What is a franchise? How franchising works for Australia small businesses

Published Friday 17 October 2025

Table of contents

• What is a franchise?
• How do franchises work?
• Types of franchise models
• Franchise laws and regulations in Australia
• Advantages and disadvantages of franchising
• What support do franchises provide?
• Managing your franchise finances
• FAQs on franchising

Key takeaways

• Research franchise opportunities thoroughly by requesting detailed performance data, interviewing current franchisees, and examining both successful and unsuccessful locations before making any financial commitments.

• Understand the total financial commitment by calculating initial franchise fees, ongoing royalty payments, higher startup costs, and fixed operational expenses to ensure you can maintain positive cash flow while meeting all obligations.

• Obtain independent legal and financial advice before signing any franchise agreement, as Australian law requires franchisors to provide disclosure documents and you need professional guidance to understand your rights and obligations.

• Evaluate the level of ongoing support provided by asking specific questions about operational systems, training programs, territory protection, and performance metrics to determine if the franchisor's assistance justifies the investment.

What is a franchise?

A franchise is a business model where an established business (the franchisor) allows others (franchisees) to operate under its brand name and proven systems in exchange for fees. The franchisor owns the original business concept, while franchisees run individual locations as separate businesses.

The franchisor provides:

• Access the established brand name and reputation
• Connect with proven suppliers and vendors
• Follow documented business processes and procedures
• Receive management guidance and marketing strategies

And what about the franchisee?

Franchisees operate independent businesses under the franchisor's brand. Key responsibilities include:

• Pay initial franchise fees and ongoing royalties (if the franchisor is overseas, you may need to withhold a flat rate for tax purposes)
• Follow established business procedures and quality requirements
• Meet contractual obligations and reporting requirements
• Incorporate as a separate legal entity (all company directors must apply for a director identification number before being appointed)

How do franchises work?

The franchise process follows these key steps:

1. Initial contact: You approach the franchisor to express interest
2. Qualification: Franchisor evaluates your skills, experience, and financial capacity
3. Agreement review: Carefully examine the franchise contract with legal assistance
4. Due diligence: Research the franchisor's track record and interview current franchisees
5. Business setup: Establish your legal entity and launch operations with franchisor support

The franchisor should supply guidance to help you through setup and early operations. You9ll be expected to pay regular franchise fees in return. The key is to build up enough revenue that you can comfortably meet those financial commitments while also banking profits.

Types of franchise models

Franchises are not all the same. Most fall into two main categories, based on how involved the franchisor is.

Business format franchise

This is the most common type. The franchisor gives you their brand, products, and a complete system for running the business. This includes marketing plans, operating manuals, training, and ongoing support. Fast-food chains or retail stores, where every location is similar, are good examples.

Product distribution franchise

In this model, the franchisor lets you sell their products but provides fewer systems for running the business. The focus is on supplying products. Examples include car dealerships or soft drink bottlers, where you use the franchisor's trademark but have more control over daily operations.

Franchise laws and regulations in Australia

In Australia, franchising is regulated by the Franchising Code of Conduct, which is mandatory under the Competition and Consumer Act 2010. This code protects franchisees and ensures franchisors are transparent.

Before you sign anything, the franchisor must give you two key documents:

• Information statement: A short document that gives you a general overview of franchising.
• Disclosure document: A detailed document that outlines the franchisor's business history, finances, and the full terms of the franchise agreement.

You must get independent legal and financial advice before you sign a franchise agreement. This helps you understand your rights and obligations, and check if the opportunity is right for you.

Advantages and disadvantages of franchising

Franchises can help you become a successful business owner more quickly. However, you should also be aware of some challenges.

Advantages of a franchise

Work with a proven business model: You use a tested concept that has succeeded in other markets. The franchisor has refined systems, processes, and strategies that help you generate profit.

Request detailed performance data: Ask for information on both successful and unsuccessful franchise locations. No franchise system has a 100 percent success rate, so transparency about challenges is important.

You'll sell market-tested products or services: If a business has succeeded in other markets, you can trust the products or services are sound. The more the franchise has grown, the more likely it is that customers value what it offers.

You'll probably be supported through setup and planning: A franchise often comes with a ready-made business plan and a manual to help you start. Pricing is set, key supplies are organised, and you may receive marketing strategies.

You may get some training: Some franchisors provide training for you and your staff. This can cover their processes, customer service, inventory management, bookkeeping, or other key parts of the business.

You'll probably get some help troubleshooting problems: Some franchises are hands-off once you start, but others support you through the first few months. They help you solve problems and guide you through any challenges.

There should be some guidance on day-to-day operations: Well-organised franchisors document all the tasks you need to do, with advice on the best ways to do them. They may provide or recommend software to automate some tasks. Job sheets, checklists, and tools can help you get started quickly.

You may even get growth plans: Experienced franchisors have a clear plan for growth. If their business model is strong, they have helped many franchisees grow from beginners to larger businesses. They can guide you on a path to sustainable growth.

Disadvantages of a franchise

• Your will be higher: Upfront franchise fees add to your startup costs. You must meet brand standards from the start, so you need the right tools, equipment, technology, and uniforms. These all cost money.
• You'll be staffing from the start: Many small businesses start as sole traders and add staff as they grow. Many franchises require you to have staff from the start, so you need to manage payroll and human resources right away.
• There will be more fixed costs: You pay regular franchise fees, wages, and may have a large startup loan. These extra fixed costs mean you need more revenue to break even. You also need to manage cash flow carefully.
• Sales targets will be demanding: Many franchises succeed by offering products or services at low cost. These low-margin, high-volume models leave little room for error. If sales drop, your earnings can change quickly.
• You have limited control: Franchises give you clear rules to make business ownership easier. However, you have less control. You must follow specific products, services, and brand standards, which can limit your choices. For example, while you may add value to the business, research shows that more than 80 percent of franchise agreements exclude franchisee goodwill.

What support do franchises provide?

Franchise support varies significantly between companies and directly impacts your success potential. Quality franchisors provide:

Comprehensive support includes:

• Documentation: Step-by-step operational procedures
• Training programs: Initial and ongoing skills development
• Business systems: Proven tools and software solutions
• Performance metrics: Clear KPIs to track success
• Ongoing guidance: Regular coaching and troubleshooting assistance

Limited support may mean you only get basic brand licensing and little operational guidance. Always check support levels before you invest.

Essential questions to ask potential franchisors:

Financial transparency:

• Can you share sales, revenue and growth reports for the whole business?
• What do new franchisees spend in their first year and when do they break even?

Business planning:

• Do you have models for predicting sales in new locations?
• What are the 10 most common problems for new franchisees?
• What are the three most important KPIs for franchisees?

Operational support:

• Do you provide systems for inventory management, accounting, payroll, health and safety, or training?

Territory protection:

• Will you commit to giving me exclusive access to my local market?

Ask to speak with other franchisees about their experience with the support provided.

Managing your franchise finances

Research carefully before you invest, as franchises involve financial and legal commitments. Choosing the right opportunity helps you succeed.

What you should receive:

• Operational support: Proven systems and ongoing guidance
• Marketing assistance: Brand recognition and promotional strategies
• Territory protection: Some level of market exclusivity

What you'll invest:

• Higher startup costs: Initial franchise fees plus equipment and setup
• Ongoing expenses: Regular royalty payments and operational requirements

Research carefully to check if the franchisor's support is worth the extra investment.

You need to know your income and expenses to manage cash flow and meet your commitments. Accounting software helps you track everything in one place, so you can run your business with confidence.

With Xero accounting software, you can manage invoices, track expenses, and see your financial position in real time. This makes it easier to stay on top of your finances, so you can focus on growing your franchise.

FAQs on franchising

Here are answers to some common questions about franchising.

What is a franchise in simple terms?

A franchise lets you use an established company's brand name and business model to open your own location. The franchisor provides the plan, and you run the local business following that plan.

Is McDonald's a franchise?

Yes, most McDonald's restaurants are owned and run by local business owners. McDonald's is a well-known example of a business format franchise.

What's the difference between a franchise and a chain store?

The main difference is ownership. Chain stores are owned by one company. In a franchise, each location is owned and run by a different person or group (the franchisee) who has licensed the brand from the franchisor.

How much does it cost to buy a franchise in Australia?

Costs vary depending on the brand and industry. You might pay under $10,000 for a small, home-based franchise or over a million dollars for a large, well-known brand. The franchisor's disclosure document lists all expected costs.

Do I need business experience to buy a franchise?

Not always. Many franchisors look for people with passion and a strong work ethic, not just business experience. The franchise system provides training and support, so it can be a good option for first-time business owners.