How to start a franchise: costs, steps and key questions

Published Thursday 16 April 2026

Table of contents

• What is a franchise and how does it work?
• Steps to start a franchise
• Understanding franchise costs and financing
• Franchise reality check
• Becoming a franchisee can be hard
• Questions for the franchisor
• Questions for other franchisees
• Questions for a lawyer
• Questions for a franchise-experienced accountant
• Taking the next step in franchise ownership
• FAQs on becoming a franchisee

Key takeaways

• Conduct thorough due diligence by requesting financial reports, franchisee performance data, and speaking with multiple current franchisees beyond those the franchisor introduces to get an unbiased view of the business reality.
• Budget for comprehensive startup costs including the initial franchise fee, setup expenses, equipment, inventory, working capital reserves, and ongoing royalties that typically range from $50,000 to $500,000 depending on the franchise.
• Engage a franchise-experienced lawyer to review all legal documents and an accountant familiar with franchise financial structures before signing any agreements to protect your interests and optimise your tax position.
• Assess your personal readiness by evaluating your risk tolerance, management style preferences, financial capacity, and genuine enthusiasm for the brand before committing to franchise ownership.

What is a franchise and how does it work?

A franchise is a business model where you, the franchisee, pay a company, the franchisor, for the right to use their brand name and business systems. This lets you open a business with an established reputation and a proven way of doing things, which can reduce some of the risks of starting from scratch.

The franchise business model

When you buy a franchise, you're buying a licence to operate. In return for an initial fee and ongoing royalties, the franchisor provides you with branding, products, and operational support.

You run the day-to-day business, but you must follow the franchisor's rules on how the business is run, from marketing to customer service.

Franchisor vs franchisee roles

The franchisor owns the overall brand and business system. Their role is to support their franchisees, protect the brand's integrity, and continue to innovate.

As the franchisee, your role is to manage your local business, serve customers, and follow the system. You own your specific business location, while the franchisor retains ownership of the brand.

Steps to start a franchise

Becoming a franchisee is a journey with several key stages. Following a clear process helps you make an informed decision and sets you up for success.

Here are the typical steps to buying a franchise:

1. Assess your readiness for franchise ownership
2. Research franchise opportunities in your industry
3. Evaluate costs and secure financing
4. Conduct thorough due diligence
5. Review legal documents with a lawyer
6. Sign the franchise agreement
7. Complete training and launch your business

Understanding franchise costs and financing

Franchise costs extend beyond the initial purchase price. You'll need to budget for startup expenses, ongoing fees, and working capital to keep the business running smoothly.

You'll also need to budget for a range of expenses to get started.

Common franchise costs include:

• Initial franchise fee: a one-time payment to the franchisor for the right to use their brand and systems
• Setup costs: fitting out your premises, buying equipment, and purchasing initial inventory
• Equipment and inventory: initial stock and tools needed to operate
• Working capital reserve: funds to cover operating expenses during the startup phase
• Ongoing royalties: a regular percentage of your revenue paid to the franchisor for ongoing support
• Marketing fees: contributions to a central marketing fund that promotes the brand
• Other recurring costs: additional fees that vary by franchise

Types of franchise models

Different franchise models suit different goals and budgets:

• Single-unit franchises: you own and operate one location
• Multi-unit franchises: you own multiple locations within a territory
• Area development agreements: you commit to opening a set number of locations over time
• Master franchise opportunities: you have rights to sub-franchise within a region

Financing your franchise purchase

Common financing options include business loans, personal savings, or investor funding. An accountant can help you create a realistic budget and identify the financing approach that best suits your situation.

Franchise reality check

Franchise risks are the financial and operational downsides of buying into an established business system. Franchises reduce some startup uncertainty, but they create new obligations you need to understand before investing.

Key franchise risks include:

• High startup costs: initial franchise fees plus setup expenses
• Ongoing financial obligations: monthly royalties and marketing fees
• Staffing requirements: many franchises require employees and payroll management, depending on the business model
• Limited business control: strict operational guidelines and brand requirements
• Sales pressure: some franchise models rely on high sales volume and tight margins, while others do not

Franchises vary in the level of support they offer. Look for those that provide strong advice, support, and proven business systems.

Becoming a franchisee can be hard

Assessing yourself helps you determine if franchise ownership suits your skills, finances, and goals. Before investing significant time and money, honestly evaluate your readiness for this business model.

Key areas to assess:

• Support preferences: decide whether you prefer working independently or want detailed guidance from the franchisor
• Risk tolerance: consider if you're comfortable taking on debt to buy into the franchise and hire staff
• Franchisor reputation: speak with other franchisees and check the franchisor's track record
• Management style: choose a franchisor whose operational approach matches how you want to run the business
• Financial capacity: plan for launch costs, ongoing fees, and a realistic budget to support growth

Questions for the franchisor

Conducting due diligence on the franchisor means investigating the franchise company's financial stability, growth track record, and support quality. A reputable franchisor welcomes detailed questions because they want successful franchisees who strengthen the brand.

How's the business doing?

Business performance data reveals the franchise system's financial health and growth trajectory. Request these key documents:

• Financial reports: current sales, revenue, and profit data
• Growth metrics: new location openings and system expansion
• Future projections: forecasts and business goals (verify assumptions carefully, as projections are estimates)
• Management credentials: leadership team experience and track record

What's the outlook for new franchisees?

Franchisee performance data shows how individual locations perform financially and operationally. Feel free to ask for this information, as research shows people prefer to have costs clearly written down (see FMA guidance on getting advice).

Data availability varies by franchise, so ensure you're comfortable with the information provided.

Essential questions to ask:

• Profitability rates: ask what percentage of franchisees are profitable
• Revenue models: ask how they predict earnings for new locations
• Operating costs: ask what a typical franchisee budget includes
• Performance benchmarks: ask for average sales figures by location type

How strong is your data?

Verify the reliability of market research and financial projections by asking:

• Timing: when was the research conducted
• Sample size: how many customers or stores were involved in the study
• Assumptions: what assumptions underpin the projections

An accountant can help you interpret this data and identify potential concerns.

What are the main teething problems?

Early-stage challenges reveal what to expect in your first year. A supportive franchisor will share this information to help you avoid common problems.

If the guidance seems unclear, ask for specific examples or more details.

What are the key performance indicators (KPIs)?

Key performance indicators (KPIs) are the metrics that drive success in the franchise system. The franchisor should identify three to five KPIs that matter most, such as customer retention, average transaction value, or labour cost percentage.

Focusing on a small number of critical metrics helps you prioritise your efforts.

Can I speak to other franchisees?

Franchisee references provide real-world insights into daily operations and franchisor support quality. Here's how to approach franchisee interviews:

• Request specific matches: ask for franchisees in similar markets or demographics
• Seek multiple perspectives: request three or more references
• Choose your contacts: request additional names until you find franchisees who match your situation
• Plan comprehensive discussions: spend substantial time with at least one franchisee

Do you provide proven business systems?

Check if the business has established processes for:

• Recruitment: hiring and onboarding staff
• Payroll: wage calculations and compliance
• Marketing: promotional activities and brand guidelines
• Customer service: handling enquiries and complaints
• Health and safety: workplace compliance requirements

It's even better if they provide automated systems for accounting, time-recording, payroll, inventory management, and customer relationship management. These systems save time and money while helping you meet legal obligations to keep all business records for seven years, which increases your chance of success.

How will growth be handled?

Ask about territory protection and growth management. You probably want exclusive access to your local market, so check if you'll get protection from other franchisees opening nearby.

Also ask what marketing support the franchisor provides to help you grow.

Questions for other franchisees

Speak with a range of franchisees to get a balanced view, including those you find independently beyond the franchisor's introductions. Franchisors naturally connect you with their strongest relationships, so seek out additional perspectives independently.

How did you get through your first year?

Franchisees can share practical insights about early challenges beyond what the franchisor covers. Compare their answers with what the franchisor told you.

Similar responses suggest consistency, while different answers may reveal gaps in support.

What are your KPIs?

A focused franchisee will track three to five KPIs that align with what the franchisor identified. If their metrics differ significantly, ask why.

Misalignment could indicate poor communication or inconsistent support across the franchise network.

What are your big challenges?

Ask about ongoing challenges such as staffing, cash flow, or seasonal fluctuations, and whether the franchisor provides adequate support to address them.

Questions for a lawyer

Reviewing the legal documents protects you from problematic contract terms before you sign. The franchise agreement governs your entire business relationship, defining your rights, obligations, and exit options.

Why professional legal help matters:

• Access franchise-specific expertise: lawyers with franchise experience may be more familiar with common franchise agreement terms and risks
• Identify red flags: they may be better placed to identify problematic clauses in franchise agreements
• Interpret contracts: complex legal language needs professional translation
• Plan for protection: your contract is critical, but legal rights and remedies may also arise under New Zealand statutes and common law, including protections against misleading or deceptive conduct. It's also helpful to know that you can claim up to $10,000 of legal expenses in a tax year (see IRD guidance on buying or selling a business)

Does this agreement say what I think it does?

Explain your understanding of the agreement to your lawyer. They can confirm whether the document matches your expectations and identify any terms that need clarification with the franchisor.

What happens if things don't work out?

Plan for exit scenarios before you sign. For example, if you sell the franchise as a going concern and both you and the buyer are GST-registered, the sale can be zero-rated for GST purposes (see IRD guidance on tax on asset sales).

Ask your lawyer to clarify:

• your options for selling the franchise
• how outstanding debts are handled
• what the franchisor would pay if they buy it back
• any restrictions on when or how you can exit

Questions for a franchise-experienced accountant

Franchise-experienced accountants understand the unique financial structure and tax implications of franchise businesses. They provide specialised guidance on profitability analysis, cash flow planning, and compliance that general accountants might miss.

Benefits of franchise-specific accounting expertise:

• Tax optimisation: knowledge of franchise-specific deductions and obligations
• Financial benchmarking: understanding of typical franchise financial performance
• System familiarity: experience with your specific franchise's financial model
• Peer insights: access to performance data from similar franchisees

Ask them about:

• Finance structure:how best to structure your funding and cash flow
• KPI selection: what key performance indicators to track
• KPI tracking: how to monitor performance effectively
• Automation:how to automate payroll, POS, and accounting data entry

Taking the next step in franchise ownership

Successful franchise ownership requires commitment and genuine enthusiasm for the brand. Before signing, ensure you meet these mindset requirements:

• Product passion: genuine belief in what you're selling
• Brand alignment: comfort with the company's values and approach
• Work commitment: operator involvement varies by franchise model; some require intensive day-to-day management
• Business dedication: many franchise systems expect active owner involvement, but expectations depend on the franchise model and agreement

Get professional advice from a lawyer and an accountant before you commit. Include your research findings in your business plan to clarify opportunities and drawbacks.

This preparation helps you make a confident decision.

Once you're up and running, clear financial visibility becomes essential. Tracking performance, managing cash flow, and staying on top of finances takes time away from growing your business. Get one month free to see how Xero can support your new venture.

FAQs on becoming a franchisee

Here are answers to common questions about becoming a franchisee.

How much does it cost to start a franchise?

Most franchises require $50,000–$500,000 in total investment. This covers the franchise fee, setup costs, equipment, inventory, and working capital.

Some low-cost franchises start under $20,000, while premium brands can exceed $1 million. The exact amount depends on the brand, industry, and location.

What are the different types of franchise models?

The four main franchise models are single-unit (you own and operate one location), multi-unit (you own multiple locations within a territory), area development (you commit to opening a set number of locations over time), and master franchise (you have rights to sub-franchise within a region).

What percentage of franchises fail?

Franchise failure rates typically range from 20%–50%, meaning most franchisees succeed. Success depends on factors like the franchise system's strength, your location, available capital, and management commitment.

Thorough due diligence before signing significantly improves your odds.

Which franchise is most profitable?

The most profitable franchise for you matches your skills and interests while offering strong support and consistent performance data. Profitability varies by industry, location, and your management ability.

Ask franchisors for average revenue and profit figures before deciding.

How long does it take for a franchise to become profitable?

Most franchises take 12–24 months to become profitable, though this varies by industry and location. Ask the franchisor for average break-even timelines from existing franchisees.

Budget for at least 12 months of operating expenses before expecting consistent profits.