A
Affiliate– Person or company who sells products to Franchisees that Franchisees may or may not be required to use. Disclosure in the FDD must clearly state the relationship of the Franchisor with the affiliate. This term can also describe companies who are part of a larger parent company. Additionally, the entity that runs a company outlet owned by the Franchisor is an affiliate of the Franchisor.
Amortization– the accounting technique to lower the book value of a loan or intangible asset over a set period of time.
AR –AR stands for Area Representative. This is an agreement drafted to allow a Franchisor to sell the rights to a defined territory to another party, the area representative, for the ability to sell other Franchises in that territory only. Essentially, the area representative becomes a sales person to sell Franchisees within this defined territory under certain terms, usually with part royalties of the Franchise sales and initial fee being given to the area representative.
B
Blacklines -The format state regulators require for renewals of an FDD to clearly show what changes there are from an older version of the FDD by underlining the text changed or added in black only with no comment bubbles or footnotes.
C
Covenantor -Person or entity who is promising something to another party. This term is typically used in the confidentiality/non-disclosure section of the Franchise Agreement ensuring that anyone the Franchisee works for is bound to keep confidential all system information of the Franchisor.
E
Exemption – A state or federal exemption from either the required disclosure of the FDD or filing for registration to be able to sell in a particular state. Exemptions are often very limited and state-specific.
F
FDD (Franchise Disclosure Document) – The document prepared for Franchisee candidates as an important part of the due diligence process to comply with state and federal regulations for the Franchise offering. It is to be delivered for review 14 days before the purchase of a Franchise can take place.
Federal State – A state that does not have a specific disclosure or filing requirements for the FDD. Be cautious still when doing business in federal states as there may be state laws that apply to the various parts of running a franchise system.
Financial Assurance – A form of financial instrument such as fee deferral, a surety bond, etc. that is satisfactory to the state requiring a financial assurance to ensure the franchisor has an incentive to perform its obligations to franchisees within a given state.
Franchisor Entity – Relates to the entity the Franchisor owns that sells and supports Franchisees. This entity can be different from the entity that runs a Franchisor’s company outlet, also not to be confused with a brand/concept name which is the system and marks each Franchisee’s purchase(s).
Franchised Concept/Brand Name – The system that is being offered for sale as a franchise under certain marks including a brand name and/or trademark.
FTC – Federal Trade Commission, created in 1914 to prevent unfair competition in commerce has expanded to other consumer protection laws and in franchising requires certain disclaimers to be included in an FDD to protect the potential Franchisee.
L
Large Franchisor – Large Franchisor for state exemption purposes varies slightly in definition depending upon the state. Typically, states define a large franchisor by a minimum net worth, a certain amount of experience franchising, and a number of franchisees in operation.
M
Material Change – A change in the franchised business that is considered important and which requires an amendment to the FDD. See Chapter 3.6 for some examples of a material change.
MUDA or Multi-Unit Disclosure Agreement – Refers to an offering where the Franchisee has the option to buy more than one unit/outlet with one agreement. The single (unit) and multi-unit offerings can be the same document.
N
NASAA – North American Securities Administrators Association, the oldest international organization organized in 1919 is devoted to investor protection. Within Franchising, they are the voice of state securities agencies who ensure Franchisees are fully informed and aware of any risks or costs associated with an offering. They set guidelines you must follow to legally sell Franchises. There are also state specific guidelines that supersede federal guidelines set by the FTC, Federal Trade Commission.
Notice Filing State – A state that typically does not have a state examiner review the FDD, though a filing of some sort is often required before a franchisor can sell in the state.
Notice of Violation – A form that is created by your SL team that will be provided to you when your documents are completed or when you sign your first franchisee. It is used to inform franchisees of violations to system standards prior to getting a formal letter of violation.
P
Principal – Any individual who has any ownership/partnership in the entity buying the Franchise. This term is used to bind person(s) in the Franchisee’s entity to the Franchise Agreement not just the entity they own.
R
Remedial Training – Training the Franchisor may mandate due to a Franchisee not meeting quality standards. Separate from additional training which is for system updates and such.
S
State Examiner – A state examiner reviews and approves filings for registration, or exemption, as dictated by state law.
Statement of Operations – The same as a profit and loss statement (P&L) also called statement of income. Needed to accompany a balance sheet when state examiners request current financials.
Successor Agreement – Previously referred to as a renewal agreement, but the document signed is not the exact same of the previously signed franchise agreement. The Successor Agreement is an updated and current agreement for the franchisee to sign for a new term that aligns with the franchise system today rather than the system when the franchisee first signed an agreement X number of years ago.
Successor Fee – Previously referred to as renewal fee. It is the fee paid for by the franchisee who wishes to continue operating as a franchisee after the term of their original agreement has ended.
T
Transfer Fee – It is a fee paid to the franchisor after an agreement was prepared to transfer the franchise business from the exisiting franchisee to the transferee franchisee.