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ABC's of Franchise
A list of business terms for any
franchisor or entrepreneur
LSU Small Business Development Center
a unit of the Louisiana Business & Technology Center
an Institute of the E. J. Ourso College of Business Administration
Louisiana State University
Phone: (225) 388-4842
Fax: (225) 388-3975
http://www.bus.lsu.edu/btc/sbdc.htm
A Partnership with the Small Business Administration
And the Louisiana Department of Economic Development
The ABC's of
Franchise
Accounts Payable: Money that a company owes.
Accounts Receivable: Money that is due to a company from the sale of goods or services.
Accrual Basis: Accounting system in which revenues, expenses, and other changes in assets, liabilities, and equity are
accounted for in the period in which the economic activity takes place.
Acid-Test Ratio: Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid items to
current liabilities.
Amortization: A payment plan which enables the borrower to reduce debt gradually through periodic payments of
principal and interest.
Amortized Loan: A loan to be repaid, interest and principal, by a series of regular payments that are equal or nearly
equal, without any special balloon payment prior to maturity.
Annual Report: A document that includes detailed financial information and is presented to stockholders of a
corporation once a year.
Asset: Something of value. Money in the bank, receivables, inventory, fixtures, and equipment are examples of assets.
Asset-Based Loan: A loan secured by the value of an asset.
Asset / Equity Ratio: The ratio of total assets to stockholder equity.
Balance Sheet: A document that outlines a company's assets, liabilities, and equity of the owner at a particular point in
time.
Bankruptcy: The condition in which companies or individuals legally declare they are unable to pay their debts.
Barrier to Entry: A strategy that prevents one's competitors from offering the same product.
Board of Directors: Managers elected by stockholders to oversee the daily operations of a corporation.
Bond: A debt instrument issued by a company to raise money.
Book Value: Total assets minus intangible assets and liabilities such as debt. A company's book value might be more or
less than the market value of the company.
Business Plan: A document that outlines a company's goals, defines its product and market, provides financial data and resumes of key personnel, and serves as an operating tool to manage the business and obtain financing.
Capitalization: 1) The amount of money used to start a business. 2) A method used to estimate value of a property
based on the rate of return on investment.
Cash Basis: Accounting basis in which revenues and expenses are not recognized until cash is received or paid.
Cash Flow: A measurement of a company's inflow and outflow of cash over a period of time.
Certificate of Occupancy: A certificate issued by a local governmental body stating that the building is in a condition to be occupied.
Certified Public Accountant (CPA): An accountant who has met state requirements and has passed a series of exams.
Chamber of Commerce: An association of businesspeople that works to promote business in the geographic area.
Chapter 7: A form of bankruptcy in which a company sells its assets in order to pay its debts.
Chapter 11: A form of bankruptcy that allows a company to reorganize in order to meet its financial obligations and
then resume operations.
Chart of Accounts: A listing of the accounts used by the entity.
Collateral: Something of value used to guarantee a loan. If the borrower defaults, the creditor keeps the item that was
pledged as collateral.
Copyright: The exclusive right of the creator or heirs to reproduce and/or sell an artistic or published work. The right is
granted by the U.S. Government for a period of 50 years after the death of the creator.
Corporation: A business structure that sets up a company as a separate legal entity from its owners and enables it to
raise capital through the sale of stock.
Creditor: Someone to whom one owes money.
Current Assets: Value of cash, accounts receivable, inventories, marketable securities and other assets that could be
converted to cash in less than 1 year.
Current Liabilities: Amount owed for salaries, interest, accounts payable and other debts due within 1 year.
Current Ratio: Indicator of short-term debt paying ability. Determined by dividing current assets by current liabilities.
The higher the ratio, the more liquid the company
Debt Financing: A method of raising money for a business through loans or the sale of bonds.
Debt / Equity Ratio: Indicator of financial leverage. Compares assets provided by creditors to assets provided by
shareholders. Determined by dividing Long term debt by common stockholder equity.
Default: Failure to pay a debt.
Demographics: The characteristics of a population that marketers can use to determine which consumers would be most interested in their merchandise.
Depreciation: The decrease in value of long-term assets (except land) to an accounting period or to units of production.
Direct Marketing: A strategy that consists of targeting a group of consumers who have a need for the products or
services of a business, and mailing promotional materials to them.
Disclosure Statement: The document required by the Securities and Exchange Commission (SEC) at the time of a
company's initial public offering (IPO) that states the purpose of the business, the number of shares of stock that will be
offered, and what the company plans to do with the money it obtain from the sale of stock.
Distribution (Marketing): The process of transporting goods from the factory to the consumer.
Distributions (Finance): Payments from fund or corporate cash flow. May include dividends from earnings, capital gains from
sale of portfolio holdings and return of capital.
Dividend: A payment to the owners of stock in a corporation.
Economic Development
Agencies: State and local government-operated departments that offer tax and other
incentives, sponsor business incubation programs, and relax zoning regulations to encourage businesses to relocate or
establish themselves in the area.
80/20 rule: The belief that 80 percent of a company's business comes from 20 percent of its customers.
Earnings: A company's income during the period.
Equity: The value of stock.
Equity Financing: A method of raising money for a business through the sale of stock in exchange for partial ownership
of the business.
Estimated Tax: An amount of tax calculated and prepaid on a quarterly basis.
Factoring: A method of financing whereby a lender purchases the accounts receivables of a business at a discount to
their face value.
Fixed Costs: A company's expenses that do not change regardless of the sales volume. Examples are rent, utilities,
interest, and insurance premiums.
Floor Planning: A method of financing inventory whereby the lender bases the loan on the credit of the vendor as well
as the credit of the business applying for the loan.
Franchise: A business that is licensed by a larger company and operates under the regulations of that parent company.
McDonald's is an example of a franchise.
Freelancer: A person who works independently without commitment to any one company.
General Ledger: A record that contains all the company’s controlling accounts arranged in the order of the chart of accounts.
General Partner: The partner in a limited partnership who has responsibility for the day-to-day management of the company.
Going Public: The process by which a company sells stock to the public.
Goodwill: Present value of expected excess earnings of a business. Only recorded when a company purchases a business at a price above the market value of the individual net assets of the business.
Gross Income: Income before expenses.
Guarantor: An individual who agrees to be responsible for the debts of another individual or business.
Holding Company: A company whose purpose is to hold stock in another company.
Income Statement: A document that outlines expenses, revenues, and net income of a business. Also known as a profit and loss (P&L) statement.
Incorporate: To register a business with the state in order to separate its legal responsibilities from that of its owners.
Initial public offering (IPO): The first time a stock is offered for sale to the public.
Intangible asset: Something of value that has no physical properties. Examples are customer loyalty,
goodwill, reputation, and trademarks.
Interest: Payment for borrowing money.
Inventory: Raw materials, items available for sale or in the process of being made ready for sale.
Inventory Turnover: The rate at which a company's inventory is sold out over a period of time.
Investor: Someone who provides money in exchange for partial ownership of a company.
Joint Venture: Business structure that consists of two or more groups of people.
Journal: A record or book where every transaction is recorded chronologically.
Leasehold: A contractual agreement between a lessor (owner of the property) and a lessee (user of the property)
granting the lessee the right to use the property for a period of time in exchange for consideration by the lessee.
Leasehold Improvements: Improvements made by the lessee that will, at the end of the lease term, revert to the
lessor.
Liability: An obligation to pay an amount to someone else.
Limited Liability
Corporation (LLC): Business structure that is taxed like a partnership and provides limited liability for
its owners.
Limited Partnership: Business structure that consists of general manager responsibilities for daily management
decisions and who assumes liability for the debts, and investors who have little involvement and whose liability is limited
to the amount of their investment.
Line of Credit: A type of revolving loan that lets a business borrow money as needed up to a set amount without having
to reapply each time.
Liquidate: To sell assets in order to raise cash.
Liquidity: The ability of an asset to be converted to cash.
Long Term Assets: Value of property, equipment and other capital assets minus the depreciation. This is an entry in the
bookkeeping records of a company, usually on a "cost" basis and thus does not necessarily reflect the market value of
the assets.
Long Term Liabilities: Amount owed for leases, bond repayment and other items due after 1 year.
Markup: The difference between what it costs to produce an item and its selling price.
MBA: An advanced degree in business administration.
Majority Shareholder: Someone who owns at least 51 percent of the stock in a company.
NASDAQ: An electronic stock market operated and regulated by the National Association of Securities Dealers
(NASD), an organization of brokers and dealers.
Net Income: Total income less taxes and expenses.
Net Worth: The difference between the assets and liabilities of a company.
News Group: A feature of the Internet that allows participants to post messages and respond to each other.
New York Stock Exchange (NYSE): The largest and most active stock market in the world.
Niche: A narrow segment of a market.
Nonprofit Organization: Business structure whose chief advantage is its exemption from paying taxes. The main
disadvantage is that it is subject to a strict set of regulations. Designed generally for religious organizations, educational
institutions, and social welfare organizations.
Organization Costs: Cost incurred in the creation of a corporation, including legal fees, registration fees, and fees to
underwriters.
Other Current Assets: Value of non-cash assets, including prepaid expenses and accounts receivable, due within 1
year.
Other Long Term Liabilities: Value of leases, future employee benefits, deferred taxes and other obligations not
requiring interest payments that must be paid over a period of more than 1 year.
Overhead: Expenses incurred as part of doing business. Examples are rent, utilities, and insurance.
Over-the-Counter (OTC): A method of selling securities electronically or by phone rather than at a stock market.
Partnership: Business owned by two or more people who are jointly liable for the debts and assets of the company.
Patent: A legal protection for a new product that prevents it from being copied for 17 years after its introduction.
Point-of-Purchase Promotion: Marketing materials (brochures, posters, and the like) that are placed directly in a retail
establishment.
Positioning: A marketing strategy that defines a company or a product.
Press Release: A brief written message sent to reporters, editors, producers, and other members of the media that
describes something newsworthy about a company or individual, the objective of which is to gain media exposure.
Prime Rate: A rate of interest to which other rates are pegged.
Principal: The original amount of money borrowed or invested.
Private Placement: Sale of stock directly to specific investors rather than through a public offering.
Privately Held Corporation: A company that does not issue stock to the public.
Professional Corporation: Business structure designed primarily for doctors, lawyers, and other professionals.
Profit: Income after expenses have been deducted.
Profit and Loss (P&L) Statement: [See: income statement.]
Profit Margin: The difference between a product's selling price and the cost of producing it.
Promotion: Marketing strategies that use ads, newsletters, brochures, sweepstakes, and similar tools to transmit a
message to prospective customers.
Publicly Held Corporation: A company that issues stock for sale to the general public.
Public Relations: A form of marketing designed to increase a company's exposure in the media or community.
Quarter: A period of three months.
Quick Ratio: Indicator of a company's financial strength (or weakness). Calculated by taking current assets less
inventories, divided by current liabilities. Also called the Acid Test ratio.
Research and Development (R&D): The process of improving products or creating new ones and introducing them
to the market.
Return on Assets (ROA): Indicator of profitability. Determined by dividing net income for the past 12 months by total
assets. Result is shown as a percentage.
Return on Equity (ROE): Indicator of profitability. Determined by dividing net income for the past 12 months by
common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors use ROE as a
measure of how a company is using its money.
Revenue: A company's net income derived from the sale of its products or services.
Risk-free or Risk-less Asset: An asset whose future return is known today with certainty. The risk free asset is
commonly defined as short-term obligations of the
U.S. government.
Royalty Financing: In this type of arrangement, capital is obtained without giving up stock or ownership in the
company. The investment is repaid through a stream of royalties on product sales. It provides a way for a company to
get money in the door without having to send any out again until the business can afford it.
Securities and Exchange Commission (SEC): A U.S. government agency that regulates the securities markets.
Seed Money: Start-up capital.
Service Corps of Retired Executives
(SCORE): A division of the SBA that matches volunteer retired executives
with entrepreneurs to provide confidential counseling, workshops, training programs.
Share: One unit of stock.
Shareholder: An individual who owns stock in a company.
Silent Partner: An individual who invests in a company but does not take a role in running it.
Sinking Fund Requirement: A condition included in some corporate bond indentures that requires the issuer to retire a
specified portion of debt each year. Any principal due at maturity is called the balloon maturity.
Small Business Administration (SBA): An independent agency of the U.S. government that counsels, assists,
provides financing for, and protects the interests of small businesses.
Small Business Development Centers (SBDCs): A network of information and guidance services administered by
the SBA that provides free management and technical support to entrepreneurs through paid staff members and
volunteers.
Small Business Institutes (SBIs): A division of the SBA, the SBI program provides counseling to small business
owners by graduate level students and faculty.
Small Business Investment Companies (SBICs): Privately owned and managed investment firms, licensed and
regulated by the SBA, that provide start-up and venture capital.
Small Company Offering Registration (SCOR): A quick and relatively inexpensive way to register stock for
companies with assets under $3 million and less than 500 individual stockholders, which is available in 38 states.
Sole Proprietorship: Business structure in which one person owns and manages a company. Its advantages are that it
is simple to set up and the owner maintains complete control and keeps all the profits. The disadvantages are that the
owner assumes liability for all debts incurred, and the personal assets of the owner are at risk in the event of
bankruptcy.
Start-up: A new business.
Stock: A share of ownership in a company.
Subchapter S Corporation: A business structure of multiple owners that provides liability protection like a corporation
does, but is taxed like a partnership.
Supply and Demand: The law of economics that states if there is a short supply of a commodity, the demand for it will
cause its price to rise.
Telemarketing: A strategy that uses the telephone to sell the products or services of a business.
Tombstone: An advertisement that announces an initial public offering (IPO).
Trademark or Trade Name: A symbol or a name that allows the holder to use it to name or identify a specific name or
service. A legal registration system allows an indefinite number of 20-year renewals.
Venture Capital: Money provided by a pool of investors, to be used for starting or expanding a business, in exchange
for partial ownership of the business.
Zoning Ordinances: The acts of an authorized local government establishing building codes, and setting forth regulations
for property land usage.
Revised September 1998