What is a franchise? How it works, costs and risks

Published Thursday 2 April 2026

Table of contents

• What is a franchise?
• How do franchises work?
• What a franchise is not
• Advantages and disadvantages of franchising
• Types of franchise
• What will a franchise do for you?
• Do your due diligence before signing
• Manage your franchise finances with Xero
• FAQs on franchises

Key takeaways

• Evaluate franchise opportunities by asking specific questions about financial performance, break-even timelines, territorial exclusivity, and the level of operational support provided before signing any agreement.
• Prepare for higher upfront costs including franchise fees of $10,000 to $50,000 plus equipment and materials, along with ongoing franchise fees that will affect your break-even point and cash flow management.
• Understand that you'll operate as an independent business owner following the franchisor's established systems and rules, which reduces your control over pricing, products, and operations compared to starting your own business.
• Review the Franchise Disclosure Document with an independent lawyer at least 14 days before signing to verify that the support, territorial rights, and fees justify your investment.

What is a franchise?

A franchise is a business arrangement where one party (the franchisor) grants another party (the franchisee) the right to use its brand, systems, and business model in exchange for fees. This lets you start a business using a proven concept rather than building everything from scratch. In the U.S., franchising accounts for nearly 8.9 million jobs.

So what is a franchisor?

A franchisor is the company or individual who owns the original business and grants franchise rights to others. The franchisor typically provides:

• access to an established brand and trademark
• connection to existing supply chains
• documented processes and operating systems
• management advice and training
• marketing strategies and materials

And what about the franchisee?

A franchisee is the person or business that purchases the right to operate under the franchisor's brand. As a franchisee, you:

• run your franchise as a separate legal entity, often as a registered company
• pay upfront and ongoing franchise fees
• follow the franchisor's standards for operations and reporting
• meet legal obligations outlined in your franchise agreement

How do franchises work?

Franchises work through a contractual partnership between franchisor and franchisee, where you pay fees in exchange for the right to use an established brand and business model.

Here's how the process typically works:

1. Contact a franchisor about joining their network and express your interest
2. Meet their requirements for skills, experience, and financial commitment
3. Review the franchise agreement carefully and get independent legal advice
4. Set up your business as a separate legal entity, usually a company
5. Launch with franchisor support using their systems, training, and guidance
6. Pay ongoing fees while building revenue to cover costs and generate profit

What a franchise is not

A franchise is not a chain of company-owned locations. Each franchisee operates as a separate business and legal entity from the franchisor.

Here's why this distinction is important:

• Financial independence: A franchisee can struggle or fail while the franchisor remains profitable
• Legal separation: You own your business, not a branch of someone else's company
• Shared branding: Multiple independent businesses operate under one brand name

Advantages and disadvantages of franchising

Franchises can speed up the journey to becoming a successful business owner. But there are also trade-offs to consider.

Advantages of a franchise

Franchises offer several advantages over starting a business from scratch:

• Proven business model: You're buying into a concept that's already making money elsewhere, and research suggests this can reduce risk, as franchised firms tend to have higher survival rates than independent businesses.
• Market-tested products or services: Customers already know and trust what you're selling, giving you a head start on building demand
• Ready-made setup support: Most franchises provide business plans, supplier connections, pricing structures, and marketing materials from day one
• Training programmes: Franchisors often train you and your staff on operations, customer service, inventory management, and bookkeeping
• Ongoing troubleshooting: Many franchisors offer support during your first months to help you work through early challenges
• Documented processes: Job sheets, checklists, and recommended software help you run daily operations efficiently
• Growth roadmaps: Experienced franchisors provide pathways to scale your business based on what's worked for other franchisees

Disadvantages of a franchise

Franchises also come with trade-offs you should consider:

• Higher startup costs: Upfront franchise fees (which are typically $10,000 to $50,000) plus required equipment, technology, and brand-standard materials add to your initial investment.
• Immediate staffing requirements: Many franchises require you to hire staff from day one, meaning payroll and HR responsibilities start immediately
• Ongoing fixed costs: Regular franchise fees, wages, and potential debt repayments increase your break-even point and require careful cash flow management
• Demanding sales targets: Low-margin, high-volume business models leave little room for error if sales dip
• Limited control: You follow the franchisor's rules on products, pricing, branding, and operations, which means less flexibility in how you run your business

Types of franchise

Franchises exist across nearly every industry, not just the restaurant chains that first come to mind; in fact, one academic review found that 70% of research papers on franchisee performance investigated multi-industry settings.

• Hospitality: restaurants, cafes, hotels
• Retail: convenience stores, clothing, specialty shops
• General services: landscaping, cleaning, pet grooming, caregiving
• Professional services: legal, IT support, tax advisory, HR consulting
• Construction and trades: building, maintenance, home improvement

You can likely find a franchise that matches your skills, experience, and interests.

What will a franchise do for you?

A good franchise reduces your risk by providing the systems, training, and support you need to succeed. However, support levels vary significantly between franchisors.

The best franchisors offer documented processes, comprehensive training, plug-and-play systems, clear key performance indicators (KPIs), and ongoing advice. Support levels vary, so it's important to verify what you'll receive before signing.

Before signing, ask potential franchisors these questions:

• Can you share sales, revenue, and growth reports for the whole business? According to the Federal Trade Commission (FTC), any financial performance claims a franchisor makes must be in Item 19 of the Franchise Disclosure Document.
• 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?
• What are the three most important KPIs for franchisees?
• Do you provide systems to manage inventory, accounting, payroll, health and safety, or training?
• Will you give me exclusive access to my local market?

Make sure you have territorial exclusivity so the franchisor won't open a competing location nearby. You'll want to ensure they're fully invested in your success, not hedging their bets with multiple franchisees in your area.

Do your due diligence before signing

Due diligence helps you find a franchise agreement that delivers real value. Franchises have helped many people become business owners, and proper research helps ensure your investment pays off.

Before committing, verify that:

• the franchisor provides adequate operational and marketing support
• you receive some level of territorial exclusivity
• the franchise fees and startup costs are justified by the support and brand value you receive
• the franchise agreement terms are fair and reviewed by an independent lawyer. In the U.S., the FTC mandates that you must receive the Franchise Disclosure Document at least 14 days before signing any contract.

Once you've completed your due diligence and are ready to move forward, you'll need the right tools to manage your franchise.

Manage your franchise finances with Xero

Franchise ownership requires careful financial management. With higher startup costs, ongoing franchise fees, and potentially tight margins, you need clear visibility into your cash flow and expenses.

Xero's cloud-based accounting software helps you track expenses, manage cash flow, and stay on top of franchise fee payments in real time. You can access your financial data anywhere, automate routine bookkeeping tasks, and make confident decisions about your business.

Get one month free and see how Xero can help your franchise succeed.

FAQs on franchises

Here are answers to common questions about franchising.

How is a franchise different from starting my own business?

A franchise gives you an established brand, proven systems, and ongoing support in exchange for fees and less control. Starting your own business means building everything from scratch but keeping full control over decisions and profits.

Do I need business experience to buy a franchise?

Not always. Many franchisors provide comprehensive training and prefer franchisees who follow their systems. However, certain skills can help you succeed faster. Research suggests that skills like creativity, management, and financial control help franchisees succeed.

How long does it take to start making profit with a franchise?

This varies depending on the industry, location, and initial investment. Ask your franchisor for data on typical break-even timelines for their network, and make sure you plan your finances carefully before committing.

Can I own multiple franchise locations?

Yes. Many franchise agreements allow multi-unit ownership, and some franchisors actively encourage successful franchisees to expand. Review your agreement for expansion rights and territory restrictions.

What happens if I want to sell my franchise?

Most franchise agreements include terms for selling your business, often requiring franchisor approval of the buyer. Review your contract for transfer fees, buyer qualification requirements, and any right-of-first-refusal clauses.