What is a franchise? Costs, pros and how to buy one

Published Monday 8 June 2026

Table of contents

• What is a franchise?
• How do franchises work?
• How do franchise fees work?
• The franchise agreement and disclosure document
• Advantages and disadvantages of franchising
• Types of franchise
• How to choose the right franchise
• Due diligence is key
• Manage your franchise finances with Xero
• FAQs on franchising

Key takeaways

• A franchise lets you run your own business using an established brand's name, systems, and supply chain in exchange for upfront and ongoing fees.
• Franchising can speed up the path to business ownership, but higher startup costs, ongoing royalties, and limited control over operations are real trade-offs to weigh up.
• A solid franchise agreement and disclosure document protect both sides; always get independent legal and financial advice before signing.
• Thorough due diligence, including interviewing existing franchisees and reviewing financial performance data, is the single most important step before committing.

What is a franchise?

A franchise is a business arrangement where one party (the franchisor) grants another party (the franchisee) the right to operate under its brand, systems, and business model in exchange for agreed fees. It's one of the most popular ways to start a business with a proven concept already behind you.

The franchisor is the company that owns the brand, products, and operating systems. They provide franchisees with access to their supply chain, training, marketing materials, and ongoing support. In return, they collect fees and set standards that every franchisee must follow.

The franchisee is the person or company that buys the right to operate under the franchisor's brand. You run the day-to-day business, hire staff, serve customers, and manage your own finances. While you follow the franchisor's playbook, you're legally and financially independent.

Understanding what a franchise is not matters just as much. Each franchisee is a separate business and legal entity from the franchisor. That means you can lose money even while the franchisor remains profitable. A franchise system is made up of many separate businesses operating under one brand; it's not one company with multiple locations.

How do franchises work?

The process of joining a franchise typically follows a structured path, from initial research through to opening day. The process typically follows a structured path.

You start by researching franchise opportunities that match your skills, budget, and interests. Once you've identified a franchisor, you'll submit an application. The franchisor will assess your financial position, experience, and commitment level before deciding whether to offer you a franchise agreement.

If both sides agree to move forward, you'll sign a franchise agreement and pay the initial franchise fee. The franchisor then guides you through setup: securing a location (if applicable), fitting out premises, ordering stock, hiring staff, and completing any required training.

Once you're up and running, the day-to-day relationship centres on you operating the business according to the franchisor's standards. You'll follow their processes for customer service, pricing, branding, and reporting. In return, you'll receive ongoing support, access to the supply chain, and the benefit of brand-wide marketing. You'll also pay regular royalty fees, typically calculated as a percentage of your revenue.

How do franchise fees work?

Understanding the full cost of a franchise is essential before you commit. Franchise fees generally fall into three categories: upfront costs, ongoing royalties, and additional charges.

The upfront franchise fee is a one-off payment you make when you sign the franchise agreement. This gives you the right to use the brand, access training, and receive setup support. Upfront fees vary widely depending on the brand, industry, and location, ranging from a few thousand dollars to several hundred thousand.

On top of the initial fee, you'll also need capital for setup costs: equipment, fit-out, stock, technology, signage, and possibly a rental deposit. The franchisor's disclosure document should give you a realistic estimate of these expenses.

Ongoing royalty fees are regular payments you make to the franchisor, usually monthly. These are typically calculated as a percentage of your gross revenue, commonly between 4% and 12%. Some franchisors charge a flat fee instead. You may also contribute to a shared marketing or advertising fund.

Some franchises include training and support costs in the upfront fee, while others charge separately. Clarify what's included before you sign. Factor all of these costs into your financial projections so you have a clear picture of your break-even timeline and ongoing bookkeeping requirements.

The franchise agreement and disclosure document

Two legal documents sit at the heart of every franchise relationship. Taking the time to understand both is one of the smartest things you can do before signing.

The franchise agreement is the binding contract between you and the franchisor. It sets out the rights and obligations of both parties, including the territory you'll operate in, the term of the agreement (often 5 to 20 years), renewal conditions, performance targets, and exit or termination clauses. Read every clause carefully; this document governs your entire relationship with the franchisor.

The franchise disclosure document (FDD) is a detailed information pack the franchisor provides before you sign. It typically includes the franchisor's financial statements, litigation history, a list of current and former franchisees, fee schedules, and estimated startup costs. Not all jurisdictions require an FDD by law, but reputable franchisors will provide one voluntarily.

Always get independent legal and financial advice before signing a franchise agreement. A solicitor experienced in franchise law can flag unfair terms. An accountant can review the financial projections and help you understand whether the numbers add up for your situation.

Advantages and disadvantages of franchising

Franchising can accelerate the path to business ownership, but it's not without trade-offs.

Franchising has several well-established benefits that make it attractive to first-time business owners.

• You get a proven business model that's already generating revenue in other markets, reducing some of the risk of starting from scratch.
• Products or services are market-tested, so you can be more confident that customers value what you're selling.
• Setup support, training, and operational guidance help you hit the ground running, even if you're new to the industry.
• Established brand recognition can attract customers from day one, saving you the time and cost of building awareness.
• Ongoing support, from troubleshooting to growth planning, means you're not figuring everything out alone.

At the same time, there are real trade-offs to factor into your decision.

• Startup costs are higher because you're paying franchise fees on top of normal setup expenses like equipment, stock, and premises.
• Ongoing royalty fees and marketing contributions add to your fixed costs, meaning you need more revenue to break even.
• You'll have limited control over pricing, products, branding, and business direction, which can feel restrictive if you have your own ideas.
• Many franchises require you to hire staff from the start, adding payroll and human resources responsibilities before revenue is flowing.
• Low-margin, high-volume business models leave little room for error; if sales dip, your earnings can change quickly.

Types of franchise

Franchises come in several forms, each with a different relationship between the franchisor and franchisee. Understanding the main types helps you identify which model suits your goals.

Business format franchising is the most common type. The franchisor provides a complete system for running the business, including branding, operations manuals, training, marketing, and ongoing support. Fast-food chains, fitness studios, and cleaning services are typical examples.

Product distribution franchising focuses on the right to sell the franchisor's products, often with exclusive access to a territory. The franchisee typically has more freedom over how they run the business day-to-day. Car dealerships and petrol stations are well-known examples.

Manufacturing franchising grants the franchisee the right to produce and sell goods using the franchisor's formula, recipe, or specifications. Bottling companies and food manufacturers commonly use this model.

Across these models, franchises operate in a wide range of sectors. Popular industries include food and beverage, health and fitness, education and tutoring, pet care, home services (cleaning, landscaping, maintenance), and professional services (accounting, IT, HR). You can likely find a franchise that aligns with your skills, experience, and interests.

How to choose the right franchise

Choosing a franchise is a significant financial and personal commitment. A structured approach helps you evaluate opportunities objectively and avoid costly mistakes.

1. Assess your skills, interests, and budget

Start by being honest about what you bring to the table. Consider your professional experience, transferable skills, and the industries that genuinely interest you. Set a realistic budget that includes the franchise fee, setup costs, working capital, and a financial buffer for the first 6 to 12 months.

2. Research the market and shortlist opportunities

Look at franchise directories, industry publications, and trade events to identify opportunities in your area. Narrow your list to 3 to 5 franchises that match your skills and budget. Check whether each brand has a presence in Hong Kong or is actively expanding here.

3. Evaluate the franchisor's track record

Request the franchise disclosure document and study it closely. Look at the franchisor's financial health, how long they've been operating, the number of franchisees, and the failure rate. A strong franchisor should be transparent about both successes and closures.

4. Interview existing franchisees

Speaking with current and former franchisees gives you the clearest picture of what the experience is actually like. Ask about the quality of training and support, the accuracy of the franchisor's financial projections, and any challenges they didn't expect.

5. Review the financials with professional advice

Work with an accountant to review the franchise's financial model, including projected revenue, costs, break-even timeline, and cash flow. Make sure you understand all fees and ongoing costs. This is also a good time to set up your small business accounting processes so you're ready from day one.

6. Get independent legal advice

Before signing anything, have a solicitor experienced in franchise law review the franchise agreement. They can identify unfair terms, restrictive clauses, or gaps in the contract that could cause problems later.

Due diligence is key

Franchises have helped many people into business ownership, but they can also be an expensive and legally complicated failure if things don't go right. Doing thorough research before you commit is the best way to protect your investment.

A good franchisor should be open and willing to answer tough questions. If they're evasive or rush you through the process, treat that as a red flag. Here are some key questions to put to them:

• Can you share sales, revenue, and growth reports for the whole franchise network?
• What do new franchisees typically spend in their first year, and when do they break even?
• Do you have models for predicting sales in new locations?
• What are the most common problems new franchisees face, and how do you help resolve them?
• Will you commit to giving the franchisee exclusive access to a defined local market?
• What systems do you provide for inventory management, recording transactions, payroll, and reporting?

That last point is especially important. You don't want the franchisor setting up a competing franchise in your area. Some franchisors will do exactly that, splitting the local market between two operators. Push for clear territorial protections in your agreement.

Also watch for these red flags: pressure to sign quickly, reluctance to provide the disclosure document, a high rate of franchisee turnover, pending lawsuits, and financial projections that seem unrealistically optimistic. If something feels off, step back and reassess. Understanding the difference between bookkeeping and accounting responsibilities will also help you evaluate the financial commitment clearly.

Manage your franchise finances with Xero

If you decide to move forward with a franchise, keeping a close eye on your finances is critical from day one. With higher startup costs and ongoing fees, you need clear visibility into your cash flow, expenses, and profitability.

Xero accounting software helps you track income and expenses, automate bank reconciliation, send invoices, and run reports so you always know where your business stands. It's built to save you time on admin so you can focus on running your franchise, so get one month free.

FAQs on franchising

Here are answers to some of the most common questions about franchising.

What is the difference between a franchisor and a franchisee?

The franchisor owns the brand, business model, and operating systems. The franchisee pays for the right to operate a business using the franchisor's brand and systems. Each franchisee is a separate legal entity responsible for their own profits and losses.

How much does it cost to buy a franchise?

Costs vary significantly depending on the brand, industry, and location. You'll typically pay an upfront franchise fee plus setup costs for equipment, stock, and premises. Ongoing costs include royalty fees (commonly 4% to 12% of revenue) and possible marketing fund contributions.

What are the risks of buying a franchise?

The main risks include higher startup and operating costs, limited control over business decisions, and dependence on the franchisor's brand reputation. If the franchisor makes poor strategic decisions or another franchisee damages the brand, your business can be affected even if you're operating well.

How does the franchisor make money?

Franchisors earn revenue primarily through upfront franchise fees paid by new franchisees and ongoing royalty fees calculated as a percentage of each franchisee's revenue. Many also collect contributions to a shared marketing or advertising fund.

Can you lose money on a franchise?

Yes. While franchises offer a proven model, they don't guarantee success. High fixed costs, slow sales, poor location choice, or inadequate support from the franchisor can all lead to losses. Thorough due diligence and realistic financial planning are essential before you invest.