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

Published Monday 30 March 2026

Table of contents

• What is a franchise?
• What a franchise is not
• How do franchises work?
• Types of franchises
• Advantages and disadvantages of franchising
• What does a franchise cost?
• What will a franchise do for you?
• Due diligence is key
• Is franchising right for you?
• Manage your franchise finances with Xero
• FAQs on franchising

Key takeaways

• Research thoroughly before committing by requesting the Franchise Disclosure Document at least 14 days before signing, speaking with existing franchisees about their experience, and getting independent legal and financial advice to verify the franchisor's support quality and financial projections.
• Calculate the total investment including initial franchise fees, ongoing royalties, marketing contributions, and operational costs to ensure you have sufficient capital and understand how these recurring expenses will impact your profit margins throughout the franchise term.
• Evaluate whether you can follow established systems and brand standards while accepting limited operational control, as franchises require strict adherence to the franchisor's processes, pricing, and business practices rather than complete independence.
• Prioritise franchisors that offer comprehensive ongoing support including training programs, operational guidance, territory exclusivity, and performance benchmarking, as the quality of this support significantly affects your chances of success.

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. Think of familiar names like McDonald's or Subway: each location is typically owned by an independent franchisee operating under the parent company's established brand.

So what is a franchisor?

A franchisor is the company or individual that owns the original business and licenses it to franchisees. The franchisor typically provides:

• access to an established brand and trademark
• connection to approved supply chains
• documented business processes and systems
• management guidance and training
• marketing strategies and materials

And what about the franchisee?

A franchisee is the person or entity that purchases the right to operate a franchise location. As a franchisee, you:

• run your franchise as a separate, independent business
• pay initial franchise fees and ongoing royalties
• follow the franchisor's operational standards and reporting requirements
• comply with legal obligations outlined in the franchise agreement

You may need to form a company structure depending on your location and the franchisor's requirements.

What a franchise is not

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

This distinction matters for several important reasons:

• a franchisee can fail financially while the franchisor remains profitable
• the franchisor has no obligation to cover a franchisee's losses
• each franchise location carries its own business risk

A franchise system is a network of independent businesses operating under one brand, not a single company with multiple branches.

How do franchises work?

Franchising works through a structured process that moves from initial enquiry to operating your own location. Here's how the process typically unfolds:

1. Research and enquiry: Contact franchisors you're interested in and request information about their franchise opportunities.
2. Qualification: The franchisor assesses your skills, financial capacity, and commitment level.
3. Review the franchise agreement: Read the contract carefully and get independent legal and financial advice before signing.
4. Set up your business: Form your own company structure and prepare your location according to the franchisor's requirements.
5. Launch and operate: Open your franchise with guidance from the franchisor, then focus on generating enough revenue to cover your fees and turn a profit.

The franchise agreement

A franchise agreement is the legal contract that defines the terms of your business relationship, but before you sign, the franchisor is required by the Federal Trade Commission's (FTC's) Franchise Rule to provide a disclosure document with 23 specific items of information.

• Term length: how long you can operate the franchise (often five–20 years)
• Territory rights: whether you have exclusive access to a geographic area
• Fee structure: initial franchise fees, ongoing royalties, and marketing contributions
• Operational requirements: brand standards, approved suppliers, and quality controls
• Training obligations: what training the franchisor provides and what you must complete
• Termination conditions: circumstances under which either party can end the agreement
• Renewal terms: your options when the initial term expires

Have a lawyer review the franchise agreement before signing. The terms significantly impact your rights, obligations, and potential profitability.

Ongoing support and obligations

The franchise relationship continues long after you sign the agreement. Both parties have ongoing responsibilities throughout the term.

Franchisors typically provide ongoing support throughout your franchise term:

• brand marketing and national advertising campaigns
• updated training materials and operational guidance
• access to new products, services, or technology
• performance benchmarking against other franchisees
• ongoing business coaching or field support

As a franchisee, you have ongoing obligations to fulfil:

• regular royalty payments (usually a percentage of revenue)
• marketing fund contributions
• compliance with brand standards and operational procedures
• accurate financial reporting to the franchisor
• participation in required training or updates

The quality of ongoing support varies between franchisors, so ask existing franchisees about their experience before committing.

Types of franchises

Franchises exist across nearly every industry, not just the restaurant chains that first come to mind. Common franchise sectors include:

• Food and hospitality: restaurants, cafes, hotels
• Retail: convenience stores, specialty shops, automotive services
• Home services: cleaning, landscaping, pest control, home repairs
• Personal services: fitness centres, hair salons, childcare
• Professional services: accounting, legal, IT support, HR consulting
• Health and wellness: pharmacies, aged care, medical clinics

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

Business format franchises

This is the most common type, where the franchisor licenses their brand and entire way of doing business. This includes marketing, operating manuals, and ongoing support. Think of fast-food chains or fitness centres.

Product distribution franchises

In this model, the franchisee is mainly focused on selling the franchisor's products. It's more like a supplier-dealer relationship. Examples include car dealerships or soft drink bottlers.

Advantages and disadvantages of franchising

Franchises can speed up the journey to becoming a successful business owner, and as a sector, are projected to add approximately 221,000 jobs in 2024. But there are also risks to consider.

Advantages of a franchise

Franchising offers several benefits for aspiring business owners.

Proven business model: Franchises are based on concepts that have already succeeded elsewhere. The franchisor has tested and refined a system that generates revenue, though you should still ask about failure rates during your research.

Market-tested products or services: When a business has grown across multiple markets, you can be more confident that customers value what it sells. Wider expansion typically signals stronger product-market fit.

Setup and planning support: Many franchises provide a ready-made business plan, operations manual, pre-set pricing, and established supplier relationships to help you launch faster.

Training programs: Franchisors often train owners and staff on proprietary processes, customer service standards, inventory management, and bookkeeping requirements.

Ongoing troubleshooting: Some franchisors offer hands-on support during your first months of operation, helping you work through early challenges and refine your approach.

Operational guidance: Well-organised franchisors document daily tasks, provide checklists, and recommend software tools to help you run the business efficiently from day one.

Growth roadmaps: Experienced franchisors have helped other franchisees scale successfully and can guide you through each stage of business growth.

Disadvantages of a franchise

Consider these potential drawbacks before committing to a franchise.

Higher startup costs: Upfront franchise fees, brand-standard equipment, technology, and uniforms add significantly to your initial investment compared to starting an independent business.

Immediate staffing requirements: Many franchises require you to hire staff from day one, meaning you'll manage payroll and human resources before generating substantial revenue.

Greater fixed costs: Regular franchise fees, wages, and potential debt repayments create higher ongoing expenses, requiring more revenue to break even and careful cash flow management.

Demanding sales targets: Many franchises operate on low-margin, high-volume models where even small dips in sales can significantly impact your profitability.

Limited operational control: Franchise agreements lock you into specific products, pricing, brand standards, and business practices, which may prevent you from adapting the business to your preferences.

What does a franchise cost?

Franchise costs vary widely depending on the brand, industry, and location. Understanding the full cost structure helps you budget accurately.

Initial franchise fees

The initial franchise fee is the upfront payment that grants you the right to use the franchisor's brand and systems. This fee usually covers:

• rights to use the brand name and trademarks
• initial training programs
• operations manuals and startup support
• site selection assistance (for physical locations)

Ongoing costs and royalties

Ongoing fees continue throughout your franchise term. These typically include:

• Royalty fees: usually a percentage of gross revenue, paid weekly or monthly
• Marketing fund contributions: a percentage of revenue for national advertising
• Technology fees: charges for required software or point-of-sale systems
• Training fees: costs for mandatory ongoing training or certifications

These recurring costs reduce your profit margin, so factor them into your financial projections.

Total investment ranges

Your total investment includes all costs to open and operate until the business becomes self-sustaining. Costs vary significantly by franchise type, from smaller home-based service businesses through to large food service operations. Request the Franchise Disclosure Document (FDD) from any franchisor you're considering, which by law must be provided at least 14 calendar days before you sign a contract or make any payments. It includes detailed cost breakdowns and financial performance data from existing franchisees.

What will a franchise do for you?

Franchisor support varies significantly between franchise systems. The best franchisors help de-risk your business by providing:

• step-by-step documentation for setup and operations
• comprehensive training programs
• ready-to-use business systems
• key performance indicators to track progress
• ongoing advice and guidance

However, some franchisors provide minimal support after collecting your fees. Research each opportunity thoroughly before committing.

Ask potential franchisors these questions to evaluate whether the opportunity is right for you:

• What are your network-wide sales, revenue, and growth figures? According to the 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?
• What models do you use to predict sales in new locations?
• What are the most common challenges new franchisees face?
• What key performance indicators should franchisees track?
• What systems do you provide for inventory, accounting, payroll, and training?
• Will you guarantee exclusive territory rights for my location?

Territory exclusivity is particularly important. Without it, the franchisor could open a competing location nearby, splitting your potential customer base.

Due diligence is key

Thorough research is essential before buying a franchise. While franchising has helped many people become business owners, poor choices can lead to expensive failures.

Before signing any agreement, verify that:

• the franchisor provides adequate operational and marketing support
• you receive territorial exclusivity or understand the competition risks
• the financial projections are realistic, which you can help verify by reviewing the franchisor's three most recent audited annual financial statements provided in Item 21 of the FDD
• the total investment aligns with your budget and expected returns
• the franchise agreement terms are fair and clearly understood

Get independent legal and financial advice before committing to any franchise.

Is franchising right for you?

Franchising suits people who want business ownership with built-in structure and support. Before committing, consider whether the model matches your goals, skills, and financial situation.

Franchising may be a good fit if you:

• want to run your own business but prefer a proven system over starting from scratch
• have access to the required capital or financing
• can follow established processes and brand standards
• value support and training over complete independence
• are comfortable with ongoing fees reducing your profit margin

On the other hand, franchising may not suit you if you:

• want full control over products, pricing, and business direction
• prefer to build something entirely your own
• have limited capital for the upfront investment
• struggle to follow prescribed systems and procedures

If franchising interests you, start by researching industries that match your skills and interests. Request information from multiple franchisors, speak with existing franchisees, and get professional advice before signing any agreement.

Manage your franchise finances with Xero

Running a franchise means managing higher financial complexity than many independent businesses. You'll need to track franchise fees, royalties, staff costs, and inventory while monitoring cash flow closely.

Xero accounting software helps franchise owners:

• track income and expenses in real time
• manage payroll and supplier payments
• monitor cash flow against franchise fee obligations
• generate reports to measure performance against targets

Stay on top of your franchise finances from day one. Get one month free and see how Xero can support your franchise journey.

FAQs on franchising

Here are answers to common questions about buying and running a franchise.

How much does it typically cost to buy a franchise?

Total investment ranges from a few thousand dollars for home-based franchises to several million dollars for major restaurant brands. Costs vary widely depending on the brand, industry, and location, so always request a full cost breakdown from the franchisor before committing.

How long does it take to become a franchisee?

The process typically takes three to six months from initial enquiry to opening day. This includes application review, training, site selection (if applicable), and setup.

Do I need industry experience to buy a franchise?

Most franchises don't require prior industry experience because they provide comprehensive training. However, general business skills and relevant experience can improve your chances of approval and success.

Can I own multiple franchise locations?

Yes, many franchisors offer multi-unit opportunities to successful franchisees. You'll typically need to prove strong performance at your first location before expanding.

What happens if my franchise business fails?

If your franchise fails, you're responsible for any outstanding debts and lease obligations. The franchisor may terminate your agreement, and you'll lose your initial investment. Review the termination clauses in your franchise agreement carefully before signing.