Jun 23, 2022 - Blog, Franchise Articles by |

If you are thinking about buying a franchise, you will need to familiarize yourself with some basic legal terms in order to understand the Franchise Disclosure Document (FDD) and franchise agreement. Here is an introduction to 10 key terms from national franchisee attorney Jeffrey M. Goldstein.

Glossary of Key Terms for Prospective Franchisees

1. Advertising Fund (or Marketing Fund)

An advertising fund (or marketing fund) is a pool of money franchisors use to conduct system-wide advertising campaigns. Franchisees contribute to the fund through a weekly, bi-weekly or monthly payment calculated as a percentage of their gross income.

2. Breach (or Default)

A breach (or default) is a violation of your franchise agreement. While franchisees may be able to cure certain breaches or defaults, others can result in immediate termination of their franchise rights.

3. Due Diligence

While not a term you will find in your FDD or franchise agreement, due diligence is a critical component of evaluating franchise opportunities. Due diligence is the process of gathering information from the franchisor, current and former franchisees, and other sources so that you can make an informed buying decision.

4. Financial Performance Representation (FPR)

A financial performance representation (FPR) is a historical or hypothetical representation of what franchisees may be able to earn from their businesses. Franchisors have the option to make an FPR in Item 19 of the FDD.

5. Operations Manual

The Operations Manual is the third main document (along with the FDD and franchise agreement) that establishes franchisees’ obligations. While you won’t be able to review the Operations Manual before you sign, it will be binding; and, if you fail to follow the Operations Manual, this could lead to the loss of your franchise.

6. Renewal

All franchise agreements specify an initial term, or duration, which is usually in the range of two to five years. In order to keep your franchise after your initial term, you will need to meet the franchisor’s conditions of renewal.

7. Royalty

A royalty fee is an ongoing fee you pay to the franchisor in exchange for your right to operate the franchise. Similar to advertising fund contributions, royalty fees are calculated as a percentage of franchisees’ gross income.

8. Termination

Termination is the end of your franchise prior to the expiration of the initial term (or a renewal term). Franchisors reserve the right to terminate their franchisees for various reasons, from nonpayment of royalties to noncompliance with the Operations Manual.

9. Trademark

A trademark is a franchisor’s brand or logo. You can find information about a franchisor’s trademarks in Item 13 of the FDD. Generally speaking, you will want to see that a franchisor’s principal trademarks are registered and that the franchisor is taking active steps to protect them.

10. Transfer

Transfer refers to the sale of your franchise. In order to conduct a transfer, you will need to pay a transfer fee and meet the franchisor’s other conditions for approval.

Get Help Evaluating Your Franchise Opportunity from a Top Franchisee Attorney

When buying a franchise, it is important to work with an experienced franchisee attorney who can help you understand your risks and make informed decisions. To discuss your franchise opportunity with national franchisee attorney Jeffrey M. Goldstein in confidence, please call 202-293-3947 or request a free consultation online today.

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