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

Published Monday 22 June 2026

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
• Franchise vs starting your own business
• What support do franchises provide?
• Manage your franchise finances with Xero
• FAQs on franchising

Key takeaways

• A franchise lets you operate under an established brand's name and systems in exchange for fees, giving you a tested business model while the franchisor retains control over brand standards and operations.
• Australian franchising is regulated by the Franchising Code of Conduct, which requires franchisors to provide 5 key documents and give you at least 14 days to review the franchise agreement before signing.
• Franchising offers lower risk than starting from scratch, but comes with higher startup costs, ongoing royalty payments, and limited creative control, so you'll need to weigh these trade-offs carefully.
• Get independent legal and financial advice before committing, and ask franchisors detailed questions about performance data, support systems, territory protection, and the experience of other franchisees.

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.

Franchising is widespread across Australia, covering industries from fast food to home services. Well-known Australian franchise examples include Jim's Group (home and business services), Red Rooster (fast food), and Anytime Fitness (health and fitness).

The franchisor typically provides:

• access to the established brand name and reputation
• connections with proven suppliers and vendors
• documented business processes and procedures
• management guidance and marketing strategies
• training program and ongoing operational support

And what about the franchisee?

As a franchisee, you operate an independent business under the franchisor's brand. Your key responsibilities include:

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

How do franchises work?

Buying into a franchise follows a structured process. Here are the key steps to expect.

1. Initial contact

You approach the franchisor to express your interest in their franchise opportunity.

2. Qualification

The franchisor evaluates your skills, experience, and financial capacity to check you're a good fit.

3. Agreement review

You carefully examine the franchise contract with independent legal assistance before signing.

4. Due diligence

You research the franchisor's track record, review financial performance data, and interview current franchisees.

5. Business setup

You establish your legal entity and launch operations with the franchisor's guidance and support.

The franchisor should supply guidance to help you through setup and early operations. You'll 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 2 main categories, based on how involved the franchisor is in your day-to-day operations.

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 looks and operates similarly, 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 rather than controlling operations. 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 about their business.

Before you sign anything, the franchisor must give you 5 key documents:

• An information statement: a short document giving you a general overview of franchising
• A copy of the Franchising Code of Conduct
• A disclosure document: a detailed document outlining the franchisor's business history, finances, and the full terms of the agreement
• A copy of the franchise agreement
• A key facts sheet: a summary of the main terms and conditions of your specific franchise

You must receive these documents at least 14 days before you sign the franchise agreement or make any non-refundable payment. This cooling-off period gives you time to review everything carefully.

You must get independent legal and financial advice before signing a franchise agreement. This helps you understand your rights and obligations, and check if the opportunity is right for you. The Australian Competition and Consumer Commission (ACCC) also offers a free online franchising course that covers the Code of Conduct and your rights as a franchisee.

Advantages and disadvantages of franchising

Australia has over 1,300 franchise systems operating across the country, and franchising can help you become a successful business owner more quickly. However, it's not the right path for everyone. Here's what to consider on both sides.

Advantages of a franchise

A franchise gives you several benefits over starting a business from scratch:

• You use a proven business model that has succeeded in other markets, with refined systems, processes, and strategies already in place
• You'll sell market-tested products or services that customers already value and trust
• You often receive a ready-made business plan with set pricing, organised supplies, and marketing strategies to help you launch
• You and your staff can receive training from many franchisors covering their processes, customer service, inventory management, and bookkeeping
• You can request detailed performance data on both successful and unsuccessful franchise locations to make an informed decision
• You benefit from well-documented operational tasks, and franchisors may provide or recommend software to automate routine work

Disadvantages of a franchise

There are also some real challenges to be aware of:

• Your startup costs will be higher, as upfront franchise fees add to your investment and you must meet brand standards for tools, equipment, technology, and uniforms from the start
• You'll need staff from day 1, so you must manage payroll and human resources right away rather than starting as a sole trader. Xero Small Business Insights found jobs growth among Australian small businesses reached +3.4% year-on-year in the December quarter 2025, the strongest result in 2 years, which can make hiring more competitive for new franchisees.
• You'll pay regular franchise fees and wages on top of any startup loan, meaning you need more revenue to break even and must manage cash flow carefully. Xero Small Business Insights data shows Australian small businesses wait an average of 23.9 days to be paid, with invoices paid 6.6 days late on average; for franchisees carrying higher fixed costs, those payment delays can put extra pressure on working capital.
• Your margins may be tight if the franchise runs on a low-margin, high-volume model; if sales drop, your earnings can change quickly
• You have limited control over products, services, and brand standards, which can restrict your choices. Historically, many franchise agreements excluded franchisee goodwill, but the updated Franchising Code of Conduct (effective 1 November 2025) now requires franchise agreements to include provisions for genuine compensation for goodwill when a franchisor terminates early.

Franchise vs starting your own business

Deciding between buying a franchise and starting your own independent business is one of the biggest choices you'll make. Both paths have trade-offs, and the right option depends on your goals, risk tolerance, and how much creative freedom you want.

When you buy a franchise, you're paying for a tested system. You get brand recognition, supplier relationships, and operational support from day 1. The trade-off is that you follow the franchisor's rules on everything from pricing to store layout. You'll also pay ongoing royalties that reduce your profit margins.

Starting your own business gives you full creative control. You choose your products, set your prices, and build your brand from the ground up. The risk is higher because there's no proven model to follow, and you'll need to build your customer base without the advantage of an established name.

Here are some key factors to weigh up:

• Risk: franchises generally have lower failure rates because of their proven model, while independent businesses carry more uncertainty in the early years
• Investment: franchise fees and setup costs are often higher upfront, but an independent business may cost less initially depending on the industry
• Creative freedom: independent businesses give you complete control over your direction, while franchises set strict guidelines on how you operate
• Support: franchises provide training, systems, and troubleshooting help, while independent owners must build these resources on their own
• Growth: franchisors may offer a clear growth path with multiple locations, while independent growth depends entirely on your own strategy and resources

If you value structure and lower risk, a franchise may suit you. If you want full control and are comfortable building something from scratch, starting your own business could be the better path.

What support do franchises provide?

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

• Step-by-step operational procedures and documentation
• Initial and ongoing training program for you and your staff
• Proven business systems, tools, and software solutions
• Clear key performance indicators (KPIs) to track your progress
• 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.

Here are some essential questions to ask potential franchisors before committing.

On 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?

On 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 3 most important KPIs for franchisees?

On operational support:

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

On 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.

Manage your franchise finances with Xero

Australian small businesses are seeing positive momentum. Xero Small Business Insights data for the December quarter 2025 shows small business sales grew +6.7% year-on-year, the best result since mid-2023, and the average time to be paid fell to 23.9 days, the fastest since records began in 2017.

Running a franchise means staying on top of franchise fees, royalty payments, staff wages, and daily expenses. You need a clear picture of your income and outgoings to manage cash flow and meet your financial commitments.

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. Get one month free.

FAQs on franchising

Here are some frequently asked questions about franchising to help you understand the basics.

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.

How does a franchisor make money?

Franchisors typically earn revenue through upfront franchise fees charged to new franchisees and ongoing royalty payments, which are usually a percentage of each franchisee's sales. Some franchisors also earn income by supplying products, equipment, or marketing services to their franchise network.

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

The main difference is ownership. Chain stores are owned and operated by a single company, while each franchise location is owned by a separate 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 $1 million 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 rather than business experience alone. The franchise system provides training and support, so it can be a good option for first-time business owners.