Franchise Glossary
Key franchise terms explained in plain English. Understanding the language is the first step in due diligence.
Break-Even
The point at which a franchise unit's revenue exactly covers all costs, including fixed and variable expenses. Operating below break-even means the business is losing money.
COGS
Cost of Goods Sold. The direct costs attributable to the production or purchase of the goods sold by the franchise, typically including ingredients, materials, and packaging.
Disclosure Period
The mandatory waiting period (typically 14 days in Australia) between receiving the FDD and signing the franchise agreement, designed to give buyers time for due diligence.
FDD
Franchise Disclosure Document. A legal document that franchise sellers must provide to prospective buyers, containing information about the franchise system, fees, obligations, and risks.
Fit-Out
The process and cost of building, furnishing, and equipping a franchise location to meet the franchisor's brand standards. Often one of the largest upfront costs.
Franchise Agreement
The legally binding contract between the franchisor and franchisee that governs the franchise relationship, including term length, fees, obligations, and termination conditions.
Franchisee
An individual or entity that purchases the right to operate a business under the franchisor's brand and system. The franchisee owns the unit but must follow the franchisor's rules.
Franchisor
The company that owns the franchise brand and system, and grants franchisees the right to operate under its brand in exchange for fees and compliance with its operating standards.
Marketing Fund
A mandatory contribution from franchisees used to fund national and regional marketing campaigns managed by the franchisor. Typically 1-5% of gross revenue.
Non-Compete Clause
A contractual restriction preventing a franchisee from operating a competing business during and sometimes after the franchise agreement. Duration and scope vary.
Renewal
The process of extending a franchise agreement beyond its initial term. Renewal conditions, fees, and requirements vary and should be carefully reviewed before signing.
Royalty Fee
An ongoing fee paid by the franchisee to the franchisor, typically calculated as a percentage of gross revenue. This is the primary ongoing cost of operating under the franchise brand.
Territory
A defined geographic area assigned to a franchisee. May be exclusive (no other units allowed) or non-exclusive. Territory protection varies significantly between franchise systems.
Working Capital
The cash reserves needed to cover day-to-day operating expenses before the business becomes self-sustaining. Insufficient working capital is a leading cause of franchise failure.