What is a franchise? How it works, costs, pros, cons

Published Thursday 12 March 2026

Table of contents

• What is a franchise?
• What a franchise is not
• How do franchises work?
• Types of franchise
• Advantages and disadvantages of franchising
• What will a franchise do for you?
• Due diligence is key
• Managing your franchise finances
• FAQs on franchises

Key takeaways

• Evaluate franchise opportunities by asking direct questions about network performance, break-even timelines, territory exclusivity, and the specific support systems provided before committing to any agreement.
• Budget for higher startup and ongoing costs including franchise fees, immediate staffing requirements, and fixed expenses that raise your break-even point compared to independent businesses.
• Understand that franchising trades business independence for proven systems and support, meaning you'll follow set procedures, pricing, and brand standards rather than making your own decisions.
• Conduct thorough due diligence by reviewing franchise agreements with independent legal and financial advisors, as support quality varies dramatically between franchisors despite similar fee structures.

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. The franchisee operates as an independent business owner while following the franchisor's established processes and standards.

So what is a franchisor?

A franchisor is the company or individual that owns the original business and grants franchise rights to others. Beyond providing the brand, a franchisor typically offers:

• access to established supply chains
• proven processes and operating systems
• management advice and training
• marketing strategies and materials

And what about the franchisee?

A franchisee is the person or entity that purchases the right to operate under the franchisor's brand and systems. They run their franchise as a separate, independent business, which often requires forming a company.

Franchisees pay ongoing fees and must follow specific standards for operations and reporting. The franchise agreement outlines these requirements along with other legal obligations.

What a franchise is not

A franchise is not a chain of company-owned stores. While multi-location businesses like corporate retail chains are all part of one company, each franchise location is a separate, independent business.

This means the franchisee carries their own financial risk. A franchisee can lose money or fail while the franchisor and other franchisees remain profitable. A franchise system is essentially many independent businesses operating under a shared brand.

How do franchises work?

Franchises work through a licensing agreement where you pay fees to use an established brand and business system. Here's how the process typically unfolds:

1. Contact the franchisor: Express interest in joining their network and learn about their requirements.
2. Meet their criteria: Demonstrate the skills, capital, and commitment they require from franchisees.
3. Review the franchise agreement: Read the contract carefully and get independent legal and financial advice.
4. Set up your business: Form a company and establish your franchise location following the franchisor's guidelines.

Once operating, you'll pay regular franchise fees in exchange for ongoing support. Success depends on generating enough revenue to cover these costs while still making a profit.

Types of franchise

Franchises exist across two main business models and nearly every industry. Understanding how these vary helps you identify opportunities that match your goals and experience.

Franchise business models

The two primary franchise structures work differently:

• Business format franchising: The most common type. You receive a complete business system including the brand, operating procedures, training, marketing, and ongoing support. Examples include fast food restaurants, fitness centres, and cleaning services.
• Product distribution franchising: You sell the franchisor's products but have more independence in how you run your business. Examples include car dealerships, petrol stations, and soft drink bottlers.

Franchise industries

Franchises span far beyond restaurants and retail. You'll find opportunities in:

• hospitality and food service
• health, fitness, and personal care
• home services: cleaning, landscaping, repairs
• professional services: accounting, legal, technology support
• education and childcare
• construction and trades

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

Advantages and disadvantages of franchising

Franchising offers a faster path to business ownership with built-in support, but it comes with trade-offs. Understanding both the benefits and drawbacks helps you decide if this model suits your goals.

Advantages of a franchise

Proven concept: Most franchises are based on a business model that's already succeeding elsewhere. The franchisor has tested and refined their approach to generate profits.

Ask for clear information about performance across their network, including franchises that didn't work out. No franchise system has a 100% success rate, so due diligence matters.

Market-tested products or services: When a business has succeeded across multiple markets, you have evidence that customers value what it offers. The wider the franchise network, the more confidence you can have in customer demand.

Setup and planning support: Franchises typically provide a ready-made business plan, operations manual, and guidance for getting started. Pricing structures, supplier relationships, and marketing strategies are already established.

Training programmes: Many franchisors provide training for owners and staff covering:

• proprietary processes and systems
• customer service standards
• inventory management
• bookkeeping and reporting requirements

Troubleshooting support: Support levels vary between franchisors. Some provide hands-on coaching through your first few months, helping you work through early challenges. Others take a more hands-off approach once you're operational.

Day-to-day operational guidance: Well-organised franchisors document every task you need to complete, along with the most efficient methods. This typically includes job sheets, checklists, and recommended software to automate routine work.

Growth roadmaps: Experienced franchisors have helped many franchisees scale from startup to established business. They can guide you through each growth stage with proven strategies for sustainable expansion.

Disadvantages of a franchise

Higher startup costs: Upfront franchise fees add significantly to your initial investment. These fees can range from a few thousand dollars to several hundred thousand, depending on the brand.

You'll also need to meet brand standards from day one, which means purchasing approved equipment, technology, signage, and potentially uniforms before you open.

Immediate staffing requirements: Unlike sole traders who add staff as they grow, many franchises require you to hire employees from the start. This means managing payroll and human resources immediately, making things more complex and costly.

Higher fixed costs: Franchise businesses typically carry more ongoing expenses than independent startups:

• regular franchise fees (often monthly or quarterly)
• staff wages from day one
• debt repayments on startup loans

These fixed costs raise your break-even point, meaning you need more revenue to become profitable. You'll need careful cash flow management.

Demanding sales targets: Many franchises operate on low-margin, high-volume business models. This means tight profit margins with little room for error. When sales dip, your earnings can drop quickly, making consistent performance critical.

Limited control: The structure that makes franchising less stressful also limits your independence. You'll typically be locked into:

• specific products and services
• set pricing structures
• brand standards and values
• sales targets and reporting requirements

This can prevent you from adapting the business to local conditions or pursuing your own ideas.

What will a franchise do for you?

Franchisor support is the main benefit of franchising. The right franchise relationship reduces risk during setup, operations, and growth. However, support levels vary dramatically between franchisors.

Strong franchisors provide comprehensive documentation, excellent training, ready-to-use systems, clear key performance indicators (KPIs), and ongoing advice. Weaker ones collect fees but leave you to figure things out alone. Thorough due diligence helps you tell the difference.

Ask direct questions to assess the quality of support you'll receive:

• Can you share sales, revenue, and growth reports for the entire network?
• What do new franchisees typically spend in year one and when do they break even?
• What models do you have for predicting sales in new locations?
• What are the 10 most common problems new franchisees face?
• What are the three most important KPIs for franchisee success?
• What systems do you provide for inventory, accounting, payroll, health and safety, and training?
• Will I have exclusive access to my local market?

Territory exclusivity matters. Some franchisors will open competing locations in your area, reducing their risk at your expense. You want a franchisor fully invested in your success, not competing against you.

Get more insights on becoming a franchisee.

Due diligence is key

Due diligence determines whether a franchise opportunity is worth pursuing. Franchising has helped many people become business owners, but poor choices can lead to expensive, legally complicated failures.

A good franchisor provides operational support, marketing help, and exclusive territory access. In return, you'll pay higher startup and operating costs. Research thoroughly to ensure the value you receive justifies the investment.

Managing your franchise finances

Franchise businesses require careful financial management due to their higher fixed costs and ongoing fee obligations. You'll need clear visibility into cash flow, expenses, and profitability to meet franchise requirements and stay profitable.

If you go ahead with a franchise, you'll need to track franchise fees, payroll, and reporting obligations. Xero accounting software simplifies these tasks by automatically reconciling your bank, tracking expenses, and reporting in real time. Get one month free to see how it can support your franchise finances.

FAQs on franchises

Here are answers to common questions people have when exploring franchise opportunities.

How much does it cost to buy a franchise?

Franchise costs vary widely, from under $10,000 for home-based services to over $500,000 for well-known restaurant brands. Total investment includes the initial franchise fee, equipment, inventory, premises, and cash to cover early expenses.

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

Most franchises take 12 to 24 months to become profitable, though this varies by industry and location. Ask the franchisor for data on how long it typically takes their franchisees to break even.

Can I run a franchise part-time?

Some franchises suit part-time ownership, particularly home-based or service businesses with flexible scheduling. However, many require full-time commitment, especially in hospitality or retail. Check the franchisor's requirements before committing.

Do I need specific qualifications or experience to buy a franchise?

Most franchises don't require industry-specific qualifications since they provide training. However, franchisors typically look for business acumen, financial capability, and commitment to following their systems.

What happens if I want to sell my franchise?

Franchise agreements usually include terms for selling your business, often requiring franchisor approval of the buyer. Some agreements include rights of first refusal for the franchisor. Review these terms carefully before signing.