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

Published Thursday 12 March 2026

Table of contents

• What is a franchise?
• 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

• Research thoroughly before committing by asking franchisors for sales data, break-even timelines, common problems new franchisees face, and confirmation of exclusive local market rights to ensure the opportunity is genuinely viable.
• Prepare for higher startup costs and ongoing financial obligations including upfront franchise fees (typically £10,000-£50,000+), equipment and setup expenses, plus regular royalty payments of 4-8% of revenue that create higher fixed costs than independent businesses.
• Understand that you'll operate as an independent business owner with limited control, meaning you must follow the franchisor's specific products, services, pricing and brand standards while remaining responsible for your own debts and obligations if the business fails.
• Prioritise franchisors that provide comprehensive support including documented processes, training programmes, business systems, and ongoing troubleshooting assistance, as support levels vary significantly between different franchise opportunities.

What is a franchise?

A franchise is a business arrangement where one party (the franchisor) grants another party (the franchisee) the right to use their brand, systems, and business model for an agreed fee, often for a contract period of five to ten years. Think of brands like McDonald's or Subway, where each location is typically owned by an independent franchisee operating under the parent company's name.

The franchisor owns the parent business. The franchisee buys the right to operate under that brand.

A franchise is not the same as a chain. While chain stores are owned by a single company, each franchise location is a separate, independent business. The franchisee and franchisor are distinct legal entities.

This means a franchisee can struggle financially even while the franchisor thrives. A franchise system is essentially many separate businesses operating under one brand.

What is a franchisor?

The franchisor is the company that owns the brand and business model. They provide franchisees with:

• Brand rights: Permission to trade under their name and logo
• Supply chain access: Connections to approved suppliers
• Operating systems: Proven processes and procedures
• Training and support: Management advice and marketing insights

What is a franchisee?

The franchisee is the person or business that buys the right to operate under the franchisor's brand. They run their franchise as an independent business, which often means forming a company.

Franchisee responsibilities typically include:

• paying upfront and ongoing franchise fees
• meeting brand standards for operations and quality
• following reporting requirements
• complying with legal obligations set out in the franchise agreement

How do franchises work?

Franchises work through a licensing agreement between the franchisor and franchisee. The franchisor grants permission to use their brand and systems. The franchisee pays fees and runs the business independently.

Here's how the process typically works:

1. Apply to the franchisor: Express interest in joining their network and demonstrate you have the required skills and commitment
2. Review the franchise agreement: Read the contract carefully and get independent legal advice before signing
3. Set up your business: Form a company and establish your franchise location with guidance from the franchisor
4. Pay franchise fees: Meet your ongoing financial obligations, which typically include royalties and marketing contributions
5. Operate and grow: Build revenue to cover your costs and generate profit

The franchisor provides support during setup and early operations. Your goal is to generate enough revenue to meet your financial commitments while banking a healthy profit.

Types of franchise

Franchises exist across nearly every industry, not just fast food. You can find franchise opportunities that match your skills, experience, and interests.

Common franchise categories include:

• Food and hospitality: restaurants, cafés, hotels (for example, McDonald's, Costa Coffee)
• Retail: convenience stores, specialist shops (for example, The UPS Store)
• Home services: cleaning, landscaping, property maintenance
• Personal services: fitness centres, hair salons, pet grooming
• Care services: childcare, home care, senior support
• Professional services: accounting, recruitment, IT support
• Automotive: repair shops, car washes, parts suppliers

Advantages and disadvantages of franchising

Franchising offers a faster path to business ownership by providing a proven model, established brand, and ongoing support. However, it also comes with costs, restrictions, and risks you need to weigh carefully.

Advantages of a franchise

Proven business model: Most franchises are based on a concept that's already succeeding elsewhere. The franchisor has tested and refined a model that makes money. Ask them for performance data and ask about franchises that didn't work out.

Market-tested products or services: When a business has succeeded in multiple markets, you can be confident customers value what it sells. The wider the franchise network, the more validated the offering.

Setup support and planning: Many franchises provide a ready-made business plan, operations manual, pricing structure, supplier relationships, and marketing strategies.

Training programmes: Franchisors typically offer training on their processes, customer service standards, inventory management, and bookkeeping requirements.

Ongoing operational guidance: Well-organised franchisors document daily tasks and provide checklists, job sheets, and recommended software to help you work efficiently.

Troubleshooting assistance: Good franchisors support you through early challenges and help you solve problems as they arise.

Growth roadmaps: Experienced franchisors have helped many franchisees scale up. They can guide you along a proven pathway to sustainable growth.

While franchising offers many benefits, there are also challenges to consider.

Disadvantages of a franchise

Higher startup costs: Upfront franchise fees add significantly to your initial investment. According to HMRC, HMRC typically treats these initial payments as capital, so they're not allowable deductions when you calculate taxable profits. You'll also need to meet brand standards from day one. This means paying for equipment, technology, signage, and potentially uniforms before you open.

Immediate staffing requirements: Unlike starting your own business as a sole trader, many franchises require you to hire staff from the outset. You'll need to manage payroll and HR responsibilities straight away.

Increased fixed costs: Regular franchise fees, staff wages, and repaying startup debt create higher fixed costs. You'll need more revenue to break even. You must also manage cash flow carefully.

Demanding sales targets: Many franchises operate on low-margin, high-volume models. If sales dip, your profitability can change quickly.

Limited control: You'll follow specific products, services, pricing, and brand standards set by the franchisor. This structure reduces risk, though it means following the franchisor's established direction for the business.

What will a franchise do for you?

A good franchise reduces the risks of business ownership by providing systems, training, and ongoing support. However, support levels vary significantly between franchisors.

The best franchisors provide:

• documented step-by-step guidance
• comprehensive training programmes
• plug-and-play business systems
• key performance indicators to track
• ongoing advice and troubleshooting

Some franchisors provide less hands-on support than others. Due diligence matters.

Before signing any agreement, ask the franchisor these questions:

• Can you share sales, revenue, and growth reports for the whole business?
• What do new franchisees spend in their first year?
• When do they typically break even?
• Do you have models for predicting sales in new locations?
• What are the 10 most common problems for new franchisees?
• What are the three most important KPIs for franchisees?
• What systems do you provide for inventory, accounting, payroll, and training?
• Will you commit to giving me exclusive access to my local market?

Confirm whether you'll have exclusive rights to your local market. You want a franchisor who's fully invested in your success.

Read our guide on how to become a franchisee, including what to look for and how to evaluate opportunities.

Due diligence is key

Due diligence is essential to your franchise investment success. Franchising has helped many people become successful business owners, and thorough research helps you find the right opportunity.

Before committing, verify that:

• the franchisor provides genuine operational and marketing support
• you'll have some level of exclusivity in your local market
• the financial projections are realistic and backed by data
• the franchise agreement terms are fair and balanced

Higher startup and operating costs mean you need to be confident the opportunity is sound. Research thoroughly.

Managing your franchise finances

Franchise businesses demand tighter financial control than many other startups. With higher fixed costs, ongoing royalty payments, and demanding sales targets, you need to clearly see your cash flow and profitability.

Good accounting software helps you track performance against targets, manage cash flow, and meet your obligations to the franchisor. Set up Xero accounting software to see your finances as they happen, or get one month free to see how it works for your franchise.

FAQs on franchises

Common questions about franchises answered.

Is McDonald's a franchise?

Yes, McDonald's is one of the world's most recognisable franchise brands. Independent franchisees own and operate most McDonald's restaurants, paying fees to use the brand, systems, and supply chain.

How much does it cost to buy a franchise?

Franchise costs vary widely depending on the brand and industry. Expect to pay an upfront franchise fee (typically £10,000 to £50,000 or more), plus setup costs for equipment, premises, and initial stock. You'll also pay ongoing royalties, usually 4–8% of revenue. Unlike the initial franchise fee, HMRC generally considers these annual payments allowable expenses for tax purposes.

Do I need business experience to buy a franchise?

Not necessarily. Many franchisors provide comprehensive training and prefer franchisees who are committed and coachable over those with specific industry experience. However, general business skills, financial literacy, and management experience are valuable.

Can I own multiple franchise locations?

Yes, many franchisees expand to own multiple locations once their first franchise is successful. The industry calls this multi-unit franchising. Some franchisors actively encourage it and offer incentives for expansion.

What happens if my franchise business fails?

If your franchise fails, you remain responsible for any debts and lease obligations. The franchise agreement will outline termination terms, which may include restrictions on competing businesses and requirements to return branded materials. Seek legal advice before signing to understand your obligations.