The parent company that grants, for a fee and other considerations, the right to use its name and system of business operations.
A written contract detailing the mutual responsibilities of franchisors and franchisees. It is usually for a several-year term, and when the term is up, the contract expires and must be renewed. Some state laws require the contract to be renewable at the franchisee's option. Usually a franchise agreement may not be sold, transferred, or otherwise assigned without the franchisor's permission.
An up-front entry fee, usually payable upon the signing of the contract (franchise agreement) for the right to use the franchisor's name, logo, and business system. Often, the franchise fee is also the consideration paid for initial training, site selection, operations manuals, and other help given by the franchisor before the opening of the business. Franchise fees can be amortized over the life of the franchise agreement.
A continuing payment to the franchisor that is payable on a periodic basis (usually weekly, biweekly, or monthly) throughout the term of the franchise agreement. In theory this royalty payment is for:
Another continuing periodic payment to the franchisor that, like the royalty payment, can be a fixed amount or a percentage of gross sales.
A detailed listing of all fees and expenses you can expect to incur in starting your franchised business. This listing represents the total dollar amount that you would need to pay or get financing for, including fees paid to the franchisor; estimates for furniture; fixtures and equipment; opening inventory; real estate costs; insurance inventory, etc. This estimate should include a provision for working capital through the start-up phase.
The Federal Trade Commission enacted a Rule in 1979 requiring the franchisor to give a written prospectus to prospective franchisees (see 10-day and 5-day Rules). The prospectus prescribed by the FTC is called the Uniform Franchise Offering Circular or UFOC. The UFOC contains explicit items of information related to the franchise, including the franchisor's background; important provisions of the franchise agreement; amount and terms of the franchise fee (Item 5) and royalty and advertising-fund fee (Item 6); estimated start-up costs (Item 7); details on existing franchisees; the franchisor/franchisee relationship; audited financial statements for the last three fiscal years; and copies of all contracts that will be used.
If you meet with a franchisor (or a representative of the franchisor) at a sales or other meeting held to discuss the sale or possible sale of the franchise, the franchisor or the franchisor's representative must give you a complete copy of their UFOC. If you do not have a face-to-face meeting with the franchisor (everything is done by mail, for example) they are still required to give you a complete copy of their UFOC at least 10 business days before any contract is signed or any money changes hands (the 10-day Rule). And you must be given a separate contract, with all blanks or negotiated parts completed (except signatures) at least five business days before any contract is signed or any money changes hands (the 5-day Rule).