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Understanding franchise terms
Franchise glossary hero v2

Franchise glossary

We’ve compiled a comprehensive glossary of franchise-related terminology to help you with your business-speak.

Appointment letter
Letter from the franchisor stating that the applicant has been approved as a prospective franchisee for a specific site.
Branded marketers
They operate as contracted agents of oil companies and distribute wholesale quantities of fuel. Service areas are outside of urban centres that the oil companies do not service themselves. Those areas where they operate are assigned to them by the supplying oil company.
Business plan
It is a plan that summaries the objectives of a business and the steps that will be implemented to achieve those objectives, including a marketing plan and financial projections.
Buyback agreement
Clause on the franchise agreement that stipulates that should the franchisee default its obligation to the Bank in terms of the loan agreement or if the site is not performing the franchisor has the right to buy the business back.
Buying groups
The groups source and provide members belonging to the group with goods or services at a better price etc. Discounts on products are then often passed to the members who belong to the buying group.
These are sites that are attached to fuel sites and these include Bakery, QSR and C-store, to offer multiple sources of income.
Company-corporate owned stores
Are franchisor owned outlets used to introduce products and systems before implementing them across the network.
Consumer Protection Act
The act provides certain consumer rights, among these are the protection against unfair discrimination by suppliers. Therefore, franchisors can no longer provide contact details of franchisees & their bankers, demand that franchisees support a specific institution, and share information on performance of outlets.
Cooling-off period
In most franchise agreements a cooling-off period is offered. This is needed in the case that either party changes their mind. It begins on the day a potential franchisee is given the disclosure document and signs the agreement and ends when they begin to make payments to the franchisor. The time frame might vary for different franchise agreements, but is generally ten days.
Disclosure document
The document discloses everything about the brand from when it was founded, how and by who, to the training provided by the franchisor, site selection, ongoing support provided by franchisor, set-up cost required, monthly fees to be paid, total number of sites in operation and closed as well as reason for closure.
Franchise agreement
The agreement stipulates the rules of engagement between the franchisor and franchisee i.e. location selection, training, unencumbered deposit etc.
The franchisee is a person or company licensed to do business under a franchisor’s trademark, brand name and business model. The franchisee buys a franchise from a franchisor.
Franchise fees
Advertising/marketing fee - It is intended to pay for national product advertising and marketing activities.
It is a model that has been tried and tested and is deemed to be successful because of the brands that are recognised.
The franchisor is a company that grants an individual or entity (the franchisee) the right to use its brand name, product or service and system of business operations for a fee and other considerations.
Fuel sites
There are different fuel sites namely (COCO - Company-owned-company operated), (CORO - Company-owned retailer-operated), (CODO - Company-owned dealer-operated, (RORO - Retailer-owned retailer-operated) and (DODO - Dealer-owned dealer-operated).
Head lease
The franchisor is given the option to take out the head lease and sublet the premises to the franchisee. The franchisor may also be the owner of the premises and let it to the franchisee.
Lease agreement
If a franchise operates from commercial premises, these will usually be rented. It’s common for the franchisor to help with site selection and lease negotiations. But in the end, the lease agreement will usually be between the owner of the premises and the franchisee.
Licensing agreement
The franchisor grants the franchisee the right to apply a brand name, sell goods, or use the franchisors patented technology, in exchange for a fee. This agreement is recorded in the licensing agreement.
Management service fee / Royalty fee
Management service fee / Royalty fee is money paid for ongoing franchisee support. It is calculated as a percentage of the franchisee’s sales and is due weekly or monthly in arrears.
Master Franchisee
The Master Franchisee is a franchisee who has the right to start a franchise within a new region, usually an entire country. The master franchisee fulfils the role of the franchisor within the new territory and does the work of recruiting franchisees. An example would be a new franchise brand in the USA coming to SA markets. The person who gets the rights to start the brand in SA will be the Master License holder in SA.
Multiple store owner
It is a franchisee that operates more than one store within a defined territory within a brand or expanding to other franchised brands.
Operations manual
Document that provides guidance to the franchisee regarding the operations of the business.
Purchase / sale agreement
Stipulates terms and conditions relating to the purchase i.e. purchase price, requirement of unencumbered deposit, etc.
Renewal period
Usually stipulated in a Franchise agreement, varies from one brand to another, Franchisee have the option to renew or exit after that period.
Restraint of trade
Most franchise agreements contain such a clause. This simply means that the franchisee is not permitted to operate in opposition to the system, usually for a specific period and within certain boundaries. This clause is legally enforceable only if it is reasonable, both to its extent and to duration. The clause is found in most franchise agreements.
The revamp period varies from brand to brand and it depends on the franchise agreement, the number of years will vary as well.
Set-up cost
The is the Total cost to set up a franchise brand business.
These are sub sectors that fall under a bigger industry i.e. in the Franchise industry there is various sectors like the Automotive sector that has the following brands Tiger wheel and Tyres, Car Service City or the Restaurant sector that consist of the likes of Ocean basket, Spur etc.
Turnkey package
A turnkey package is prepared by the franchisor and includes premises, systems, equipment, and may even include the initial stock needed by the franchisee to "turn the key" and start trading.
Unencumbered / equity contribution
This is the money that belongs to the franchisee and has no financial liability attached to it. (Funds should not attract a repayment). Most franchisors will insist that a prospective franchisee has access to between 40 - 60% of the total investment in unencumbered capital. This signals self-discipline ensures commitment and reduces the strain on the new business’s cash flow.
Upfront fee / initial fee
Depending on the industry, this fee varies. In some cases, a significant portion is set aside for training, site selection and the commencement of the business, initial handholding and any help given by the franchisor up to the point the franchisor opens trading.
Working capital
A significant reason for a franchisee's failure is lack of working capital. Working capital is normally made up of cash in the bank, borrowing capacity, trade credit, and cash flow (any monies generated by the business). A new business needs adequate working capital to meet start-up expenses that see them through any unexpected dips in business activity. For example, funds are required to pay rent, including a rent deposit, utility deposits, license fees, and wages during the training period.