10 Franchising Terms to Understand Before Buying a Franchise

Franchising terms can be overwhelming. At The Tailored Closet, we simplify the essentials to ensure you're equipped to thrive in your upcoming franchise venture.

According to a recent study by GOBanking Rates, 42% of Americans want to start a business, but lack of time and financial constraints often hold them back. Many individuals who pursue entrepreneurship turn to franchising to limit risk and take advantage of a proven brand, training, and ongoing guidance. Having a network of peers to share best practices can be useful and put new owners on a faster path to

achieving their vision. There are 806,270 franchises in the U.S., and the industry is forecast to grow 1.9% to 821,589 units this year.

The Tailored Closet is a franchise with nearly 200 locations across the U.S. We specialize in whole-home organization, offering business owners a low-cost, low-overhead opportunity in the home services industry. We’ve compiled a list of franchising terms to help as you explore franchise options and understand the costs of a franchise:

1. Franchise agreement: A legal document outlining the terms and conditions of a franchise deal. It gives a franchisee the right to operate a franchisor’s brand, products, and business model for a certain amount of time. Before signing a franchise agreement, it’s important to have the document reviewed by a franchise legal expert to mitigate risk. Like many franchisors, our initial franchise agreement is for ten years.
2. Initial franchise fee: A one-time payment a franchisee is required to pay a franchisor to use its business model. The Tailored Closet’s initial franchise fee is $19,950. We also have an initial territory fee of $55,000 consisting of approximately 100,000 households.
3. Franchise disclosure document: The franchise disclosure document (FDD) outlines the franchise agreement to enable entrepreneurs to make informed decisions. It provides details about training, marketing, and vendors, and may include financial performance representations of some of its locations. Franchisors must give a copy of their FDD to people interested in purchasing a franchise.
4. Item 19: This portion of the FDD lists financial performance representations of the business. The information provided in Item 19 varies widely and may only represent certain locations rather than the entire system. Item 19 of our FDD includes information from 36 locations with one territory and data from 29 multi-territory owners.
5. Non-compete agreement: As part of a franchise deal, franchisees sign a non-compete agreement prohibiting them from competing with the franchisor for a specified time. The agreement is designed to protect a franchisor’s trade secrets. The Federal Trade Commission recently passed a rule banning non-compete agreements for workers, but it excludes agreements between franchisors and franchisees.
6. Royalties: Franchisees are required to pay a regular royalty fee to the franchisor to use the brand. The royalty fee also helps pay for ongoing training and support franchisees receive. Some franchisors charge a flat fee while others charge a percentage of gross sales. The Tailored Closet offers sliding-scale royalty fees to help franchisees as they get started.
7. Area developer: An area developer signs a multi-unit franchise deal to operate within a specific territory.
8. Master franchise: A master franchisee can develop and franchise locations in a certain territory. Master franchisees have local knowledge and typically spearhead marketing in their region. Having master franchisees enables brands to expand rapidly in new markets.
9. Conversion franchise: When an existing business with employees and a loyal customer base rebrands as a franchise it’s called a conversion franchise. This model allows owners to take advantage of support and marketing from the franchisor and tap the brand’s peer network for guidance.
   
   
10. Renewal rights: When a franchise agreement ends, franchisees have certain renewal rights to retain access to the brand. But they may have to meet certain performance standards or update their locations to meet new brand standards before they can renew their franchise agreement. Details of a renewal clause are in the FDD.

The Tailored Closet: A Structured Approach to Business Ownership

We’re dedicated to helping our franchise owners navigate franchise terminology to achieve their personal and business goals with a business in the home services industry. The Tailored Closet is a leader in the home services industry, and we have the technology and tools to help our franchisees thrive. Our franchise owners provide in-demand organizational solutions for homeowners and businesses in their communities.

Inquire now to learn more about launching a recession-resistant franchise with a trusted leader in the home services industry.