Reference
Franchise Glossary
Plain-English definitions of the franchising terms that actually matter when you are evaluating a franchise. Every definition is sourced from how the Franchise Disclosure Document (FDD) and the FTC Franchise Rule define these concepts.
- Franchise
- A franchise is a business model in which an owner (the franchisor) licenses its brand, systems, and support to an independent operator (the franchisee) in exchange for an initial fee and ongoing royalties. The franchisee runs their own location using the franchisor's proven playbook. Browse the franchise directory →
- Franchisee
- A franchisee is the person or company that buys the right to operate a location of a franchise brand. The franchisee invests the capital, runs the day-to-day business, and pays royalties to the franchisor. See franchisee operators →
- Franchisor
- A franchisor is the company that owns a franchise brand and grants franchises to others. The franchisor provides the brand, operating system, training, and support, and earns franchise fees and royalties in return. Franchise development for franchisors →
- Franchisee vs Franchisor
- The franchisor owns the brand and licenses it out; the franchisee buys the license and operates a location. In short: the franchisor sells the system, the franchisee runs a unit of it.
- Franchise Disclosure Document (FDD)
- The Franchise Disclosure Document is the legally required document a franchisor must give to prospective franchisees at least 14 days before they sign or pay anything. It contains 23 standardized Items covering fees, investment, litigation, unit counts, and financial performance. Search the FDD database →
- Item 7 (Estimated Initial Investment)
- Item 7 of the FDD is the estimated total initial investment to open a franchise, shown as a low-to-high range. It is the most reliable figure for what a franchise actually costs all-in, including the franchise fee, build-out, equipment, and working capital.
- Item 19 (Financial Performance Representation)
- Item 19 is the only place in the FDD where a franchisor may disclose unit-level financial performance, such as average revenue. It is optional, so when a brand has no Item 19, it has chosen not to disclose earnings, which is itself worth noting.
- Item 20 (Outlets)
- Item 20 of the FDD lists outlet counts over the last three years: openings, closures, terminations, and transfers, plus a franchisee contact list. It reveals whether a system is growing or churning.
- Franchise Fee
- The initial franchise fee is the one-time fee a franchisee pays the franchisor at signing for the right to open a location. It is disclosed in Item 5 of the FDD and is separate from the total investment.
- Royalty Fee
- A royalty fee is an ongoing payment, usually a percentage of gross revenue, that a franchisee pays the franchisor for continued use of the brand and system. Typical royalties run roughly 4 to 8 percent and are disclosed in Item 6.
- Ad Fund (Brand Fund)
- An advertising or brand fund is an ongoing fee, usually a percentage of revenue, pooled across franchisees to pay for national or regional marketing. It is separate from the royalty and disclosed in Item 6.
- Exclusive Territory
- A territory is the geographic area assigned to a franchisee. An exclusive (or protected) territory means the franchisor agrees not to open or grant another location within it. Territory terms are disclosed in Item 12.
- Multi-Unit Operator
- A multi-unit operator is a franchisee that owns and runs two or more locations, often across multiple brands. Multi-unit operators are the most experienced, best-capitalized buyers in franchising. Find multi-unit operators →
- Area Developer
- An area developer signs an agreement to open a set number of units within a defined region over a set schedule, in exchange for development rights to that area.
- Master Franchise
- A master franchise gives a franchisee the right to sub-franchise a brand within a territory or country, effectively acting as the franchisor for that region and sharing in the fees they collect.
- Franchise Agreement
- The franchise agreement is the binding contract between franchisor and franchisee that governs the relationship: term length, fees, territory, obligations, and renewal. The FDD discloses its terms before signing.
- Discovery Day
- Discovery Day is an in-person or virtual meeting where a prospective franchisee visits the franchisor's team to evaluate the opportunity before signing. It is typically one of the final steps in the award process.
- Franchise Broker
- A franchise broker (or consultant) helps prospective franchisees choose a brand and is paid a commission by the franchisor when a candidate they refer signs. Because brokers are paid by the brands, their recommendations can favor whoever pays the most.
- FTC Franchise Rule
- The FTC Franchise Rule is the federal regulation that requires franchisors to provide an FDD and governs how franchises are sold in the United States. It exists to give prospective franchisees the information they need before investing.
- Net Worth & Liquidity Requirements
- Most franchisors require candidates to meet minimum net worth and liquid capital thresholds, ensuring a franchisee can fund the build-out and survive the early months before a unit is profitable.
Ready to go deeper?
Browse the free franchise directory, search Franchise Disclosure Documents, or, if you run a brand, see our franchise development services.