A
Advertising Levy
A contribution made by franchisees to a central marketing or advertising fund, used to promote the brand nationally or regionally. Usually calculated as a percentage of turnover, separate from the management service fee. Also called a marketing fund or marketing levy. Not all franchise systems charge one, it depends on how the brand’s marketing is structured.
Area Development Agreement
An arrangement where a franchisee commits to opening a set number of outlets within a defined territory over an agreed timescale. Common in larger systems where the franchisor wants to grow quickly in a region without taking on that development directly. The franchisee typically pays a reduced fee per unit in exchange for the exclusivity and volume commitment.
B
bfa (British Franchise Association)
The UK’s voluntary self-regulatory body for franchising. The bfa sets ethical standards and accredits franchisors, franchisees, and advisors who meet its code of conduct. Membership is not mandatory but is widely regarded as a mark of credibility. TFC is a bfa Advisor Member, one of a relatively small number of consultancies to hold this accreditation.
Break-even
The point at which a franchisee’s revenue covers all costs, including the management service fee, any marketing levy, and operating expenses, leaving neither a profit nor a loss. Franchisors typically provide a projected break-even timeline as part of their financial disclosures, though individual results will vary depending on location, effort, and local market conditions.
Business Format Franchise
The most common type of franchise. The franchisor grants the franchisee the right to operate a business using the franchisor’s brand, systems, products, and support, not just the right to sell a product. The franchisee receives a complete operating model, training, and ongoing support in exchange for fees. Most high-street and service franchises operate on this basis.
C
Conversion Franchise
Where an independently operated business converts to a franchise model by affiliating with an established brand. The business owner trades some independence for the benefits of operating under a recognised name, shared marketing, and a proven system. Common in sectors such as estate agency, care, and professional services.
Cooling-off Period
A period, typically 14 days in the UK under consumer contract regulations, during which a party may withdraw from an agreement without penalty. In franchising, cooling-off provisions are not automatic and depend entirely on what is written into the franchise agreement, so legal advice before signing is essential.
D
Discovery Day
An invitation-only event where a prospective franchisee visits the franchisor’s head office or a flagship location to meet the team, ask questions, and assess the culture and operation in person. Usually one of the final steps before a franchise agreement is offered. Discovery days are a two-way assessment, the franchisor is evaluating the candidate just as much as the candidate is evaluating the brand.
Disclosure
The process by which a franchisor provides a prospective franchisee with detailed information about the business, the system, and the agreement, enabling an informed decision. The UK does not have a statutory disclosure law equivalent to the US Franchise Disclosure Document (FDD), but the bfa’s code of practice requires members to provide fair and accurate pre-sale information.
E
Earning Potential
A guide to the income a franchisee could reasonably expect once the business is established. Responsible franchisors present earning potential as a range based on actual franchisee performance data, not a guaranteed figure. Prospective franchisees should always ask how the earning potential figures were derived and speak directly with existing franchisees to validate them.
F
Franchise Agreement
The legally binding contract between franchisor and franchisee that sets out the rights and obligations of both parties. It covers the licence term, territory, fees, renewal conditions, restrictions on trading, and exit provisions. Franchise agreements are almost always weighted in favour of the franchisor, which is standard, but should be fair. Independent legal advice from a solicitor experienced in franchising is strongly recommended before signing.
Franchise Fee
The upfront payment made by a franchisee to the franchisor when joining the system. It typically covers the licence to operate under the brand, initial training, territory allocation, and onboarding support. The franchise fee does not usually include working capital, equipment, or premises costs, these form part of the total investment figure.
Franchise Information Memorandum (FIM)
A detailed document produced by a franchisor, or a consultant on their behalf, that sets out the full proposition for prospective franchisees. A well-prepared FIM covers the business model, financial projections, territory information, support structure, and the franchise agreement summary. TFC produces FIMs for clients as part of the franchise development process.
Franchise Package Fee
A separate fee charged by some franchisors in addition to the licence fee, covering the tangible elements they supply or arrange as part of a franchisee’s initial setup. Where a franchisor splits the initial fee into two components, the licence fee covers the right to trade under the brand, while the package fee covers the physical or operational package — which might include branded equipment, uniforms, initial stock, proprietary software, specialist tools, or training that goes beyond standard onboarding, such as a regulated or licensed qualification required for the sector. Not all franchisors separate their fees in this way; many bundle both elements into a single initial franchise fee. Where the fees are separated, it can have tax implications for the franchisee, as some elements of the package fee may be treated differently to the licence fee for accounting purposes. Always seek independent accountancy advice on how the fee structure affects your specific position.
Franchisee
The individual or business entity that licenses the right to operate under a franchisor’s brand and system. The franchisee invests in the business, employs their own staff, and takes on the day-to-day operational responsibility. In return they receive training, an established brand, a proven operating system, and ongoing support from the franchisor.
Franchisor
The business that grants franchisees the right to trade under its brand and system. The franchisor’s role does not end at the point of sale, a good franchisor provides ongoing support, marketing, system development, and the infrastructure that gives franchisees the best chance of success. The quality of the franchisor is one of the most important factors in a franchisee’s long-term performance.
G
Goodwill
The value of a business beyond its tangible assets, the brand reputation, customer relationships, and trading history that make it worth more than the sum of its parts. In franchising, goodwill can be a complex area: the franchise agreement will usually set out what happens to goodwill on exit or resale, and whether the franchisee can realise it. This is an important point to clarify before signing.
L
Licence
In franchising, the franchisor grants the franchisee a licence, not ownership, to use the brand, systems, and intellectual property. The licence is time-limited (typically five or ten years), subject to conditions, and returnable to the franchisor in certain circumstances. Understanding the scope and limitations of the licence is a key part of due diligence.
M
Management Service Fee (MSF)
The ongoing fee paid by the franchisee to the franchisor throughout the term of the agreement, usually calculated as a percentage of gross turnover. Sometimes called a royalty. The MSF funds the franchisor’s support team, system development, and central infrastructure. It is distinct from any advertising levy. A typical MSF in the UK ranges from 6% to 12% of turnover, though this varies considerably by sector.
Master Franchise
An arrangement where a master franchisee acquires the rights to sub-franchise a brand within a defined territory, often a country or large region. The master franchisee takes on some of the franchisor’s responsibilities, recruiting and supporting sub-franchisees within their territory. Master franchise arrangements are common when a brand is expanding internationally.
Multi-unit Franchise
Where a franchisee operates more than one outlet under the same brand. Multi-unit franchising is increasingly common and can offer significant economies of scale, though it requires stronger management infrastructure than a single-unit operation. Some franchisors actively recruit multi-unit operators; others prefer franchisees to establish one unit successfully before expanding.
O
Operations Manual
The comprehensive document that sets out how the franchise system should be run, covering everything from day-to-day procedures and customer service standards to supplier relationships and compliance requirements. A well-written operations manual is one of the foundations of a replicable franchise. It is typically provided to franchisees under strict confidentiality provisions and remains the property of the franchisor.
P
Pilot Operation
A real-world trial of the franchise model operated by the franchisor, or an independent pilot franchisee, before the system is rolled out more widely. A genuine pilot demonstrates that the model works, that the financials are realistic, and that the support systems are in place. Prospective franchisees should be cautious about joining a system with no pilot history, as the model is effectively unproven at franchise level.
Prospectus
A summary document used by franchisors to introduce their opportunity to prospective franchisees at the early stages of recruitment. Less detailed than a Franchise Information Memorandum, the prospectus covers the brand story, opportunity overview, financial headline figures, and next steps. TFC produces prospectuses for clients as part of its franchise development work.
R
Renewal
At the end of a franchise term, the franchisee may have the option, though not always an automatic right, to renew the agreement for a further term. Renewal terms, fees, and conditions should be clearly defined in the original franchise agreement. Some franchisors charge a renewal fee; others require the franchisee to update equipment or premises to current standards before renewal is granted.
Resale Franchise
An existing franchise unit that is being sold by the current franchisee, rather than a new territory being granted by the franchisor. Buying a resale can offer advantages, an established customer base, trained staff, and a trading history, though the reasons for the sale should always be investigated as part of due diligence.
Royalty
Another term for the management service fee, the ongoing payment made by the franchisee to the franchisor as a percentage of turnover. The word “royalty” is more commonly used in international franchising contexts; UK franchising tends to use “management service fee” or “MSF”.
S
Sub-franchisor
A party who holds a master franchise licence and in turn grants franchise licences to individual franchisees within their territory. The sub-franchisor sits between the brand franchisor and the franchisees, providing local recruitment, training, and support.
T
Territory
The defined geographic area within which a franchisee has the right to operate. Territories may be exclusive, meaning the franchisor will not grant another franchisee the right to trade in the same area, or non-exclusive. The size, definition, and protection of the territory should be clearly set out in the franchise agreement. Some service franchises define territory by postcode; others by population or customer catchment area.
Total Investment
The full amount a franchisee needs to invest to get the business operational. This includes the franchise fee, equipment, premises fit-out (if applicable), initial stock, working capital, and any professional fees. The total investment figure is always larger than the franchise fee alone and is the figure that should be used when assessing affordability and discussing financing with a lender.
Training Programme
The initial training provided by the franchisor to new franchisees before they open for business. A comprehensive training programme typically covers both the technical and operational aspects of running the business. Ongoing training, covering new products, system updates, and refresher content, should also be available throughout the franchise term. The quality and depth of training is one of the most important questions to explore during due diligence.
W
Working Capital
The funds needed to cover day-to-day operating costs in the early months of trading, before the business reaches a level of revenue that sustains itself. Working capital is often underestimated by new franchisees. A realistic working capital allowance, typically three to six months of operating costs, should be included in the total investment calculation and factored into any financing arrangements.