Accounts Receivable Turnover
This is the ratio obtained by dividing total credit sales during an accounting period by average accounts receivable during that same period. The ratio indicates the number of times the receivables have been collected during the accounting period.
Acknowledgment of Receipt
A document provided to a prospective franchisee by the franchisor.
It confirms that you have received the franchise documents as of a
A fee paid by franchisees to the franchisor, for advertising
expenditures. The funds may be used locally, regionally, or
nationally. The fee is usually a percentage of the franchisee's
annual sales and is paid in addition to royalty fees.
Advertising to Sales Ratio
A ratio that helps measure the effectiveness of an advertising campaign calculated by dividing total advertising expenses by sales revenue. The calculation is most meaningful if only one ad campaign is run at a time. Also, some ad campaigns are designed to establish long term results which means that examining short term results may not fully reflect the benefits of the campaign.
This can mean overstating revenue in order to increase net income, or overstating expenses in order to reduce taxable income. Sometimes losses are hidden within subsidiaries. Other times, capital expenditures are written off as expenses. Also called "cooking the books." Often the purpose is to inappropriately inflate the price of the stock.
A real estate investment with a negative cash flow.
Approved Advertising Materials
Advertising materials provided by the franchisor to the franchisee for use in his or her local market. The materials may be created by the franchisee and submitted to the franchisor for approval.
A location that meets the criteria of the franchisor. Approval does not guarantee success of the business.
Area Development Rights
The rights by which a franchisee receives the right to develop or
sell multiple franchise rights for the franchisor in a specific
The price at which a security is offered for sale on an exchange or in the Over the Counter market. Also called the Ask Price, Asking Price and Offering Price.
Asset Based Loan
This is a loan normally secured by accounts receivable, inventory, or balance sheet assets such as machinery or equipment. Interest rates on Asset Based Loans tend to be lower than unsecured loans because the lender has collateral that can be seized and liquidated if the loan is not repaid when due. Asset Based Loans are made by Finance Companies and Commercial Banks.
Asset Test Ratio
See Quick Ratio.
This is an event that is nearly impossible to adequately prepare for, that occurs suddenly, and is a worst case scenario. It is the type of event that would likely make the corporation's stock price dive. An example would be the indictment of the CFO for securities violations.
A supplier designated or approved by the franchisor to sell to the franchisees. An approved supplier may be the franchisor, an affiliate of the franchisor, or a third party. See Key Vendor or Supplier.
A person who believes stock prices will decline. See Bull.
The price a prospective buyer is willing to pay for a security.
Bid and Asked
Bid is the highest price a prospective buyer is willing to pay for a security and Asked is the lowest price the seller will accept. Together, the two prices are a Quotation with the difference being the Spread. While the concept of Bid and Asked is involved in all trading of securities, the terms Bid and Asked almost always refer to unlisted OTC securities.
Board of Advisors
A Board of Advisors is an informal, less costly alternative to a Board of Directors. It is intended to enhance a firm's ability to grow, its credibility, and reputation. Unlike directors, advisory board members do not owe a fiduciary duty to the company and generally have no liability. Consequently, they do not require coverage, under a Directors and Officers Liability Policy and usually receive far less compensation than directors.
An agent that represents buyers and sellers of franchises. Some brokers refer to themselves as franchise consultants.
A person who believes stock prices will rise. See Bear.
Business Format Franchise
A franchise based primarily on the method of conducting the business, or a business system, as opposed to the right to sell a specific product. See Product Franchise.
The price at which a bond can be called or redeemed. It is generally higher than the par value with the difference being the Premium.
This is the length of time during which a bond cannot be called or redeemed. See Call Risk.
This is the risk to a bondholder that a bond may be redeemed before its maturity. The risk to the bondholder is that the bond cannot be replaced with the same yield because rates have declined. Bonds are called because they can be replaced at a lower cost.
This is the initial capital (cash) required to start the franchise business. It includes the franchise fee, start - up costs, and working capital.
To convert an income stream into a present value or capitalized value, by dividing the annual income by the rate of return required. For example, a stream of income equal to $1,000 per month or $12,000 if the required rate of return is 10% ($12,000 / 10% = $120,000). The process is referred to as "capitalization or to capitalize." Earning assets such as rental properties and businesses are usually valued using the capitalization method, but it is not the only method of determining value.
Capitalization Rate or Cap Rate
This is the rate used to convert a stream of income into a present value. The market determines cap rates.
Refers to franchisors that sell failed franchises over and over to unsuspecting buyers. Churning is not a common practice but does occur. Compare churning to Retrofranchising.
This is the ratio of a firm's average accounts receivable to its average daily sales. Average daily sales are divided into average accounts receivable to determine the average number of days it takes to convert sales to cash. See Accounts Receivable Turnover.
Common Stock Ratio
This is the percentage of total capitalization represented by the common stock. A high percentage indicates a lack of leverage and a high degree of safety in the event of a liquidation. Companies with stable earnings can more safely leverage their capital structure so as to increase the return on capital.
A site or location owned and operated directly by the franchisor.
In economics, the law of comparative advantage states that two countries (or businesses) will both gain by trading their goods if they have different relative costs for producing the same goods. The net benefits are called the gains from trade. See Division of Labor.
Training of franchisees that continues after the initial training. All high quality franchisors offer continuous training in recognition of the fact that their long term success is dependent upon the success of the franchisees.
Controller or Comptroller
This person is the chief accountant for a firm and may also serve as Treasurer in smaller firms.
Conversion franchisees refer to existing independent businesses that convert their independent business into a franchisee. This requires a change of name and adoption of the franchisor's requirements.
Copyrights are exclusive rights granted to the authors of "original works of authorship" including literary, dramatic, musical, artistic, and certain other intellectual works, both published and unpublished. To qualify for copyright, the creative work must be original and must exist in some tangible form; it cannot exist only in the author's mind. The owner of copyright has the exclusive right to reproduce the copyrighted work, to prepare derivative works, to distribute copies or phonorecords of the copyrighted work, to perform the copyrighted work publicly, or to display the copyrighted work publicly. Copyrights arise automatically as soon as creative works are made; however, registration affords owners of copyrighted materials additional legal benefits.
This refers to new technologies and businesses that produce new industries and jobs that end up destroying or minimizing older industries that become obsolete. Examples include personal computers replacing typewriters, automobiles destroying the business of making harnesses (for horses), and on-line publications replacing traditional print newspapers. Creative Destruction is inherent in capitalism and freedom. It is not to be confused with the definition described by Karl Marx.
These are cash, accounts receivable, inventory and other assets that are likely to be converted into cash in the normal course of business within twelve months.
These are liabilities that are due within twelve months.
This important ratio is determined by dividing the current assets by the current liabilities. The ratio indicates a firm's ability to pay its current obligations from current assets. A firm with a reliable cash flow can operate more safely with a low current ratio than a firm with an unreliable cash flow.
Debt to Equity Ratios
There are three common debt to equity ratio calculations used to evaluate a firm's financial statement:
Total liabilities divided by total shareholders' equity. This ratio indicates to what extent shareholders' equity is available to cover creditors' claims if there is a liquidation.
Total long term debt and preferred stock divided by common stock equity. This measures securities with fixed charges to those without any fixed charges.
Total long term debt divided by shareholders' equity. This ratio indicates the extent of leverage. Leverage is the use of borrowed funds for the purpose of increasing the return on the equity of the common shareholders.
Design includes everything that creates the image of the franchise including but not limited to the use of colors, layout of the space, logo, signage, and architectural features.
See Virtual Bank.
To ensure quality standards, some franchisors require that
franchisees purchase supplies or products for their franchised
business only from a designated, exclusive list of suppliers.
A distribution method for a company's products by which a business,
the distributor, is authorized under the terms of a Distributor
Agreement, to sell the products or services of another company.
The annual rate of return earned by an investor based on dividends only.
Division of Labor
The Division of Labor or Specialization of Labor refers to breaking down the production process into a sequence of stages where employees specialize and focus their efforts on a single stage. The division of labor increases productivity, increases profits, and results in higher wages and benefits. The division of labor encourages trade. See Comparative Advantage.
Statements of sales, profits, or other financial information made by
a franchisor regarding the operations of their franchisees.
See Price / Earnings Ration (P / E Ratio).
A specifically defined geographic area in which a franchisee has the
exclusive, protected right to operate within the franchisor's
Federal Trade Commission (FTC)
The agency of the federal government charged with regulating trade
practices including franchises.
Refers to employees of the franchisor that are responsible for making certain that franchisees are in compliance with the franchisor's requirements. Sometimes field consultants provide advice and continuous training to franchisees.
This is the written contract between the franchisor and franchisee. These contracts are prepared by an attorney representing the franchisor. They should always be reviewed by a franchise attorney who represents the franchisee.
An attorney who represents franchisors, franchisees, or both. Some franchise attorneys represent franchisee associations. In addition to franchise law, most franchise attorneys will be experienced in business formations, intellectual property (copyrights and trademarks), employment - independent contractor law, commercial leases, agency law, and asset protection.
A skilled and experienced advisor with extensive knowledge in the structuring, design, development and operation of franchises. Some franchise brokers and agents refer to themselves as Franchise Consultants, but in reality, few brokers and agents have earned the right to call themselves Franchise Consultants.
Franchise Disclosure Document (FDD)
The Franchise Disclosure Document (FDD) is a legal document which must be presented to a prospective purchaser of a franchise at least 14 days before any money is paid or contract signed. It was originally known as the Uniform Franchise Offering Circular (UFOC). The term UFOC is still commonly used.
Franchise fraud is defined by the FBI as an illegal pyramid scheme where profits are earned by the sale of new franchises instead of the sale of goods and / or services. See Churning.
The Federal Trade Commission (FTC) has oversight of franchising in the United States rather than the Securities and Exchange Commission. The FTC has established the Franchise Rule in order to facilitate informed decisions and to prevent deception by franchisors. Under the Franchise Rule, all franchisors are required to use the Franchise Disclosure Document (FDD).
Franchise Agreements will stipulate the grounds for termination, curing defaults, resolving disputes, remedies, damages, and attorney fees.
The owner of franchise rights who is entitled to use the
franchisor's trade names, trademarks and systems.
The initial amount of money paid to the franchisor for the right to
become a franchisee.
A method of conducting business that involves a franchisor (parent
company) and franchisee who pays for the right to sell the parent
company's products and use their trademark/name.
A company that owns a business system, products, trade names and
trademarks that are sold through a distribution method using
This is total sales not including sales taxes. It is the amount generally used to calculate percentage royalties.
See Performance Stocks.
This is inflation that is out of control, where people lose confidence in the value of currency and put their assets in hard assets like gold, certain stocks, and real estate, including land. Historically, people start to lose confidence in their currency when the government is printing large amounts of money, deficits are out of control, or inflation exceeds five percent per year. See Inflation Hedge. See Barter.
Indenture or Deed of Trust
An indenture is a written contract between the issuer of bonds and the bond holders setting forth all terms. It is sometimes called a Deed of Trust. The indenture will provide for the appointment of a trustee to act on behalf of the bondholders.
The increase in the price of goods, services, and other assets. Inflation causes a loss of purchasing power where currency loses value. It occurs when the supply of money increases faster than the economy is growing. See Hyperinflation and Inflation Hedge.
An investment designed to protect the investor from the loss of purchasing power caused by inflation. Inflation hedges are usually investments in gold, certain stocks, and real estate, including land.
The upfront cash investment required to purchase a particular
franchise business. It refers to the franchise fee and/or deposits
required to be paid at the time a franchise agreement is signed.
Intellectual Property Law and Licensing
Intellectual Property (IP) Law encompasses the protection of a wide variety of property created by businesses, authors, musicians, artists, and inventors. Copyright, trademark, trade dress, trade secret, and patent laws protect Intellectual Property. IP law protects the property rights of businesses and individuals from infringement, unauthorized use, and misuse. By maintaining property rights, an individual or business can control the use and distribution, including the sale and licensing of such property.
Licensing is a key business strategy because it is a way to gain earnings from inventions and creative works. Licensing is the process where you grant some rights to intellectual property you own to others. It is really a business relationship between the licensor, who owns the IP, and the licensee, who is given the limited right to use it.
Technology licensing by the author or inventor of a new product or technology requires both IP protection and contractual agreements to realize an economic benefit from its production. For instance, the author of a software program or an inventor can grant a license to a corporation that has the resources to produce and distribute the embodied Intellectual Property.
Inventory Turnover Ratio
This is the ratio of annual sales to average inventory. Sometimes called the Inventory Utilization Ratio, it indicates how many times the inventory of the company is sold and replaced during an accounting period. It is useful to compare the Inventory Turnover Ratio of a company to industry averages. A low turnover may be an unhealthy indicator.
Inventory Utilization Ratio
Refer to Inventory Turnover Ratio.
A Keepwell Agreement is a contract between a parent company and a subsidiary to maintain solvency and financial backing for the term of the agreement. It is a means of increasing the credit worthiness of Subsidiaries.
Key Vendor or Supplier
A vendor or supplier approved by the franchisor. See Authorized Supplier.
This is the ability to quickly sell an asset without an affect on the price of the asset. Treasury securities would be highly liquid. Raw land would not be a liquid asset. Highly liquid assets tend to have a lower rate of return, but are safer because they can easily be converted to cash.
Manual (Or Operating Manual)
This is the instruction or operating manual used to instruct the franchisee on how to operate the business. It also includes all policies and procedures.
Mark to Market Accounting
Mark to Market Accounting or Fair Value Accounting refers to accounting for the fair market value of assets rather than the historical cost. This can change the values on the balance sheet of a firm as market conditions change. Historical cost accounting does not reflect the current market value of assets. Balance sheets primarily made up of marketable securities can change dramatically when economic conditions are unstable.
A franchisee that purchases the right to sell franchises to subfranchisees within a defined territory. Sometimes the master franchisee will provide some of the initial and / or continuing services otherwise provided by the franchisor. Master franchisees usually share in the franchise fee and continuing royalties paid by franchisees within their area.
A business that acquires the right to sell franchise locations to
other franchisees within a designated geographic territory.
Negative Working Capital
A situation where current liabilities exceed the current assets of a company. If the situation is not corrected, the company will find itself in a position where it cannot pay its obligations when due. This could result in insolvency and / or bankruptcy.
Net Current Assets or Working Capital
This is the difference between current assets and current liabilities.
Net Operating Income (NOI)
The amount of cash generated by a business after deducting operating
expenses. NOI is calculated without considering loan payments.
Net Operating Profit (Or Loss)
See Operating Profit (Or Loss).
Also referred to as Net Cash Flow, the amount of cash generated by a
business after deducting operating expenses and loan payments.
Net Quick Assets
These liquid assets are cash, marketable securities, and accounts receivable, less current liabilities. See Quick Ratio.
The amount determined by deducting total liabilities from total
A clause often found in a Franchise Agreement that restricts the
franchisee's ability to compete with the franchisor's business.
Non Current Asset
This is an asset that is not expected to be converted into cash, sold, or exchanged within one year. Examples are (1) Intangible Assets such as goodwill, trademarks, and patents, and (2) Fixed Assets such as machinery, equipment, and real estate.
This is the person authorized by a franchisee, owned by more than one person, to communicate with the franchisor.
Operating Profit (Or Loss)
This is the difference between the revenues of the firm and the related costs and expenses. Income from sources other than regular operations are excluded. Income taxes are excluded and cost unrelated to the operations of the business are also excluded. Operating Profit is also referred to as Net Operating Profit and Net Operating Income.
Operating Ratios measure a firm's operating efficiency and effectiveness by relating certain income and expense numbers from the income and expense statement to each other and to certain balance sheet numbers. Operating Ratios include: sales to cost of goods sold, operating expenses to income, and net profits to gross income. The ratios are particularly meaningful when comparisons are made to prior periods and with industry averages.
A detailed manual that is provided by a franchisor to a franchisee
which contains the operational details and specifications required
to successfully operate a franchise business.
OTC Bulletin Board (OTCBB)
The OTCBB is the electronic listing of Bid and Asked quotations of Over the Counter (OTC) Stocks that do not meet the minimum net worth and other requirements of the NASDAQ stock listing system. It provides continuously updated data on domestic stocks that are not listed and traded on an organized exchange.
Over the Counter Stocks (OTC)
These are stocks and other securities of corporations that do not meet the listing requirements of an organized exchange, or securities of corporations that have chosen Over the Counter trading. The rules of OTC securities trading are written and enforced by the National Association of Securities Dealers (NASD), a self-regulatory group. Prices of OTC securities are published in many daily newspapers.
Pac - Man Strategy
This is a defensive strategy used to defeat a hostile takeover bid where the target corporation begins buying the shares of the acquirer corporation or threatens to do so.
This is an interest in a single loan or a pool of loans evidenced by a written agreement or certificate.
Payment in Kind Securities
These are securities that pay their holders with more of the same type of security instead of cash. For example, bond holders will receive more bonds instead of cash payments.
Penny Stocks are common shares of public companies that trade for under one dollar. They are generally thinly traded and are often targets for price manipulation.
A performance stock is also called a Growth Stock. These are stocks of fast growing companies that usually pay no dividends. All profits are reinvested in the company in order to help finance its growth. These companies generally take higher than average risks.
See Payment in Kind Securities.
Pink Sheets LLC, formerly the National Quotation Bureau, provides daily bid and offer quotes, electronically, from Market Makers on unlisted, OTC Stocks (pink sheets) and bonds (yellow sheets) to subscribers of the service. It is not a stock exchange.
This is a right usually set forth in a shareholders Agreement or Articles of Incorporation giving existing owners of corporate stock the right or opportunity to purchase shares of new issues before it is offered to others. The purpose is to protect shareholders from dilution of value and control.
Price Earning Ratio (P / E Ratio)
This is the price of a stock divided by its earnings per share. The P / E Ratio is also known as the multiple or Earnings Multiple. It is a measure of price paid for a share relative to the annual net income or profit earned by the corporation per share.
This is the rate that commercial banks charge their most credit worthy borrowers. It is also a base rate, from which other interest rates are calculated. For example, one borrower may be charged prime plus 1%, another prime plus 2%, etc. Every bank has its own prime rate, although the prime rate at most major banks, is the same or very close to the same. Smaller banks may have a prime rate that is higher than major bank prime.
Under SEC Rules, a Principal Shareholder owns 10% or more of the voting stock of a Registered Company.
Private Equity Fund
Generally, a limited partnership controlled by a private equity firm that acts as the general partner. The Private Equity Fund (General Partner) usually solicits investment funds from Accredited Investors and Qualified Institutional Investors for investment into various ventures.
Private Limited Partnership (PLP)
This is a limited partnership that is not registered with the SEC.
Projected financial results for a business.
Pro Forma Budget
A projected or hypothetical budget used for planning purposes.
A franchise based on selling and distributing a specific product made by the franchisor as opposed to a business format franchise where the franchisee is acquiring primarily a method of conducting business or system. Examples would be automobile dealerships and gas stations.
Proprietorship or Sole Proprietorship
This is an unincorporated business owned by one person. The individual proprietor is entitled to all profits and is responsible for all expenses and liabilities. A Proprietorship offers the owner no asset protection.
The formal written offer to sell securities that sets forth the business plan of the enterprise and all relevant information the investor will need to make an informed decision to pay or not buy the securities.
These are minimum standards established in the Operating Manual or Franchise Agreement which the franchisee must meet in order to avoid a default. High quality franchisors will enforce the quality standards for the benefit of all franchisees as well as the benefit of the franchisor.
Cash, marketable securities, and accounts receivable divided by current liabilities. This ratio excludes inventory, thus concentrating on the companies most liquid assets. It provides an answer to the question: If sales declined materially or stopped, could the company still meet its obligation? A Quick Ratio of 1:1 is considered acceptable. This is also referred to as the Acid Test Ratio.
This is a method of financial analysis used to make credit, investment, and financial decisions. It uses the relationships of numbers found in financial statements. Ratio Analysis will help the analyst determine the strengths and weaknesses of a company, as well as important trends.
A company that has filed a Registration Statement with the SEC in connection with a public offering of securities. Registered Companies must comply with many SEC Rules including disclosure requirements.
Some states, including California, require registration of the franchise disclosure document and exhibits before the franchisor is permitted by law to offer the franchise for sale. See Franchise Attorney.
Franchisees are generally offered for a limited period of time with
a right to renew. The franchise agreement will set forth what
renewal rights, if any, are provided to the franchisee.
Franchise agreements have a termination date that will range from five to more than ten years. Most, but not all, can be renewed subject to renewal terms set forth in the Franchise Agreement. Renewal Terms vary among franchises.
Retained earnings are undistributed profits accumulated in a corporation after dividends are distributed. They are also called Earned Surplus. Retained Earnings are not the same as cash received in exchange for stock.
Retrofranchising is sometimes referred to as refranchising and is not the same as Churning. Retrofranchising usually refers to the sale of a franchise for an existing location owned and operated by the franchisor. It is the sale of an existing, successful business that is expected to remain successful.
This is an "investors disease": the fear of having uninvested cash. Some investors believe they can only maximize their portfolio return if they are fully invested at all times.
A percentage of gross sales that a franchisee pays to the franchisor
Compensation to the franchisor payable usually monthly and generally calculated as a percentage of gross sales. Sometimes the fee will be a fixed amount per month, but this is not the most common method.
Say on Pay
Given that corporate directors and officers overpay themselves, the bylaws of some corporations require that compensation for directors and officers be approved by the shareholders of the corporation. Proponents point out that directors and officers owe a fiduciary duty to the corporation and that Say on Pay promotes a stronger relationship between the directors and officers on the one hand, and the shareholders on the other. Corporations listed on an exchange are subject to strict disclosure rules and restrictions under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Second Preferred Stock
This is Preferred Stock issued that is ranked below another class of Preferred Stock. For example, Second Preferred Stock might pay dividends only if the Preferred Stockholders receive a dividend payment of a defined amount.
Single Unit Franchise
Exists where the franchisee owns one franchise. With many types of franchises, a franchisee will purchase multiple franchises in order to secure a larger exclusive territory.
Small Issues Exemption
Refers to issues of securities under $1.5 million that qualify for simplified registration under SEC Regulation A.
Start Up Costs
See Capital Required.
The total amount of funds needed to get started in a franchised
business. This amount includes the Initial Investment plus any
required build out, inventory, equipment purchases and working
A trademark is a word, name, symbol, or device that is used in trade with goods to indicate the source of the goods and to distinguish them from the goods of others. A Servicemark is the same as a trademark except that it identifies and distinguishes the source of a service rather than a product. Trademarks allow businesses to protect the symbolic information that identifies the source of goods and services by preventing use of the information by competitors. Trademark rights may be used to prevent others from using a confusingly similar mark, but not to prevent others from making the same goods or from selling the same goods or services under a clearly different mark. To receive protection, a word, name, symbol, or device must be distinctive and must be used in commerce. A trademark need not be registered, but if it is registered the owner of the mark has put others on notice that the trademark is already in use.
This person is a corporate officer responsible for the receipt, custody, investment, and disbursement of funds. In addition, the Treasurer has responsibility for the borrowing of funds and recording changes in stock ownership. In some firms, the Treasurer is also the Controller or chief accountant.
Uniform Franchise Offering Circular (UFOC)
A document required by the FTC to be provided by franchisors to
potential franchisees. It is also referred to as the Disclosure
A Virtual Bank or Direct Bank is a bank without a network of branches. It offers its banking services by using the internet, telephones, email, mail, and automatic teller machines. Virtual Banks have substantially lowered operating costs which allows them to charge lower fees and interest on loans while paying account holders higher interest rates.
These are assets that irreversibly decline in value over time. These types of assets include vehicles, machines, computers, office furniture, and other fixed assets. Depreciation schedules are assigned to Wasting Assets, thus the loss in value is recognized each year.
Watered Stock is stock that is issued at a price that is much greater than the value of the underlying assets of the corporation. The assets can be overvalued for many reasons including accounting manipulations and fraud.
White Elephant Investment
An investment that is so expensive to operate and maintain that it is highly unlikely to ever be profitable. Something whose cost of upkeep is out of line with its usefulness.
Working Capital or Net Current Assets
This is the difference between current assets and current liabilities.