Franchise glossary

The disclosure vocabulary, defined from the filings rather than from brochures. 30 terms.

• Ad fund (marketing fee)

  The ad fund is a second ongoing percentage of sales — typically 1–4% on top of the royalty — that franchisees pay into a franchisor-controlled marketing pool.

• Area development agreement

  An area development agreement commits you to open multiple units on a schedule in exchange for territorial exclusivity and usually discounted fees.

• Charge-off

  A charge-off is a loan the lender has written off as a loss because the borrower — here, a franchisee — could not repay it.

• Churning (retread units)

  Churning is the pattern of a franchisor repeatedly reselling the same failed location to successive new franchisees, collecting a fresh fee each time.

• Discovery day

  Discovery day is the franchisor-hosted visit near the end of the sales process — equal parts final interview and final sales push.

• Distress signals

  Distress signals are recent events for a single brand — bankruptcies, mass closures, and litigation — shown on that brand's page only after the brand's own entity is confirmed as the named party.

• Exit quality ratio

  The exit quality ratio measures terminations plus “ceased operations — other reasons” as a share of all outlet exits. Item 20 does not say why an outlet left, so it is a signal to investigate rather than a count of failures.

• Exit rate

  The exit rate is the share of a brand's franchised outlets that left the system in a year — through termination, non-renewal, or ceasing operations. Transfers to a new owner and reacquisitions by the franchisor are not counted as exits.

• FDD (Franchise Disclosure Document)

  An FDD is the legal document every U.S. franchisor must give prospective franchisees before they buy — a ~200–500 page disclosure of the company's finances, fees, litigation, and unit history.

• FDD Item 19

  Item 19 is the optional section where a franchisor discloses how much its outlets actually earn — a Financial Performance Representation.

• FDD Item 20

  Item 20 is the section of a Franchise Disclosure Document containing five tables of outlet counts and franchisee status changes over the prior three years.

• FDD Item 3 (Litigation)

  Item 3 is the FDD section where a franchisor must disclose material litigation — including lawsuits brought by its own franchisees and actions by regulators.

• FDD Item 5

  Item 5 is the FDD section disclosing the initial franchise fee — including, when the fee is not uniform, the conditions under which it varies and often the actual range collected.

• Financial performance representation (FPR)

  An FPR is the earnings claim a franchisor may make in FDD Item 19 — the only place it can legally state what units earn, under a methodology it chooses.

• Franchise agreement

  The franchise agreement is the binding contract you actually sign — distinct from the FDD, which is disclosure. The FDD describes the deal; the agreement is the deal.

• Franchise broker (franchise consultant)

  A franchise broker or "consultant" is paid by franchisors — often a large share of the initial franchise fee — for each buyer they place, which shapes which brands they show you.

• Franchise fee

  The franchise fee is the one-time upfront payment you make to the franchisor for the right to open a location — disclosed in FDD Item 5.

• Franchise registration states

  Registration states are the U.S. states that require franchisors to file their FDD with a state regulator before selling there — the reason FDDs are publicly retrievable at all.

• Franchise resale (transfer)

  A franchise resale is buying an existing unit from its current owner rather than opening a new one — recorded as a transfer in FDD Item 20.

• From the FDD vs. sample data

  On this site, FROM FDD means a number was machine-extracted from the brand's actual FDD filing or a federal record. Nobody has checked each figure by hand, and extraction can err — check the linked source. Sample data is placeholder content and never citable.

• Item 7 (total investment)

  FDD Item 7 is the franchisor's estimate of everything it costs to open one outlet — from the franchise fee through build-out, equipment, and initial working capital.

• Personal guarantee

  A personal guarantee makes you individually liable for your franchise's obligations — your house and savings stand behind the LLC, not just the business.

• ROBS (401(k) rollover)

  ROBS — Rollovers as Business Start-ups — is a structure that lets you fund a business with your retirement savings without an early-withdrawal penalty.

• Royalty

  A royalty is the ongoing fee — usually a percentage of your gross sales — that a franchisee pays the franchisor every period, disclosed in FDD Item 6.

• SBA 504 loan

  An SBA 504 loan finances major fixed assets — real estate and heavy equipment — through a certified development company, alongside the more common 7(a) program.

• SBA 7(a) loan

  An SBA 7(a) loan is a bank loan partially guaranteed by the U.S. Small Business Administration — the most common way franchise buyers finance a purchase.

• Transfer

  A transfer is an existing franchise outlet sold by one franchisee to another — the unit survives, but the owner changes.

• Validation

  Validation is the diligence step of calling existing (and former) franchisees to test what the franchisor's disclosures and salespeople have told you.

• Vintage curve

  A vintage curve groups loans by the year they were made and tracks how each year's cohort performed — separating old problems from current ones.

• Watch Desk verdict

  The Watch Desk verdict is a categorical rating — Strong disclosed record, Proven & steady, Weaker disclosed record, Adverse public-record signals, Too new to judge, Filing too old to rate, or Not enough disclosure. It starts from a brand's own FDD Item 20 with an explicit evidence gate; a going-concern audit opinion or SBA loan losses well above same-era loans can cap it.

How these terms feed the verdicts is set out in the methodology.