What is a franchise? Definition, costs, pros, and cons

Published Wednesday 22 April 2026

Table of contents

• What is a franchise?
• Types of franchise models
• How do franchises work?
• Franchise costs and fees
• Advantages and disadvantages of franchising
• FAQs on franchises

Key takeaways

• Evaluate franchise opportunities by requesting specific financial data from franchisors, including sales reports, break-even timelines, and common problems faced by new franchisees to make an informed investment decision.
• Budget for comprehensive franchise costs beyond the initial fee, including ongoing royalties of around 5–6% of revenue, marketing fund contributions, and total startup investments that can exceed $326,000.
• Look for franchisors that offer territory rights, comprehensive training programs, and documented operational systems, as these are strong indicators of a well-supported franchise opportunity.
• Recognize that franchise ownership means trading flexibility for proven systems, so you'll follow strict brand standards and operational procedures while gaining access to an established business model and ongoing support.

What is a franchise?

A franchise is a business arrangement where an established company grants you the right to operate under its brand name and proven systems in exchange for fees.

Two key players make up the franchise relationship. Understanding their roles helps you evaluate franchise opportunities:

• Franchisor: the parent company that owns the brand and business model
• Franchisee: the individual or business that purchases the right to operate the franchise

Each franchisee operates as a separate legal entity from the franchisor. You manage your own financial outcomes while the franchisor maintains the brand.

A franchise system includes many independent businesses operating under the same brand. This structure differs from chain stores, where one company owns all locations.

So what is a franchisor?

The franchisor provides more than just the brand name. They offer comprehensive support to help you succeed. They typically supply:

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

This support helps franchisees launch and grow their businesses more quickly than starting from scratch.

And what about the franchisee?

The franchisee runs their franchise as an independent business. As a franchisee, you take on specific responsibilities. This typically involves:

• forming a legal business entity
• paying initial and ongoing franchise fees
• following brand standards for operations and reporting
• meeting legal obligations outlined in the franchise contract

You own and operate the business, but you agree to follow the franchisor's established guidelines.

Types of franchise models

Franchise opportunities exist across many industries beyond food service, with approximately 220 sectors within franchising. Each model offers different advantages depending on your skills and interests. Here are common categories:

• Food and beverage: Restaurants, coffee shops, food trucks
• Retail: Clothing stores, convenience stores, specialty shops
• Services: Cleaning, landscaping, automotive repair, fitness centers
• Professional services: Accounting, legal, marketing, IT support
• Healthcare: Dental practices, physical therapy, senior care
• Education: Tutoring centers, language schools, test preparation

How do franchises work?

Franchises work through a structured process where you apply, get approved, set up your business, and operate under the franchisor's system.

Step 1: Initial application

• Contact the franchisor to express interest
• Meet their requirements for skills, experience, and financial capacity

Step 2: Legal review

• Review the franchise disclosure document (FDD), which can be complex and lengthy, reinforcing the need for professional advice. Many owners are unaware of FTC's guide on purchasing a franchise
• Get independent legal and financial advice
• Negotiate terms if possible

Step 3: Business setup

• Establish your legal business entity
• Complete franchisor training programs
• Set up operations according to brand standards

Step 4: Ongoing operations

• Pay regular franchise fees and royalties
• Follow brand guidelines and operational procedures
• Build revenue to cover costs and generate profit

Franchise costs and fees

Franchise costs include both upfront fees and ongoing payments. Your total investment goes well beyond the initial purchase price. Common franchise fees include:

• Initial franchise fee: a one-time payment for the right to use the brand and systems
• Royalty fees: ongoing payments typically ranging from 5% to 6% of your revenue
• Marketing fund contributions: required payments to support shared advertising efforts

One major franchisor reported an average royalty rate of 5.61% in 2018. Some franchise disclosure documents estimate total initial investments ranging from $160,000 to over $326,000.

Advantages and disadvantages of franchising

Franchising offers a trade-off: you gain proven systems and brand recognition, but you give up some business flexibility. Consider these factors before making your decision.

Key considerations when evaluating a franchise:

• Proven concept: access tested business models and market-validated products
• Higher startup costs: pay franchise fees that increase your initial investment
• Ongoing support: receive training, marketing guidance, and operational assistance
• Limited control: follow strict brand standards and operational procedures

Advantages of a franchise

Proven business concept: Most franchises have demonstrated success across multiple locations. Some franchisors estimate franchisees can earn an average cash-on-cash return of over 25% in their second year.

This gives you:

• Access to established systems and processes
• Reduced risk compared to starting from scratch
• Track record of success in similar markets

Research matters. Ask franchisors about both successful locations and franchisees who haven't met their goals. Many owners have concerns about franchisors' practices but often fail to report them.

• Market-tested products: sell products or services already proven in other markets, reducing demand uncertainty
• Setup support: receive a business plan, operations manual, pricing guidance, and supply chain access
• Training programs: get initial training for you and your staff, with some programs lasting several days at corporate locations
• Troubleshooting help: access support during your first months to solve early challenges
• Operational guidance: follow documented processes, checklists, and recommended software to run daily tasks efficiently
• Growth plans: receive step-by-step guidance from franchisors experienced in helping franchisees scale

Disadvantages of a franchise

• Higher startup costs: expect substantial investments, including franchise fees and brand requirements (see costs section above)
• Immediate staffing needs: hire and manage employees from day one, as many franchises require
• Increased fixed costs: manage regular franchise fees, wages, and loan repayments that raise your break-even point and require careful cash flow management
• Demanding sales targets: meet challenging targets, as low-margin, high-volume models mean your earnings can shift quickly if sales drop
• Limited control: follow strict guidelines on products, pricing, and brand standards, which may limit your ability to adapt the business

Getting started with your franchise finances

To manage your franchise finances, track your fees, compliance costs, and performance metrics to stay profitable.

Keep these financial points in mind:

• Track franchise fees, royalties, and marketing contributions
• Monitor performance against franchisor benchmarks
• Maintain cash flow for ongoing operational requirements
• Plan for territory expansion or additional locations

When you evaluate franchise opportunities or manage your franchise, clear financial visibility helps you succeed. Get one month of Xero free to streamline your franchise accounting and stay on top of your numbers.

FAQs on franchises

Here are answers to common questions about franchising.

What makes a good franchise opportunity?

Look for franchisors with proven track records, comprehensive training programs, and strong ongoing support. Territory rights, transparent financial disclosures, and successful existing franchisees are positive indicators.

How much does it cost to buy a franchise?

Total franchise costs vary widely by industry and brand. Expect to pay an initial franchise fee plus setup costs, with total investments often ranging from $160,000 to over $326,000. You'll also pay ongoing royalties and marketing fees.

Can I negotiate franchise terms?

Some franchisors allow limited negotiation on terms like territory size or payment schedules. However, most franchise agreements use standard terms to maintain consistency across locations. Always review the franchise disclosure document with legal counsel before signing.

How long does it take to become profitable?

Profitability timelines vary by franchise type, location, and your management skills. Some franchises become profitable within the first year, while others may take two to three years. Ask the franchisor for average timelines and review financial performance representations in the FDD.