What is a franchisee? Costs, risks and key questions

Published Monday 13 April 2026

Table of contents

• What is a franchisee?
• Benefits of becoming a franchisee
• Franchise reality check
• Becoming a franchisee can be hard
• Understanding franchise costs
• Things to consider when becoming a franchisee
• Questions for the franchisor
• Use Xero to get your franchise finances right
• FAQs on becoming a franchisee

Key takeaways

• Evaluate the full financial picture before committing, including upfront costs like franchise fees and equipment, plus ongoing expenses such as royalty fees (typically 4-10% of revenue), marketing contributions, and operational costs during the first 6-12 months when income may be low.
• Research the franchisor's credibility thoroughly by requesting current financial data, franchisee profitability information, and speaking directly with existing franchisees in similar locations, as over 33% of franchisees had serious disputes with their franchisor in the past year.
• Assess your personal fit for franchise ownership by considering whether you can work within strict operational guidelines, handle significant debt obligations, and commit to intensive work requirements, since successful franchises often limit your business autonomy.
• Ask detailed questions about business performance data, common early challenges new franchisees face, and what support systems are genuinely provided, as not all franchisors offer the same level of ongoing assistance despite initial promises.

What is a franchisee?

A franchisee is a person or business that buys the right to operate under an established company's brand, products, and systems. You pay fees to the franchisor (the parent company that owns the brand) to run your own location of their business.

The key difference: the franchisor owns the brand and licenses it out, while the franchisee funds and operates individual locations. For example, if you open a new branch of a well-known coffee chain, you're the franchisee operating under the franchisor's brand.

Benefits of becoming a franchisee

Buying a franchise offers advantages that independent startups don't have. You get access to an established brand, proven systems, and ongoing support from day one.

Franchises offer several key benefits:

• Brand recognition: customers already know and trust the brand, reducing your marketing burden
• Proven business model: you follow systems that have worked for other franchisees
• Training and support: franchisors provide initial training and ongoing operational guidance, which can include access to support teams for marketing, IT, and finance
• Supplier relationships: access bulk purchasing power and established vendor networks
• Reduced startup risk: you're investing in a tested concept rather than an unproven idea

These advantages don't guarantee success, but they can shorten your learning curve and improve your odds compared to starting from scratch.

Franchise reality check

Franchise risks are the financial and operational challenges that can affect your success as a franchisee. Key risks include:

• High startup costs: paying initial franchise fees, equipment costs, and setup expenses
• Ongoing financial obligations: covering monthly franchise fees, royalties, and staffing costs
• Performance pressure: meeting demanding sales targets in low-margin businesses
• Limited autonomy: operating within strict guidelines, as over 80% of franchise agreements exclude franchisee goodwill
• Variable support quality: receiving minimal ongoing assistance from some franchisors

Not all franchises offer the same level of support. Some provide strong advice, support and business systems, while others offer less guidance. Check what's included.

Becoming a franchisee can be hard

Successful franchises set high standards for potential franchisees to protect their proven business model. This selectivity has increased as the total number of franchisees declined by 5.2 per cent from 2014–2023.

Quality franchisors with consistently profitable locations often require you to:

• demonstrate business experience, such as management or entrepreneurial background
• understand the specific market or service area
• show enthusiasm for representing and promoting the franchise

If you join a successful franchise chain, you may have limited control over the business. Ask questions to make sure the franchise is right for you.

Ask questions of yourself, the franchisor, other franchisees, an accountant, and a lawyer.

Understanding franchise costs

Franchise costs include both upfront investment and ongoing fees that affect your profitability. Understanding the full financial picture helps you budget realistically and avoid cash flow problems.

Upfront costs

These are the initial expenses to get your franchise running. They typically include:

• Initial franchise fee: a one-time payment for the right to use the brand
• Setup and equipment: fit-out costs, signage, inventory, and any required technology systems
• Working capital: funds to cover operating expenses during your first six–twelve months while revenue builds

Ongoing costs

These are recurring fees you pay to the franchisor and to run the business. They often include:

• Royalty fees: a percentage of revenue paid to the franchisor; for non-resident franchisors, you may need to withhold a flat rate of 30% for tax purposes
• Marketing fees: contributions to national or regional advertising funds
• Operational expenses: rent, wages, stock, utilities, and insurance

The first few months may be lean as you build your customer base. Make sure your budget accounts for low income during this period, and confirm you have enough cash or finance to get through it.

Things to consider when becoming a franchisee

Before proceeding, assess three major commitment areas:

• Financial commitment: significant upfront investment plus ongoing fees and operational costs
• Legal commitment: binding contractual obligations that limit your business autonomy
• Personal commitment: intensive work requirements and long-term business involvement

Beyond these commitments, also consider:

• Assess your support needs: decide whether you prefer detailed guidance or are comfortable figuring things out independently
• Evaluate your risk tolerance: consider whether you can take on debt for franchise fees and staff costs, unlike lower-overhead sole trader setups
• Verify franchisor trustworthiness: research their reputation and check for court proceedings, especially since one government survey found over 33% of franchisees had a serious dispute with their franchisor in the last year
• Match management styles: confirm whether the franchisor's level of control fits your preferred way of running a business

Work out how much you can realistically afford before committing.

Questions for the franchisor

Evaluating the franchisor helps you determine whether the company has a sustainable business model and genuinely supports franchisee success. Quality franchisors welcome thorough questioning because they want informed, committed partners.

How's the business doing?

Business performance data reveals the franchisor's financial health and how the business is growing. This matters because many of the 1,712 franchisors operating in Australia have turnover of less than A$10 million. Request:

• Current financials: review sales reports, revenue figures, and growth rates
• Future projections: check forecasts and expansion goals, treating them as estimates rather than guarantees
• Leadership credentials: assess management team backgrounds and industry experience

What's the outlook for new franchisees?

Franchisee profitability data shows whether existing operators are financially successful, which is critical given forecasts show the industry's contribution to the economy will decrease relative to overall GDP growth. This information helps you set realistic expectations for your own earnings. Ask for:

• Profit margins: average earnings across different locations and timeframes
• Operating budgets: detailed cost breakdowns including all fees and expenses
• Revenue models: location-specific earning predictions and performance benchmarks

If the franchisor cannot provide this data, your investment risk is higher. You'll need to be comfortable with greater uncertainty.

How strong is your data?

Franchisors may present market research and financial projections, but you shouldn't accept them at face value. Check whether the data is reliable by asking:

• Timing: when was the research conducted?
• Sample size: how many customers or stores were included in the study?
• Assumptions: what conditions or variables were assumed?

If you're not confident interpreting the data, ask an accountant to review it.

What are the main teething problems?

Ask them what franchisees struggle with in the early days. A good franchisor will be happy to share this information. They'll want you to avoid common traps and pitfalls.

What are the key performance indicators (KPIs)?

Ask which KPIs matter most and how they are measured. The number and type of KPIs vary by business.

Can I speak to other franchisees?

Speak to franchisees in similar locations before you decide. If the franchisor's list does not include relevant contacts, ask for more options.

Do you provide proven business systems?

Check whether the business has established processes for:

• managing recruitment
• running payroll
• carrying out marketing

Use Xero to get your franchise finances right

Franchise ownership requires genuine passion for the business model and significant personal commitment, not just perceived safety.

Xero cloud-based accounting software can help you track your financial performance and support informed decision-making throughout your franchise journey. Get one month free.

FAQs on becoming a franchisee

Common questions about becoming a franchisee and what to expect.

How much does it cost to become a franchisee?

Costs vary widely depending on the franchise. Initial fees can range from tens of thousands to hundreds of thousands of dollars. You'll also need to budget for setup costs, equipment, working capital, and ongoing royalty fees (typically 4–10% of revenue).

Can I negotiate franchise fees?

Some franchisors may negotiate fees, but many have fixed pricing structures. It's worth asking, particularly if you're opening multiple locations or have relevant industry experience.

What happens if the franchisor goes out of business?

Your franchise agreement should outline what happens in this scenario. Typically, you may lose access to the brand and support systems, though you might retain your business assets. Review this clause carefully with a lawyer before signing.

How long are franchise agreements?

Most franchise agreements run for five–ten years, with options to renew. Check the renewal terms and whether there are additional fees when extending your agreement.

Can I sell my franchise?

Most agreements allow you to sell, but the franchisor typically needs to approve the buyer. You may also need to pay a transfer fee. Check these terms before committing to ensure you have a viable exit strategy.