franchisee will operate the business. The terms usually include the following:
- The right to use the trade name
- The Franchisee’s obligations
- The Franchisor’s obligations
- The premises and the territory
- Length of Franchise contract
- Financial aspects such as initial franchisee fee and ongoing royalties
- Renewal terms
- Control of standards
- Rights of sale
- Performance targets
- Effects of termination
Franchisee – The individual who buys the licence to use a brand name and business model (franchise). In return for a fee paid to the franchisor, they can expect to get training, ongoing support and advertising assistance. Nevertheless, a franchisee remains an independent business owner, with appropriate autonomy and, in most cases, ultimate responsibility for the success or failure of their business.
Franchise fee – The franchise fee is the amount of money a person pays a franchisor for the right to operate a franchise. Your initial franchise fee is what you pay to be given the right to use the franchise brand and business systems within a specified territory. This initial fee usually covers your start-up training. Your ongoing franchise fee or service fee varies between franchisors and is typically a percentage of your turnover. Payable weekly or monthly, it helps the franchisor to grow and develop the business and brand.
Franchisor – The organisation that licences its brand and business model to be used by franchisees.
Operations manual – A franchise’s bible, the operations manual gives people all the details they need to follow a franchise business model, including policies and procedures. Whilst the operations manual may not cover every aspect of the day-to-day running of the business, failure to comply with the terms of the operations manual would generally be considered a breach of the franchise agreement.
Resale – Once a franchisee has the business up and running, they can choose to sell it on – this is known as a resale. Whereas buying a licence for a franchise involves setting everything up and becoming established, an individual that purchases a resale has had much of the work done for them, so the upfront purchase price tends to be higher. Bear in mind that this kind of transaction is generally between the current and incoming franchisee, not the franchisor.
Territory – A designated area or geographic boundary granted to the franchisee by the terms of a franchise agreement. The franchisor agrees to not to open another franchised or company-owned business of a similar nature within the franchisee’s protected territory.
Trademark – A distinctive name or symbol used to distinguish a particular product or service from others. It can be used exclusively by the owner, and no one else can use it without the owner’s permission. Part of a franchise’s value is the right to use a recognized trademark.
Working capital – A great measure of a company’s short-term health is to calculate its working capital, which is basically the liquid assets it holds to meet short-term debts. It does not include fixed assets or long-term returns. To calculate working capital, deduct the value of current liabilities from current assets – if the figure is less than one, then a business has negative working capital.