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

Published Friday 15 May 2026

Table of contents

• What is a franchise?
• How do franchises work?
• Types of franchise
• How much does a franchise cost?
• Advantages and disadvantages of franchising
• Franchise rules and regulations in the UK
• What will a franchise do for you?
• Due diligence is key
• Famous franchise examples in the UK
• Managing your franchise finances
• Simplify your franchise finances with Xero
• FAQs on franchises

Key takeaways

• A franchise lets you run a business under an established brand. You pay fees to the franchisor in exchange for the right to use their name, systems, and support, typically for a contract period of five to ten years.
• Startup costs are higher than going independent. Expect upfront franchise fees of £10,000–£50,000 or more, plus equipment and setup expenses, alongside ongoing royalty payments of 5–9% of revenue.
• You operate as an independent business owner with limited control. You must follow the franchisor's brand standards, pricing, and processes while remaining responsible for your own debts and obligations if the business fails.
• Thorough research protects your investment. Ask franchisors for sales data, break-even timelines, and confirmation of exclusive local market rights before committing to any franchise agreement.

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. These contracts typically run for five to ten years. Think of brands like McDonald's or Costa Coffee, 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 the tools and support needed to operate successfully.

• 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, and 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 come in several structural formats and span nearly every industry. Understanding the different types helps you identify which model best suits your skills, experience, and investment level.

Business format franchise

A business format franchise is the most common type in the UK. You receive the complete business system, including branding, operations manuals, training programmes, marketing strategies, and ongoing support. McDonald's, Costa Coffee, and most high-street franchise brands use this model.

Product distribution franchise

In a product distribution franchise, you sell the franchisor's products but typically have more freedom over how you run your day-to-day operations. Car dealerships and fuel stations often follow this model. The franchisor focuses on manufacturing and supply while you handle sales and customer service in your territory.

Manufacturing franchise

A manufacturing franchise grants you the right to produce and sell goods using the franchisor's formula, recipes, or specifications. Bottling companies and food production businesses commonly use this structure. You handle production locally while the franchisor maintains quality standards and brand consistency.

Beyond these structural types, franchise opportunities exist across a wide range of industries:

• Food and hospitality: restaurants, cafes, hotels (for example, McDonald's, Costa Coffee)
• Retail: convenience stores, specialist shops
• 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

How much does a franchise cost?

Franchise costs vary widely depending on the brand, industry, and location. Before you commit, it's worth understanding the full range of expenses you'll face as a franchisee.

Upfront franchise fees

Most franchisors charge an initial franchise fee for the right to use their brand and systems. In the UK, this typically ranges from £10,000 to £50,000 or more for well-known brands. HMRC generally treats these initial payments as capital expenditure, so they're not allowable deductions when you calculate taxable profits.

Setup costs

On top of the franchise fee, you'll need to budget for premises, equipment, signage, technology, initial stock, and potentially uniforms. These startup costs can match or exceed the franchise fee itself, depending on the brand's requirements. Many franchisees also need working capital to cover the first few months of trading before the business becomes self-sustaining.

Ongoing royalties

Franchisees pay regular royalty fees to the franchisor, typically 5–9% of revenue. Unlike the initial franchise fee, HMRC generally considers these ongoing payments as allowable expenses for tax purposes. Some franchisors also charge a separate marketing levy of 1–3% of revenue to fund national or regional advertising campaigns.

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

Buying a franchise gives you access to a tested business model and an existing customer base. Here are the key benefits to consider.

• Proven business model. Most franchises are based on a concept that's already succeeding elsewhere. The franchisor has tested and refined a model that generates revenue. Ask them for performance data and 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.
• Growth roadmaps. Experienced franchisors have helped many franchisees scale up. They can guide you along a proven pathway to sustainable growth.

Disadvantages of a franchise

Franchising isn't without its challenges. Here are the main drawbacks to keep in mind.

• Higher startup costs. Upfront franchise fees add significantly to your initial investment. You'll also need to meet brand standards from day one, which means paying for equipment, technology, and signage 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 of 5–9% of revenue, staff wages, and repaying startup debt create higher fixed costs. You'll need more revenue to break even.
• 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.

Franchise rules and regulations in the UK

The UK doesn't have franchise-specific legislation, but several regulatory frameworks and industry standards apply. Understanding these rules helps you protect your investment and operate within the law.

British Franchise Association (BFA) Code of Ethics

The British Franchise Association (BFA) sets the industry standard for ethical franchising in the UK. While membership is voluntary, franchisors that follow the BFA Code of Ethics commit to transparent disclosure, fair dealing, and proper support for their franchisees. Choosing a BFA-accredited franchisor gives you an additional layer of confidence in the opportunity.

Franchise agreement key terms

The franchise agreement is the legal contract that governs your relationship with the franchisor. Before signing, make sure you understand the key terms.

• Territory rights: whether you have exclusive access to a defined geographical area
• Contract duration: the length of the agreement and renewal conditions
• Termination clauses: what happens if either party wants to end the agreement early
• Non-compete restrictions: limitations on running similar businesses during or after the contract
• Intellectual property: how you can use the franchisor's trademarks, branding, and proprietary systems

Tax obligations

As a franchisee in the UK, you'll need to register with HMRC and meet several tax obligations. Here's what to plan for.

• Business registration. Register as self-employed or set up a limited company with HMRC. Use the starting a business checklist to make sure you don't miss anything.
• VAT registration. You must register for VAT if your taxable turnover exceeds £90,000 per year.
• PAYE. If you employ staff, you'll need to set up PAYE to handle income tax and National Insurance contributions.
• Self Assessment. File an annual Self Assessment tax return to report your business income and expenses.

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. 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 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 the 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.

Famous franchise examples in the UK

Some of the UK's most recognisable brands operate as franchises. These examples show the range of industries and investment levels available to prospective franchisees.

• McDonald's. With over 1,400 restaurants across the UK, McDonald's is one of the most established franchise operations in the country. Franchisees run individual restaurants under strict brand standards, with significant training and operational support.
• Costa Coffee. Costa operates more than 2,600 stores in the UK, with many run by franchisees. It's one of the most visible coffee franchise brands on the British high street.
• Kumon. Kumon is an education franchise offering maths and English programmes for children. It's a popular choice for franchisees looking for a lower-cost entry point with flexible working hours.
• Anytime Fitness. This 24-hour gym franchise has expanded rapidly across the UK. Franchisees benefit from a well-known global brand and a membership-based revenue model.
• Holiday Inn. Part of the InterContinental Hotels Group (IHG), Holiday Inn franchisees operate hotels under one of the world's most recognised hospitality brands. It's a higher-investment franchise with strong brand recognition.

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 clear visibility over your cash flow and profitability.

Good accounting software helps you track performance against targets, manage expenses, and meet your obligations to the franchisor. Staying on top of your finances from day one makes it easier to spot problems early and keep your business on track.

Simplify your franchise finances with Xero

Running a franchise means juggling royalty payments, staff wages, supplier invoices, and tax obligations. Cloud accounting software gives you real-time visibility over all of it, so you can focus on growing your business rather than chasing paperwork.

Xero helps you track your franchise finances as they happen, from daily sales to monthly royalty calculations. Get one month free to see how it works for your franchise.

FAQs on franchises

Here are answers to some frequently asked questions about franchises.

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 of £10,000–£50,000 or more, plus setup costs for equipment, premises, and initial stock. You'll also pay ongoing royalties, typically 5–9% of revenue.

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. General business skills, financial literacy, and management experience are valuable, though.

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.

What are the ongoing costs of running a franchise?

Beyond the initial franchise fee, you'll typically pay royalties of 5–9% of revenue, a marketing levy of 1–3%, staff wages, rent, stock, and equipment maintenance. HMRC treats ongoing royalties as allowable business expenses, unlike the initial franchise fee which is considered capital expenditure.