Franchise Advice

The Franchise Advice section on Franchise Zone offers an array of sector reviews, franchisee and franchisor interviews, and expert franchise advice to inspire, inform and help you along with franchising research, due diligence, franchise funding and franchise operations.

  1. Latest Advice
  2. Franchising FAQs
  3. Franchise Glossary

Franchise Advice Categories

Are You Suited to Franchising

Before you commit to a franchise, establish whether you are suited to franchising. Do you have the aptitude, character traits and skill-sets required to become a successful franchisee?

Franchise Finance

Obtaining finance for a franchise can be a daunting task. Let us guide you through the minefields by offering expert advice on how to apply for franchise finance and get the funds you requires to buy a franchise.

Franchise Interviews and Profiles

Insights and lessons from the franchisors, franchisees and industry experts at the coalface. They share their experiences and learnings about overcoming challenges and maximising opportunities to make it in the competitive world of franchising.

Franchise News

Keep up to date with the latest local and international franchise news and information on franchising and the franchise industry.

Franchise Sector Spotlight

Undecided on which franchise you're interested in investing in? Take a look at our franchise sector reviews to get a good perspective of the various cluster of activity.

Franchise Your Business

Looking to grow your business? Franchising can be an effective means to expand your business, however the learning curve can be steep. Take some advice from our expert contributors on how to best position your business for franchising success.

Researching a Franchise

The importance of conducting thorough research before investing in a franchise cannot be over-emphasised. Refer to the advice in this section to guide you through the research steps required to uncover the whether a franchise opportunity is worthwhile or not.

Tips for Franchisees

So you've bought a franchisee, now you need to run it effectively to maximise profit. Use these expert franchisee tips to improve and optimise the running of your franchise.

Tips for Franchisors

As the franchisor, you face many demands. From recruiting new franchisees to liaising with stake holder, from managing operations to maintaining a competitive edge. Use these expert franchisor tips to improve and optimise the your franchise operation.

Franchises vs Biz Ops

What is a franchise?
Unlike starting a business from scratch, when you buy a franchise your purchase includes the right to use the franchise system's methodologies, systems, recipes, copyright, brand and all other intellectual property. The brand name is also hopefully already established and has recognition in the marketplace; and because of that, it has commercial magnetism - it will attract customers. The business model has also hopefully already been refined and, being in a developed or advanced state of operation, therefore successful. In order to be part of a franchise and use its intellectual property, the franchisee buys into the franchise with an initial payment, and pays ongoing fees that include royalties, marketing and management fees.
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What is the difference between a single-unit and multi-unit franchise?
A single unit franchise is often the first step for a new franchisee. This means that the franchisee owns one franchise unit from one brand, and in most cases is an owner/operator, for example, a Steers. From there, depending on the franchisee's success and business management skills, they can then expand with more units. This can be more franchised units of the same brand from the same franchisor, for example two or three Steers; various brands from the same franchisor, for example Steers, Milky Lane and a Mugg & Bean; or brands from different franchisors, for example a Spur, Steers, and Maxi's.
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What is a social franchise?
Like a social entrepreneur or a social business, social franchising applies the same principles for commercial franchising but in order to promote social benefit rather than profit. Most social franchises are in the areas of health care and wellness.
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What is a tandem franchise?
This is where two franchise systems have some sort of symbiotic or complementary relationship, for example a fast food outlet next to a video hire outlet or a smaller franchisee outlet or kiosk within a larger different franchise outlet.
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How does a licensee or agent system differ from a franchise model?
Essentially, franchising is just a sophisticated form of licensing. Under a license system, someone owns intellectual property, and allows someone else to use it. Importantly, in a franchise system, the franchisor owns their own business, as does the franchisee - they are two separate entities. Under an agency system, an agent acts for and on behalf of the principal, as if he is the principal entity. The two types of contract or structures are similar in that one will find similar types of contractual provisions in each. Both will have provisions such as who will do what, where and how.
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What is a master franchise?
Imagine there is a franchisor operating overseas. They're interested in setting up operations in South Africa, but they do not have the infrastructure or wish to establish a business here themselves. They may therefore appoint a master franchisee, a person who will roll out the operation in this country and manage it. Master franchises are intermediaries - although not franchisors, they perform the same functions, opening stores, managing franchisees and so on.
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How does a franchise differ from a business opportunity?
While there are similarities between the two, the models diverge in three key areas:
  • Common brand and operating system: In a franchise, all units operate under a common brand and operating system, so that no matter where you go or what franchised unit you visit, each will be the same. The franchisor places a lot of emphasis on support and adherence to the brand and its systems. A biz op, on the other hand, focuses on setting the owner up for operation and does not require adherence to rules of operation.
  • Ongoing support: An established and reputable franchise will provide ongoing support to its franchisees in the form of training, marketing and other issues relating to operation. By contrast, a biz op may offer ongoing support, but the process is usually very informal, infrequent, and tends to be demand driven. A biz op is not contractually committed to providing support where as good franchisor will require its franchisees to commit to ongoing support
  • Ongoing fees. If you think of a franchise as an exclusive club, you have to pay joining fee to be part of it - this is your initial franchise fee. From there, in order to stay in the club you are contractually commitment to pay ongoing fees in the form of royalties, marketing and management fees. These are typically a percentage of turn-over, but varies from franchisor to franchisor.
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Reasearch & Evaluation

As a prospective franchisee, is it advisable to request access to the franchisor's financial records to assess the stability of the company?
Yes, but the franchisor may decide not to grant such access. That's because you're buying a franchisee outlet, so the information that is relevant to you is the viability, performance and feasibility of that outlet and other outlets, not the financial records of the franchisor company itself. It's like buying a car - you need to know about the car's features, not the features or finances of the company that manufactured it.
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How should one go about evaluating a franchise opportunity?
A Disclosure Document is a key tool in evaluating a franchise and helping a potential franchisee make an informed decision about buying into a specific franchise system. The document should include a feasibility study, exact expenses, start-up costs, the training furnished, employee requirements, and how long it will take for the franchisee to break even. You should also ask for the names and contact details of other franchisees who will be able to tell you whether for example, the actual performance of the business system meets its projected targets.
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What are the red flags to be aware of associated with unstable or shady franchise operators?
A potential franchisee should assess at the outset whether the franchisor is viable. Red flags can be identified by asking the following questions:
  • Does the business operate in a large and growing market?
  • Is the growth in the market likely to be sustainable?
  • Are attainable margins sufficient to cover franchise fees?
  • Does the franchisor have access to sufficient capital?
  • Are suitable systems and procedures in place?
  • Will there be on-going support from the franchisor?
  • Does the franchisor have a record of being transparent in their dealings?
- Busi Silwanyana, head of franchising, business lending, and mid-corporate: Standard Bank
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What are the hallmarks of a stable franchise operation?
Successful franchise operations have the following in common:
  • The franchise system is well developed and known in the market
  • There is a highly motivated franchise support team
  • The concept is fully researched and developed before implementation
  • A proper evaluation of prospective franchisees is conducted
  • Site selection is based on a scientific approach
  • The operation has been in business and the industry for a reasonable period of time
  • The operation is protective of their brand image.
- Busi Silwanyana, head of franchising, business lending, and mid-corporate: Standard Bank
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What is usual practice when it comes to the franchisor screening and vetting franchisees?

Many franchisors have adopted assessment models from industry consultants such as Franchize Directions and Franchise Plus. These may be compared to sophisticated application forms that screen out people who are unlikely to be successful as franchisees in that system; just as a company requests a potential employee to undergo a personality assessment.

This is important, because the success of a franchise often depends on the selection of the right type of person as a franchisee. Screening therefore aims to ensure a match between the strengths, skills and attributes of the franchisee and the requirements of the franchise. Franchisors will look for people who can work alone and are independent self-starters; a crucial factor, because although your franchise is part of a broader network, it operates as your own business. As such, the ability to think as an entrepreneur is a plus. Consider whether your interests are in tune with the business - if you're considering opening a DVD franchise, will you be prepared to chat to people about their choices when they ask for advice? Remember that your franchise will require a lot of input, especially as many franchisors insist that franchisees manage their outlets. Do you have what it takes to deliver on the business's requirements, and are you prepared to put in the effort?

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What are the different types of franchise financing available in South Africa?
There are several sources of business finance available in South Africa. However, as with any business, finding finance for a new venture can be difficult. Potential franchisees can be financed through the following sources:
  • Own funds - this involves obtaining finance without approaching a financial institution. Options could include saving toward a franchise, loaning funds from family members, or using a payout package from work.
  • Venture capital - this is equity funding provided by outside investors into early-stage, high-potential, high-risk ventures in return for above-average returns. The VC capital fund makes money by owning equity in the companies it invests in.
  • Bank finance - this covers different funding options, from overdrafts, business term loans, debtor financing and asset financing.
- Busi Silwanyana, head of franchising, business lending, and mid-corporate: Standard Bank
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What options do banks typically provide in terms of franchise financing?
Business finance options provided by banks typically include the following options:
  • Bank overdraft (short-term lending) - An overdraft is suitable as a way to manage your cash flow. It is linked to your business account.
  • Term loans (medium to long-term) - Business term loans are a relatively simple way of securing funds that is repayable in equal monthly installments for periods up to eight years. This type of loan may be suitable for things such as capital expenses.
  • Business revolving credit - This is a loan where repayments are made in equal monthly installments. You only pay interest on the amount you use. Once you have paid back 25% of the loan, you can withdraw the funds up to the original limit.
  • Asset financing - Refers to financing for vehicles or other assets that the business may require.
  • Property finance - A commercial property loan offers long-term finance in the form of flexible loans for purchasing premises for business purposes.
- Busi Silwanyana, head of franchising, business lending, and mid-corporate: Standard Bank
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What is the typical process involved when applying for franchise financing from a bank?
It is very important to note that a franchisee must first be approved by the franchisor before a bank can be approached for finance consideration. When the franchisee has been approved by the franchisor, an application for finance can be submitted through a bank's acquisition specialist, or through an existing relationship manager. The application for finance must provide the bank with an overview of the individuals involved, the proposed business venture and the financial structures, and required background. Over and above the business plan, documents that may be required are:
  • Personal balance sheet
  • Income and expenditure statement
  • Cash flow projection
  • Company or corporation registration documents, if available
  • Partnership, shareholders' or members' agreement
  • Draft lease agreement for premise to be leased.
- Busi Silwanyana, head of franchising, business lending, and mid-corporate: Standard Bank
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What should a franchise business plan contain if you are applying for finance?
The business plan must contain the following:
  • Business objectives
  • Define the business concept
  • Business operations
  • Competitors
  • Marketing and sales plan
  • Employee plan
  • SWOT analysis
  • Personal statement of assets and liabilities for all partners, members or directors
  • Cash flow projection
  • Source and application of funding
  • Franchise Agreement
  • Disclosure Document
  • CVs of the member/s
- Busi Silwanyana, head of franchising, business lending, and mid-corporate: Standard Bank
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What are the red flags that would cause investors/lenders to turn down an application for franchise finance?
Over and above the usual financial considerations taken into account when assessing an application for finance, some of the factors that would be considered for applications for franchise financing specifically include the following:
  • The type of industry the franchise operates in
  • The relevant market conditions that the franchise would operate within
  • The level of franchisor commitment to the business
  • The level of franchisee commitment to the business
  • The reputations of both the franchisor and the franchisee.
- Busi Silwanyana, head of franchising, business lending, and mid-corporate: Standard Bank
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Am I likely to obtain 100% franchise financing?
It is important to note that many franchisors require an unencumbered contribution from new franchisees to show their commitment to the business. For this reason, 100% financing for a new franchisee is unlikely. For established franchisees, their track record and relationship with their bank would be taken into consideration when assessing applications for further financing. - Busi Silwanyana, head of franchising, business lending, and mid-corporate: Standard Bank
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Disclosure Document

What should a comprehensive Disclosure Document include?

The document should outline the salient features of the franchise, its characteristics, details and a feasibility study.

First, it will list the contact details of the franchisor, the names and details of the shareholders and senior employees of the franchisor, as well as the company's background, history and structure. Next follows a description of services and products, together with the factors influencing success; the details of the franchisor's initial and ongoing support and training; an outline of the contents of the procedural manual; total investment required (including a breakdown of the franchise royalties, administration fees and working capital) and a short feasibility study.

Details of other franchisees should be included. Any past and present financial difficulties of the franchisor and franchisee must be noted, along with the full details, requisites, equipment, layout and proposed sites for an average franchise outlet. Finally, the Disclosure Document will include a summary of the Franchise Agreement.

The purpose of the document is to ensure that the potential franchisee has sufficient accurate information to help them assess the franchise operation, and make an informed decision about whether to enter the Franchise Agreement or not.

- Busi Silwanyana, head of franchising, business lending, and mid-corporate: Standard Bank
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What is FASA's minimum criteria for a Disclosure Document?
The Code of Ethics and Business Practices of the Franchise Association of Southern Africa (FASA) lays down the minimum amount of information a disclosure document must provide:
  1. Full and traceable information about the franchisor company, including contact details and details of professional affiliations.
  2. Details of qualifications and business experience of the franchisor and their officers in the type of business being offered as a franchise.
  3. Details of criminal or civil action against the franchisor or his officers, either taken during the past three years or pending.
  4. Full details of the franchise offer and the underlying business.
  5. Full details of the obligations of the franchisor vis-à-vis the franchisee.
  6. Full details of the obligations of the franchisee vis-à-vis the franchisor.
  7. An explanation of the most important clauses of the franchise agreement, including restrictions placed on the franchisee.
  8. Financial projections for at least two years and an explanation of the basis on which these projections were calculated.
  9. Full details of all payments, initial and ongoing, the franchisee will be expected to make, and what they can expect to receive in return for these payments.
  10. A list of existing franchisees and their contact details.
  11. An auditor's certificate certifying that the franchisor's business is a going concern and able to meet its obligations as they fall due.
  12. A statement by the franchisor to the effect that to their best knowledge and belief, the financial situation of the franchise company has not deteriorated since the day the auditor's certificate was issued.

In addition to these requirements, provisions made by the Consumer Protection Act must be adhered to. These include and are not limited to:

  • A notice referring to the 10-day cooling off period a franchisee is entitled to must appear on the top of the first page of the agreement
  • The name and description of the products or services that the franchisee is to sell or provide, followed by obligations of the franchisor and franchisee, territorial rights described in detail, details relating to the advertising fund, and the effect of the termination or expiration of the franchise.
  • Information about the franchisor's directors and members.
  • Full detail of the financial obligations of the franchisee in terms of the franchise agreement.
  • Any direct or indirect benefit the franchisor stands to receive from prescribed suppliers.
- Busi Silwanyana, head of franchising, business lending, and mid-corporate: Standard Bank
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When should I expect to see the Disclosure Document?
As soon as you request it. The Disclosure Document is often used as a selling tool by the franchisor, so they will usually be willing to let you peruse it if they believe you have a real interest in buying into the system.
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Will the franchisee have to sign a confidentiality agreement before the Disclosure Document is handed over?
Probably not - although you would be required to sign the Franchise Agreement or a Confidentiality Agreement before you receive additional information. It's not usual practice to sign confidentiality clauses this early because the information contained in a Disclosure Document is often not especially sensitive.
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Franchise Agreement

What are the typical terms and conditions of an agreement? What should a comprehensive Franchise Agreement include?
  • The agreement will first identify and describe the parties (franchisor and franchisee) involved.
  • It will then identify and record the intellectual property rights available to the franchisee through the franchise arrangement, along with definitions of franchised business, intellectual property and so forth.
  • Next, it will detail the grant of the franchise: whether it is an exclusive, sole or ordinary franchise. Information about payment is also included (the franchise fee, royalties, advertising, administration fees and working capital).
  • The Franchisors' Obligations (initial and ongoing) are outlined, as well as the obligations of the franchisee (also initial and ongoing).
  • Further information contained in the agreement relates to use of trademarks; the operating manual; conditions about change of ownership, death and incapacity of the franchisee and termination; conditions of restraint; disclosure, suretyship, confidentiality, a possible provisional period, as well as general clauses.
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Are there particular clauses that prospective franchisees should be mindful of or look to include?

Pay special attention to the grant clause, as this will determine whether you are the sole franchisee operating in a certain territory (exclusive grant); whether the franchisor may also operate an outlet in the same territory (sole grant); or whether there are no restrictions on the number of franchisees who may operate in that area (ordinary grant). The number of operators naturally impacts on your ability to turn a profit.

Make sure you have a thorough understanding of the franchisor's obligations. Bear in mind that although the Franchise Agreement may appear to be onerously biased in favour of the franchisor, it is in the interests of all involved in the franchise system to ensure that there is consistency in branding, service, product and the like. There must be a balance, however, and this is where the franchisor's obligation to develop the franchisee and provide guidance is key.

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Do I need a lawyer to look at the agreement? What would they be checking?
It is advisable to ask a lawyer who specialises in franchising - and has experience in this area - to review the Franchise Agreement. They must ensure that there is balance, especially in terms of the franchisor's obligations; that the royalty fees are reasonable; that the business model is commercially viable and that all aspects of the agreement support the success of the franchisee rather than limiting it. This is vital, as an agreement may look simple, but any areas that are not correctly understood may have severe repercussions.
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Do agreements have a cooling off period?
Yes. The cooling off period is usually 14 days. This is a FASA recommendation, according to FASA's Code of Ethics and guidelines for Best Practice, but it is not legislated.
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Legislation & Regulation

Is there legislation that governs franchising in South Africa?
  • The Competition Act: makes it unlawful for a franchisor to fix prices for a franchisee's products and services. The Competition Commission also has concerns regarding exclusive suppliers and territories. The latter may however not be prevented if there is vigorous intra-brand competition. The Act functions as a Consumers' Bill of Rights, and it introduces a substantial number of new considerations in terms of fairness and equity. The Act enforces full disclosure upfront, and makes it possible to cancel an agreement if such disclosure is not offered or if it misrepresents what is sold. That's important, because one of the biggest problems facing franchisees at present is that their purchase of a franchise does not match their expectations, either because a franchisor has puffed up the business system's success, or because they have not known the right questions to ask confirming that success.
  • The Consumer Protection Act: came into effect on 1 April 2011 and will require many franchisors to update their franchise agreements. As enforced by the CPA, every franchise agreement must contain the following:
    • A notice referring to the 10-day cooling off period a franchisee is entitled to must appear on the top of the first page of the agreement
    • The name and description of the products or services that the franchisee is to sell or provide, followed by obligations of the franchisor and franchisee, territorial rights described in detail, details relating to the advertising fund, and the effect of the termination or expiration of the franchise.
    • Information about the franchisor's directors and members.
    • Full detail of the financial obligations of the franchisee in terms of the franchise agreement.
    • Any direct or indirect benefit the franchisor stands to receive from prescribed suppliers.

This list is not exhaustive and a franchise agreement entered into must contain the prescribed information incorporated in the regulations. Any provisions in conflict with the Act or the regulations is not enforceable by law.

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What is the role of FASA in South Africa?
FASA aims to promote ethical franchising in South Africa and ensure that international best practice is upheld. The association is a voice for the industry, provides a support and networking function for franchisees, hosts a reference library, and offers a mediation service in settling complaints. FASA further hosts the International Franchise Expo, which matches franchisors with potential franchisees, and the FASA Awards for Excellence. The body has done much to advance the development, professionalism and ethics of the franchising industry in South Africa.
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What is the criterion for FASA membership for franchisors?
Members must meet and maintain FASA's requirements. They must lodge with FASA a Franchise Agreement that is compliant with the association's ethical code and best practice guidelines, along with an Operations and Procedure Manual and a Disclosure Document.
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How will I, the franchisee, be affected by Capital Gains Tax?
There may be a Capital Gains Tax payable if you sell your franchise.
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Will I, the franchisee, be affected by New Credit Act?
Yes, inasmuch as any other industry is affected. If the franchisor has funded the franchisee, or granted a loan, they will be regulated according to the terms of the Act. The New Credit Act also requires banks and other lending institutions to act responsibly when issuing loans to eradicate predatory lending practices that are an issue across the world. This means that your loan application will be considered (among other things) on your ability to repay the loan.
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Why do franchisors require prospective franchisee to sign non-disclosure agreements?
A non-disclosure agreement, also known as a confidentiality agreement, is a legal contract between a franchisor and a prospective franchisee. During the due diligence process you will have access to sensitive financial information relating to the franchisor, as well as access to their operations, systems and trade secrets. In order to protect their intellectual property, a franchisor will require a non-disclosure agreement to be signed.
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The Franchise Fee

What does the upfront fee cover?
In a turnkey franchise situation - where the franchisee purchases a complete store - the upfront fee includes fixtures, fittings, equipment, opening stock and the cost of setting up the store. The cost of training is also taken into account, along with the franchisor's management and legal costs and the goodwill element of the brand, which will be more expensive in developed franchise systems. The upfront fee of an operation that is not a turnkey franchise will cover similar costs, but it may be broken down differently. You may, for example, spend the same on purchasing stock and setting up the store, but this money will be spent with suppliers and possibly not directly with the franchisor.
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When and how is the fee usually paid?
It's usually paid into a trust account, or directly to the franchisor on signature of the Franchise Agreement (or shortly thereafter).
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What does working capital cover and how much will the franchisee need?
That depends on the business itself. Very few franchises can cover their costs from month one, so you will need sufficient funds to cover - or at least partially cover - the business's expenses at least until the business breaks even. The feasibility study included in the Disclosure Document is a guide to how much working capital is required.
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What can the franchisee expect to pay in terms of ongoing payment?
The ongoing fees may be termed management service or royalty fees. This is usually calculated around 25% of the business's net profit, or a percentage (usually up to about 6% or 8%) of gross turnover. This monthly fee is for the continued use of intellectual property, as well as administrative and management services provided by the franchisor. Monies paid for marketing should go into a separate, independent fund that is managed by the franchisor in consultation with the franchisee. This sum is usually about 3% of turnover.
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What are renewal costs and when are they applicable?
When buying a franchise you will pay an initial franchisee fee. Depending on the franchise, you may be required to pay a renewal fee over and above your ongoing fees. This is not usually as expensive as the initial franchisee fee as your systems are already set up, but in order to remain part of the franchise you will be required to pay a renewal fee. This practice varies from franchisor to franchisor and some do not require renewal.
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The Franchise Operation

What should new franchisees expect from the franchisor in terms of an operations manual?
It is not a legal requirement to provide an Operations and Procedure Manual, although it is a FASA requirement. This provides a blueprint for the operation of the franchise.
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What should the new franchisee expect from the franchisor in terms of scouting for and securing a location?
This differs between systems. In some cases, the franchisor finds a location, then looks for a franchisee to operate it. On the other hand, the franchisee may approach the franchisor because he believes he has found an optimal location, in which case the franchisor will evaluate it. It's important that both parties are satisfied that the location is a good one. Some franchisors are also able to assist with lease negotiations.
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What should the new franchisee expect from the franchisor in terms of training and support?
The franchisor should provide adequate and appropriate training, which is sufficient to allow the franchisee to carry on his business effectively and efficiently. Training usually takes place on an initial basis, but may be ongoing as the business requires. This should be outlined in the Disclosure Document.
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What should the new franchisee expect from the franchisor in terms of marketing assistance?
This is broad and varied, because it depends on the requirements of the store. For example, if the franchise system is brand new and is not nationally known, it makes sense to advertise locally at first. However, if the franchise is part of an established and national network, less investment in local marketing may be required. The franchisor usually assists with the initial marketing, public relations and a grand opening, but this again depends on the franchise system's level of development. The franchisor's obligations are also influenced by the money available in the marketing fund.
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The Buy and Sell Options

Is there an 'out' of the agreement, should the franchisee wish to sell their franchise?
There usually is an out; however, the franchisor must consent to your sale to a new franchisee, so that they can be sure the new franchisee suits the business requirements. It's advisable to examine your Franchise Agreement to determine whether there are any restraints, and how long that restriction is. The franchisor may be entitled to a percentage of your sales fee, particularly if further training for the new franchisee is needed.
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After what period is a franchisee able to sell their franchise?
This is dictated by the terms of the Franchise Agreement.
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How does a franchisee go about selling?
The sale is conducted in conjunction with the franchisor, as their consent must be obtained before the sale goes through. The franchisor may be able to put you in touch with prospective franchisees, or you may advertise as you would with any other business. The franchisor often makes the ultimate decision about whom the franchise is sold to.
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Is there a benefit to buying a re-sale franchise?
Yes; you're buying a business that is hopefully already established and has ironed out any initial problems. Your staff will have received training, you are likely to have a regular clientele, and the business may also be generating profits. There's no guesswork about the viability of the franchise (as when buying a new outlet), because it will have been in operation for some time. Be careful, though, that you don't overpay for the business - carefully consider the information including financial information provided.
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How should one evaluate a re-sale franchise?
Evaluate the outlet using similar information as if you are buying a new one. The difference here is that the outlet would have been trading for some time so having a look at its financial records and speaking to existing staff regarding performance of the outlet and any difficulties experienced will be very useful.
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Advertising Fee
As part of a franchise system, head office is able to roll-out large scale advertising and marketing campaigns such as national TV and radio adverts, and large colour adverts in popular media for example. These are expensive and therefore require franchisees to make a monthly contribution to an advertising fund over and above the royalty fees. The advertising fee is usually expressed as a percentage of turnover but can be a set contribution. By having many franchisees contribute in the region of 2% or 3% monthly, the franchisor is able to drive traffic to its franchisees. Things to note are that not all franchisors have an advertising fund, and advertising is not aimed at a particular outlet, but for the benefit of the whole group.
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Agreement
The Franchise Agreement is a legal and binding document that you sign with a franchisor in order to operate under their brand. The contents of an Agreement vary from franchisor to franchisor, and it is essential to consult a lawyer specialising in franchise agreements before signing.
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Approved Products
Franchises are about brands, meaning that in order to maintain the brand, products used by franchisees need to be purchased from the franchisor and/or their specified and approved suppliers. Using burgers as an example, all franchisees are required to purchase their buns, patties and sauces from the same supplier in order to create continuity with cost and product quality.
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Approved Supplier
Connected to approved products, in order to control purchase cost, product distribution and product quality, franchisors find, vett and approve particular suppliers that franchisees must use.
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Arbitration
In the event of a dispute, arbitration is the use of an impartial third party to hear both sides of the story and come to a decision outside of the courts. Arbitration is typically used in resolving commercial disputes, and disputes occuring between consumer and company, or employmers and employees.
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Area Developer
When a franchise expands into an undeveloped area, an Area Developer (also known as an Area Franchisee) buys and holds the rights to a large territory and opens a single store. From there, the Area Developer is then required to recruit single-unit franchisees and multi-unit franchisees. Depending on the franchisor, an Area Developer may receive preferential terms on their franchise agreement, or receive a portion of the franchise and royalty fees from franchisees in that territory. An Area Developer does not sell franchises, but acts as an intermediary.
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Area Development Rights
Related to an Area Developer, Area Development Rights are granted to a franchisee to open a certain number of franchises locations within a given territory and over a specified period of time.
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Buys the rights from the original franchisor to develop the system in a defined region. An area developer cannot sell franchises.
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Biz Opportunity / Biz Op
With a biz op there is no requirement to operate under a common brand and operating system, which offers flexibility to change things in the business. There are also no ongoing fees like a franchise, generally it's a once off initial fee. Ongoing support is sometimes provided, although a biz op is not contractually committed to providing it and it is demand-based.Since biz ops are not required to operate under the same brand, finding all businesses under a biz op may be more challenging during your due dilligence.
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Broker
A broker is an individual or company who work on behalf of franchisors to sell their franchises. This works on a fee basis, whereby brokers receive payment for each franchise unit sold. Since it is in the broker's interest to sell to franchisees, franchisees should still independently evaluate the viability and suitability of a chosen franchise.
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Business Format Franchising
This is the most common form that franchises take. It means that the franchisor provides a complete plan to the franchisee for marketing, sales, financial procedure, operations and staff management. The format spells out, step by step, how the franchise works and the necessary tasks involved in creating a successful business. It also gives franchisees the license to operate their business using the franchisor's trademarked products and branding under the condition of following the specified operation.
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A license to operate a business using a franchisor's product, service and trademark under certain guidelines for a specified time.
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A plan that outlines the objectives of a business and the steps necessary to achieve those objectives. This can include financial projections and the planned steps for expansion. If you are seeking funding from a bank or building society you will often be asked to provide your business plan to secure borrowing. In fact, many of the well-known banks can offer advice and assistance on formulating a comprehensive and achievable business plan for your franchise.
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Business Plan
Like an independent business, a franchise also needs a business plan that outlines the objectives of the business and the steps necessary to achieve those goals. Franchises are very systematised, but franchisees are still expected to have sound understanding of the business concept, operations, competitors, marketing and sales plans, employee plans, and cash flow projections. All banks require a business plan when applying for a loan or finance.
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Capital Gains Tax
In franchising, Capital Gains Tax is applicable during the sale of a business and is measured against the amount of profit made. Not all businesses qualify, however. To qualify for an exclusion, a person’s total small business interests must not have a market value asset base of more than R5 million. The exemption amounts to R500 000 which means up to this amount will be free of CGT when a small business or franchise is sold.
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Company-owned locations are owned and operated by the franchisor and similar in most respects to a franchise location.
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Company-Owned Outlet
Depending on the franchise, some franchise companies own franchise units over and above managing the brand. They are owned and operated by the franchisor as opposed to a franchisee, and are used by the franchisor to trial new concepts and processes before rolling them out to all franchise units in the network.
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Consumer Protection Act (CPA)
The Consumer Protection Act (CPA) which took effect from October 2010 is designed to protect the consumer. This also relates to franchises in that franchisors are required to provide specific information in its disclosure documents so that a prospective franchisee is not misinformed or unduely influenced.
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Conversion Franchise
In the instance of an independent business converting to a franchise operation, this is known as a conversion franchise. There are usually reduced initial fees for a conversion rather than starting from scratch. Most of the expense occurs in aligning the independent business's stock, equipment and image with that of the franchise.
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Cooling Off Period
In accordance with the CPA, after signing the Franchise Agreement, a franchisee is entitled to a 10-day cooling off period in which he or she is able back out of the agreement without liability.
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Copyright
Copyright is a legal concept enforced by law that gives a creator of works exclusive rights to it. In franchising, business operations, manuals, trade secrets, products and branding are copyrighted to the franchisor and use of them without the expressed consent of the franchisor is copyright infringement.
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Default
Defaulting is the failure to comply with a provision or clause in the franchise agreement by either the franchisee or franchisor. Non-compliance triggers a default and is actionable by law.
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Development Type
This concept relates to the method that a franchisor chooses to develop the franchise network. This can include weighting of single to multi-unif franchising, area developers, and master franchisees.
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A right granted by a manufacturer to sell a product to others. A distributorship is not a franchise. However, certain distributorship arrangements may qualify as a franchise or as a business opportunity requiring disclosure.
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Distributorships
This is not a franchise in itself, but relates to franchising in the sense that manufacturers and wholesalers give permission to businesses or individuals to sell their products to others.
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Earnings Claim
During the due diligence process, a franchisor will give financial information to a franchisee that enables them to gauge the level of income, expense and profit the business is capable of. This information is important for writing the realistic business plan.
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Estimated Initial Investment
This is a comprehensive list of all expenses (including fees) a franchisee can expect once they choose to open a particular franchise. The list includes costs for initial franchise fees, shop-fitting, inventory, rentals, insurance, and working capital to carry the business in the start-up phase.
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An exclusive territory right gives you, as the franchisee, the right to that territory. The franchisor cannot sell other franchises within that territory. May also relates to products or services sold in the territory.
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Exclusive Territory
Is the right granted to a franchisee that stipulates that the franchisor may not sell other franchises in a given area, nor operate company-owned franchises. The range of this territory can be large or small.
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FASA
The Franchise Association of South Africa is an organisation (FASA) represents franchisors, franchisees and the professional organisations that service the franchise industry. It is the only recognised representative body of the franchise industry in South Africa and aims to ensure its members practice ethical franchising and that it continues to develop and expand the business environment for franchising in South Africa. Its criteria for membership conforms to international best practices and is acknowledged by government and the public at large. FASA is also a full member of the World Franchise Counsil.
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Franchise
A franchise is a replicable business that is systematised and moderated by the franchisor (owner) and expanded through franchisees who are given the rights to offer specific products or services for an on-going fee. The franchsor also provides training and support for running a franchise.
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The rights you acquire to offer specific products or services within a certain location for a declared period of time.
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A written contract between the franchisor and the franchisee, which details the specifics of operations using the franchisor proprietary items, logos, etc.
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Franchise Agreement
This is a written contract between a franchisee and franchisor that details the expectations, obligations and requirements of the franchisee and franchisor. It also includes operations and use of proprietary material, territorial rights of the franchisee, training, fees, location requirements, among others.
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Franchise Consultant
A franchise consultant is able to provide professional services to potential franchisees, such as advising on and explaining the franchise agreement. Unlike a franchise broker, a franchise consultant operates independently of a franchisor. A broker, on the other hand, is recruited by a franchisor to find franchisees and leverages a commission for each franchisee signed.
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The initial fee paid by the franchisee to the franchisor to obtain the franchise rights.
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Franchise Fee
In order to run a franchise unit, an initial fee must be paid to the franchisor to obtain the franchise rights. It is often payable upon signing the franchise agreement and can include initial training, site selection, and operation manuals.
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Franchise Resale
When the owner of a franchise chooses to sell the business, the purchase by another owner is called a franchise resale. Resale may occur for a number of reasons either related or unrelated to the performance of the franchise outlet. While it can be more expensive to buy an existing franchise location, it also minimises risk inherent with a new business and is also operational from day one.
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Franchise Type
This is the type of franchise that will be run. It spans the scope of retail or services franchises, and how it is operated, for example: single-unit or multi-unit franchises, single owner-operator, single operator executive, or investment franchise.
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Franchisee
The person or company that the franchisor gives the rights to own and operate a franchise unit.
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The operator or owner of a franchise.
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Franchising
A contractually binding arrangement between franchisor and franchisee to run a franchise in a given industry.
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a method of doing business within a given industry that involves at least two parties - the franchisor and the franchisee. The contract binding the two parties is the franchise.
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A person or entity issuing or granting a franchise or license.
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Franchisor
A person or parent company that grants and issues licenses to franchisees to operate their franchise in exchange for fees and other considerations.
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Home-Based Franchises
These are franchises that can be operated from an owner's home or a small office. Because premises are already established, the franchise investment is typically lower than one with a leased location.
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The funds needed to initially set up a franchise and begin trading. This amount must cover the franchise fee paid to the franchisor and also includes outlay needed to secure space, purchase products, and cover any other initial set-up costs.
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Initial Investment
These are the funds required to set up and begin trading, including the franchisee fee. This investment should cover locating and leasing a space, stock purchase, initial set-up costs, and necessary working capital.
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Intellectual Property (IP)
This refers to intangible assets in the form of ideas, trademarked words, phrases, symbols and designs, systems and practices or trade secrets that belong exclusively to the individual, business or organisation. In franchising, trade secrets, recipes, branding etc. fall under intellectual property of the franchisor and are protected by intellectual property law.
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Investment
Also referred to as "skin in the game", it is the amount of money a franchisee has invested of his or her own money before finance. The greater the personal financial investment, the greater the franchisee's belief and committment to the business.
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Management Service Fee
Also known as royalties, this is a monthly contribution by the franchisee to the franchisor that can take the form of a fixed fee or a percentage.
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Marketing Fee
See Advertising fee.
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Marketing Plan
Most franchisors have a marketing plan for the brand. While marketing fees paid to the franchisor cover national promotion, individual outlets are required to conduct their own local marketing. A marketing plan should therefore be included in the business plan. The marketing plan should identify target market, customers, competition and anticipating changes within these areas.
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Master Franchisee
This has similarities to an Area Developer in that the franchisor grants the individual or company exclusive rights to develop franchises in a territory, with the main difference being a Master Franchisee has the authority to sell franchises in the same territory. The Master Franchisee exercises the responsibility of executing the franchise agreements and providing training and support. This practice is also known as sub-franchising.
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Misrepresentation
In contract law, misrepresentation is a false statement of fact made by either the franchisee or franchisor that results in the signing of a contract under false pretences. The 10-day cooling off period is designed to provide an "out" from the contract in the event of misrepresentation by either party.
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This is a franchisee who is given the right by the franchisor to develop and sell franchises under the brand name within a certain territory. Unlike area development rights, where a franchisee can open outlets themselves within a given region, a master franchise owner must only sell franchises in a particular region.
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Multi-Level Marketing
A marketing strategy in which sales people receive a commission for the sales they generate as well as for the sales made by others they recruit as distributors. While some are legitimate business opportunities, there MLMs considered to be pyramid schemes. It is the responsibility of the individual to conduct thorough research.
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The franchisor awards the right to a franchisee to operate more than one unit within a defined area based on an agreed upon development schedule.
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Multi-Unit Franchise
Where a franchisee typically owns and operates a single franchise unit, a multi-unit franchisee has been awarded the right by the franchisor to operate more than one unit.
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Non-Compete Clause
Existing as a clause in a franchise agreement and many other contract agreements, it prohibits an individual or company from entering into the same line of business for a specific period of time in the event the individual or company leaves or is terminated.
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Non-Disclosure Aggreement (NDA)
A non-disclosure agreement, also known as a confidentiality agreement, is designed to protect franchisors during a franchisee's due dilligence process. Any information provided by the franchisor - financials, systems, etc - may not be divulged by the potential franchisee.
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Non-Solicitation
This terminology refers to a former franchisee from soliciting the franchisor's clients or suppliers for a specific length of time in the event of a franchisee leaving the franchise. Simply put, it means no poaching allowed.
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Offer
This is the oral or written proposal by franchisor to sell a franchise or an existing franchisee or to sell their franchise to a prospective franchisee. The offer is based on general and understood terms and conditions and begins the process of acquisition.
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Operating Caital
Operating capital is separate from the initial fee when buying a franchise. It does not relate to assets but is essentially cash in the bank to support cash flow and any incidental costs. Operating capital needs to meet start-up expenses and carry the business during times of changed consumer activity.
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Operations and Procedures Manual
When operating a franchise, the franchisor will provide the franchisee with operations and procedures manuals that are in-depth guidelines on how to operate the business. It is to be adhered to at all times by the franchisee, and prescribes procedure on all aspects of the business from finance, staff and advertising, to suppliers, quality control and management.
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Operations Manual
The manual(s), which instruct a franchisee on how to operate the franchised business and covers all aspects of the business, including general business procedures. May consist of different manuals addressing such subjects as accounting, advertising, promotion and marketing.
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Once the rights to market a product or service have been acquired, you may offer other products along side your "product franchise." For example you may have a service station that sells a brand of gasoline, but you are not restricted on the other products or services that you can sell. Many times these are not true franchises, but can be considered distributorships
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Product Format Franchise
Not always considered true franchises, rather distributorship, the right to sell a particular product does not represent all the products that are sold. For example, a petrol station may sell one brand of petrol, but it is not restricted from selling other products or services.
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Protected Territory
This is a specifically defined territory agreed to in the franchise agreement, whereby the franchisor agrees to not to allow development of another franchise (company-owned or franchisee) in that area.
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Quality Control
This is the process of ensuring products or services provided by franchisees are consistent across the franchise network. The franchisor sets parameters and guidelines to which franchisees must adhere, and franchisees use the operations manuals to maintain the set quality. Some franchisors may have operations teams that periodically inspect and assess franchisees, offering assistance to the franchisee and providing reports to the franchisor.
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Regional Development Agreement
A franchise right to develop or sell a person's franchise rights in a defined geographic area. A portion of the franchise fee is paid in advance for a certain number of franchise outlets.
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Regional Franchise
A regional franchisee buys the rights either from the franchisor or a master franchisee to sell franchises in a specified territory.
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Renewal is the resigning or extension of a Franchise Agreement after the initial terms of the franchise agreement expires.
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Renewal
A franchise agreement's initial terms have an expiration period. Renewal the process of extending or resigning the terms at expiration. The new franchise agreement should state any new terms and conditions to which the franchisee and franchisor both agree. If there is disagreement, renewal cannot occur.
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Restraint of Trade
Most franchise agreements contain such a clause. It means that the franchisee is not permitted to operate in opposition to the network, usually for a specific period and within certain boundaries. This clause is legally enforceable only if it is reasonable, both to its extent and duration.
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Royalty
The royalty fee is an amount of money, typically expressed as a percentage of sales, that is owed by the franchisee to the franchisor on an on-going basis. A monthly payment is the norm, and support services and training are provided by the franchisor.
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Royalty Fees
Ongoing fees paid to the franchisor by franchisees in respect of ongoing training and support services provided, usually a % of turnover.
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Single Operator
The business is typically small and does not require staff, making it the franchisee's responsibility to run all aspects of the business themselves.
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Single Unit Franchise
The most common place for new franchisees to start - a franchisee owns and operates a franchise unit allocated a territory, and is very involved in its operation. The operation costs and level of complexity are much lower than a multi-unit franchise.
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Social Franchising
Social franchising takes a similar form to social entrepreneurship, whereby the primary outcome is to create social change and betterment rather than generate profit. The most common areas for social franchising is in healthcare and wellness sectors.
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Surety
Surety is the a guarantee to assume responsibility for a debt if payments default. This can take the form of another person standing guarantor, or an asset such as a house designated as surety.
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Tandem Franchise
This is where two franchise systems have some sort of symbiotic or complementary relationship, for example a fast food outlet next to a video hire outlet or a smaller franchisee outlet or kiosk within a larger different franchise outlet.
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Termination Clause
A clause included in a franchise agreement, it refers to the legal provisions by which a franchisee or franchisor can terminate their contract, for example in the instance of misrepresentation, default or breach of contract.
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Territory/Area
That 'exclusive' portion of land, on a national, regional/area, county, metropolitan or postcode basis, which is allocated to franchisees as part of the franchise package.
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Total Investment
Similar to estimated initial investment, total investment refers to the amount of money required to get the business running, but also includes additions to euqipment and stock believed necessary for a fully operational and profitable business.
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The total amount of money estimated for the start up of a franchise, including working capital, and subsequent additions to supplies and equipment necessary for a fully operational business.
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Trademark
This is a distinctive sign or symbol registered and used by an individual, organisation or company to indicate to their consumers that the product or service that accompanies the trademark is the original source and is distinguishable from other similar products, services or businesses. The trademark is considered commercially valuable and requires license from the trademark owner to be used by others.
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Turnkey Operation
Everything a franchisee would need to open and commence business is included in the package.
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Viability Study
Linked to a business plan, a viability study determines whether a venture is feasible in terms of profit, loan repayment, market, demand, etc.
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Unencumbered Cash
Simply put, it means the money is yours and you're free of debt. The money has no financial liability attached.
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