Accounting Period
An accounting period is a period of time reflected in financial statements. It is typically a year, a quarter or a month.
back to top

Accrued Interest
Accrued interest is the amount of money that you owe on a loan or is owed you on a loan or bond since the last principal payment was made.
back to top

Acknowledgement of Receipt
Included in the UFOC, it is the last page that you sign and return. It provides proof of the date that you received the UFOC.
back to top

Advertising Contributions
Also known as the advertising fee. It is a fee, separate from the royalty fee that is paid to the franchisor to support advertising and marketing campaigns. It is in addition to any advertising you do yourself.
back to top

Advertising Fee
See Advertising Contributions
back to top

Agent
An individual who can act on the behalf of another. An individual who acts on the behalf of a corporation and can legally bind the corporation.
back to top

Agreement
Also called the Franchise Agreement. It is the contract that you sign with a franchisor.
back to top

Amortization
In loan terms, it is the periodic payment of interest and principal to pay down a loan. In accounting terms, it the periodic writing down of an intangible asset. It is similar to the concept of depreciation to write down the value of assets.
back to top

Amortization Schedule
The schedule that shows over time, usually monthly, the status of a loan and the principal and interest applied to the loan. Alternately, the schedule showing, over time, the amortization taken against an intangible asset.
back to top

Approved Products
Proprietary products that a Franchisee must purchase from the Franchisor. Also, products that must be purchased from approved suppliers. The goal is to achieve uniform quality assurance among all franchisees.
back to top

Arbitration
A process in which a neutral third party hears both sides to a dispute and renders a decision. It is an alternative to using the legal process, which can be costly, and time consuming.
back to top

Area Development Rights
The rights granted to a franchisee to develop a certain number of franchises within a specified geographic area, usually within a certain time frame.
back to top

Articles of Incorporation
Articles filed with a state government that initiate a corporations legal existence. They contain information about the corporation's existence and function.
back to top

Articles of Organization
Articles filed with a state government that initiate a Limited Liability Company's (LLC) legal existence. As with a corporation, they define the LLCs existence and function.
back to top

Assets
In accounting terms, an asset is an item on the balance sheets of a company that has future economic value.
back to top

Balance Sheet
The balance sheet is a financial statement that shows a company's assets, liabilities and equity as of particular moment in time.
back to top

Break-Even Point
Break even is reached when sales equals costs. Sales above the break-even point would generate profits.
back to top

Broker
An intermediary who manages a sale and purchase. Brokers can represent either sellers or buyers. Different brokers can represent both a seller and a buyer.
back to top

Business Format Franchise
A license to use the franchisor's product, service and trademark. Training is involved that teaches the franchisee the "business format" that the franchisor is selling.
back to top

Business Plan
A plan that provides the objectives of a business and the steps necessary to achieve those objectives.
back to top

Buy-Sell Agreement
A legal document that details the provisions under which a business may be sold.
back to top

C Corporation
Also known as regular corporations. They are called C corporations because they are defined in subchapter C of the Internal Revenue Code. They are taxed differently than S corporations. A C corporation is taxed on its earnings prior to distribution of dividends and the shareholders are also taxed on any dividends received.
back to top

Calendar Year
An accounting year that runs from January 1 to December 31.
back to top

Closely Held Corporation
A corporation whose shares are held by either family members or by relatively few persons.
back to top

Company-owned Outlet
An outlet that is identical to a franchised outlet, but it is owned by the franchisor as opposed to the franchisee.
back to top

Compound Interest
Interest paid on the principal of a loan as well as on the previously accumulated interest.
back to top

Conversion Franchise
A conversion franchise is one in which the franchisee previously ran an independent business similar to a franchisors, and converted the independent business to a franchised business.
back to top

Copyright
The exclusive right to produce, publish and sell written or musical works.
back to top

Data Universal Numbering System (DUNS)
A DUNS number specifically identifies your business in the Dun and Bradstreet database. This is used to generate financial reports available to others about your business as well as uniquely identify you in the Central Contractor Register (CCR) used by the Federal Government in identifying contractors.
back to top

DBA
DBA is an acronym for "doing business as". For example, you may name your corporation, "The Smith Family Corporation", but your business is known to the public as ABC Restaurants. In this instance, your business would be identified as The Smith Family Corporation, d/b/a ABC Restaurants.
back to top

Default
A failure to perform as required by a contract.
back to top

Depreciation
Depreciation is the decrease in the value, over time, of a long-term asset. It is measured using a depreciation schedule.
back to top

Designated Supplier
A supplier designated by the franchisor as the source for purchasing approved products. The use of a designated supplier for certain products guarantees the franchisor that each franchisee is providing the same product to its customers.
back to top

Directors
Elected by the shareholders, directors direct the affairs of a corporation.
back to top

Disclosure Statement
Also known as the offering circular, a document that provides information on twenty items required by the FTC. The law requires that a franchisor provide a disclosure statement to a potential franchise buyer.
back to top

Distributorship
Usually a distributorship is not a franchise. It is a right given that allows you to sell a particular product to others.
back to top

Domestic Corporation
A corporation is considered a domestic corporation in the state in which it is incorporated. In all other states, it would be considered a foreign corporation. For example, a corporation incorporated in Arizona is a domestic corporation in Arizona, but a foreign corporation in all the other states.
back to top

Earnings Claims
Claims made by the franchisor as to the past performance of franchisees or to the potential financial performance of a franchisee. If given, they must be disclosed in section 19 of the UFOC.
back to top

EBITDA
This is an acronym for "Earnings Before Interest, Taxes, Depreciation and Amortization". It is a measure of cash flow available to meet debt payments.
back to top

Equity
Equity represents the value of ownership in a business, less the claims made against the business. Is also expressed as net assets, from the accounting equation: Equity = Assets - Liabilities
back to top

Exclusive Territory
An exclusive territory right gives you as the franchisee the right to that territory. The franchisor cannot sell other franchises within that territory.
back to top

Fair Market Value
A price arrived at by a buyer and seller with the assumption that both buyer and seller have reasonable knowledge of the prevailing market conditions.
back to top

Federal Tax Identification Number
Also known as the FEIN. Assigned by the federal government, it is the identifying number of a company used for tax purposes.
back to top

Fee Simple Ownership
Property ownership that allows the owner to use, possess or dispose of property as they see fit during their lifetime. An absolute form of ownership.
back to top

Fictitious Name
This term is sometimes used in place of "doing business as". The DBA name is the fictitious name.
back to top

Financial Statements
For smaller companies, usually the balance sheet and income statement. For larger corporations, it will include a statement of cash flows.
back to top

Fiscal Year
A 12 month period that constitutes a company's financial year and does not correspond to a calendar year. For example, a fiscal year may be July 1 to the following June 30.
back to top

Foreign Corporation
A corporation doing business in a state other than the one that they were incorporated in.
back to top

Franchise
A legal agreement that allows one organization with a product, idea, name or trademark to grant certain rights and information about operating a business to an independent business owner. In return, the business owner (franchisee) pays a fee and royalties to the owner.
back to top

Franchise Agreement
Also called the Agreement. It is the contract that you sign with a franchisor.
back to top

Franchisee
A business owner who purchases a franchise from a franchisor and operates a business using the name, product, business format and other items provided by the franchisor.
back to top

Franchise Fee
A one-time fee paid by the franchisee to the franchisor. The fee pays for the business concept, rights to use trademarks, management assistance and other services from the franchisor. This fee gives the franchisee the right to open and operate a business using the franchisor's business ideas and products.
back to top

Franchise Trade Rule
A law regulated by the Federal Trade Commission that places several legal requirements on franchisors. It requires that franchisors disclose all pertinent information to potential buyers of a franchise. These disclosures provide potential buyers with most information needed to make a wise purchasing decision.
back to top

Franchisor
A company that owns a product, service, trademark or business format and provides this to a business owner in return for a fee and possibly other considerations. A franchisor often establishes the conditions under which a business owner operates but does not control the business or have financial ownership.
back to top

Furniture, Fixtures and Equipment
Also abbreviated as FF&E. Movable personal property used in the operation of a business. Usually a separate line item on the balance sheet.
back to top

General Partnership
A business created by the agreement of the parties and one in which the personal liability of each general partner is unlimited.
back to top

Gross Sales
Gross sales is revenue before any expenses are deducted. It is the sum of all money generated prior to deducting wages, product cost, taxes, interest, etc.
back to top

Income Statement
The statement indicating the profit or loss of a business during its accounting period. Otherwise known as a profit and loss statement. Simply put it is Revenue - Costs = Profit (or loss).
back to top

Initial Investment
What you are required initially to open a franchised business. It reflects all monies required including the Franchise Fee and monies needed to secure space, purchase inventory, insurances, etc.
back to top

Limited Partnership
A partnership in which there is one general partner and one or more limited partners. The limited partners are liable only to the extent of their capital contribution to the partnership. The general partner has unlimited liability.
back to top

LLC
A limited liability company. It is created by an agreement of the owner/members. The members are liable only to the extent of their capital contributions. It provides many of the protections of a corporation. The LLC is not taxed at the business level, but "flows through" and the members are personally taxed.
back to top

Marketing Plan
A plan, usually included as part of a business plan that identifies and plans the marketing strategy for a product or service.
back to top

Master Franchisee
A franchisee that is given the right by the franchisor to develop and sell franchises within a certain territory. As opposed to Area Development Rights where a franchisee can open outlets themselves within a given region, the master franchisee can sell franchises in a particular region.
back to top

Master Region
The region that a master franchisee acquires.
back to top

MBE
An acronym standing for "Minority Owned Business". A minority owned business must be certified as such and can receive certain advantages in government contracts from that certification.
back to top

Multi Level Marketing (MLM)
A form of distributorship in which you receive commission on your own sales and on the sales of others whom you sign up as distributors. Some MLMs are considered pyramid schemes and illegal in some states. Some are legitimate business opportunities. Any business of this nature should be investigated closely.
back to top

NAIC
The North American Industrial Classification System. It is a classification system that numerically identifies business establishments by the industry they are in. It succeeds the SIC and offers the ability to classify business into more descriptive categories.
back to top

Name Reservation
The process of reserving a name with the appropriate state authority prior to filing the incorporation or organization articles. The name of a corporation or LLC must be distinguishable from all others in the state.
back to top

Net Cash Flow
The amount of cash remaining in a business after costs, interest and principal payments are made.
back to top

Non-compete Clause
A clause in a contract that prohibits you from entering into the same line of business for a specified time and within a specified area after you leave employment or after you terminate, sell, or otherwise leave a franchise.
back to top

Officers
The directors of a corporation appoint the officers. The officers are responsible for the daily operations of the business. In most cases, they are the President, Treasurer and Secretary. In some states, one person can occupy all three positions.
back to top

Operations Manual
Any and all information needed by the franchisee relating to the operations of the franchise.
back to top

OSDBU
Office of Small and Disadvantaged Business Utilization. Offices located throughout the United States that offer small businesses information on how to compete for prime and subcontracting opportunities with the federal government.
back to top

Overhead
Expenses that do not change as production changes. A simple way to look at overhead is even if there were no sales, what expenses would still have to be met? Typically expenses such as lease payments, utilities, etc.
back to top

Partnership
A form of business created by the agreement of two or more individuals. See also general partnership and limited partnership.
back to top

Pass through Taxation
A form of taxation where a business is not taxed on its revenues, but the characteristics of the expenses and revenues "pass through" proportionately to the owners and they are taxed personally.
back to top

Personal Guaranty
Usually the owner(s) of a corporation cannot be held personally responsible for a corporation's debt. If a loan requires a "personal guaranty" it means that the lender is asking the owner to personally guarantee the debt should the corporation default.
back to top

Pro Forma
Usually, financial statements that have hypotheticals or projections built into them. They are forward looking projections of income and operations.
back to top

Product Format Franchise
The ability to sell a particular companies product that does not constitute all that you sell. 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.
back to top

Protected Territory
A geographic area granted to a franchisee in which the franchisor agrees not to sell franchises to others or to open company-owned stores.
back to top

Quality Control
Also known as quality assurance. A franchisor will send teams or individuals to franchise locations to ensure that the rules in the operations manuals are followed. This ensures the consistency of the product or service between different franchisees. The strictness of the quality control is to the franchisees benefit as it ensures that his operation's reputation is not tainted by the laxness of another franchisee.
back to top

Real Property
Land and anything permanently affixed to the land. If an item can be removed from real property without significant effort or damage, it is considered personal property.
back to top

Registration
Some states require that franchisors to register with the state before allowing any franchise sales within the state.
back to top

Renewal
You are granted a particular time frame in which to conduct business as a franchisee in your initial Franchise Agreement. The franchise agreement should also state the terms and conditions to renew that business relationship. Renewal is the resigning of a Franchise Agreement after the initial or subsequent terms of the franchise expires.
back to top

Royalty Fee
A continuous fee paid by the franchisee to the franchisor. The royalty fee is usually a percent of the gross revenue earned by the franchisee. back to top

S Corporation
An S corporation functions similarly to a C corporation. It is called an S corporation because it is regulated by subchapter S of the Internal Revenue Code. It provides for the limited liability advantages of a regular corporation, but with the advantages of pass-through taxation. It is typically a closely held corporation. There are limits on what corporation can qualify as an S Corporation.
back to top

SBA
SBA is an acronym for the Small Business Administration. The SBA provides technical, financial and management assistance to help individuals start and run small businesses.
back to top

SBC
SBC is an acronym for Small Business Centers. They are General Services Administration (GSA) offices that assist small businesses in acquiring federal contracts for goods and services.
back to top

SCORE
SCORE is an acronym for the Service Corps of Retired Executives. This is a volunteer organization associated with the SBA. It consists of retired executives who volunteer to provide counseling, workshops and seminars for small businesspeople.
back to top

Service Mark
A service mark is similar to a trademark in that it registers exclusive use of a slogan or logo. However, it is specifically used for services as opposed to tangible goods.
back to top

Shareholder
A shareholder owns "shares" in a corporation for which they typically give capital to the corporation in exchange for shares of the corporation.
back to top

SIC
SIC is an acronym for Standard Industrial Classification. It is the predecessor of the NAIC and is a numerical identification system that classifies businesses into defined industries.
back to top

Simple Interest
Interest paid on the amount of the principal of a loan only as opposed to compound interest.
back to top

Sole Proprietorship
A form of business where one individual opens a business. Legally, the owner is the business and the business is not considered a separate legal entity. The owner is personally subject to unlimited legal liability for the business.
back to top

Sweat Equity
In the early stages of a business, an owner may invest their time without taking a salary in order to grow the business. This concept is known as sweat equity.
back to top

Trade Secret
Trade secrets are what give some companies their competitive edge. They can be diverse from secret product formulas to confidential customer lists. Provisions for the confidentiality of trade secrets can sometimes be found in the Franchise Agreement.
back to top

Trademark
A distinctive name or symbol used to distinguish a particular product or service from others. A trademark must be registered with the U.S. Patent and Trademark Office. It can be used exclusively by the owner. No one else can use it without the owner's permission. Part of a franchise's value is the right to use a recognized trademark.
back to top

Turnkey
Literally a business whereby a new owner simply has to "turn the key" to start operations.
back to top

UFOC
An acronym for Uniform Franchise Offering Circular. This is the disclosure document that the franchisor must give you prior to selling you a franchise.
back to top

Variable Cost
Any costs that vary with the level of production. For example, materials directly used to produce a product are variable costs. The more product produced, the more materials needed to produce the product.
back to top

Venture Capital
Money loaned by venture capitalists to new businesses that show the potential for above average growth, usually in new, or unusual industries.
back to top

WBE
An acronym for Women Owned Business. In order to be a WBE, you must go through a strict certification process to ensure that the business is truly owned and controlled by a woman. Only 51% ownership and control need normally be demonstrated. The advantages to certification include certain federal government contract advantages and potential low interest loans.
back to top