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

Published Tuesday 9 June 2026

Table of contents

• What is a franchise?
• How do franchises work?
• Types of franchises
• How much does a franchise cost?
• Advantages of franchising
• Disadvantages of franchising
• Franchise agreements and legal considerations
• Questions to ask before buying a franchise
• Doing your due diligence
• Manage your franchise finances with Xero

Key takeaways

• A franchise is a licensing arrangement where a franchisor grants a franchisee the right to operate a business under an established brand, systems, and support structure in exchange for fees and royalties.
• Franchise costs in South Africa range from under R100,000 for smaller operations to over R1 million for major brands, with ongoing royalties typically between 4% and 12% of revenue.
• Franchises tend to have higher survival rates than independent startups, with research showing that around 92% of franchise businesses remain open after 2 years.
• Before committing, thorough due diligence on the franchisor's track record, financial requirements, and legal obligations is essential to making a confident decision.

What is a franchise?

If you're looking to start a business with a proven model behind you, franchising could be worth exploring. A franchise is a licensing relationship where a business owner (the franchisor) grants another party (the franchisee) the right to operate under their brand name, using their systems, products, and intellectual property. In return, the franchisee pays fees and agrees to follow the franchisor's established guidelines.

This arrangement gives you access to a recognised brand and a tested way of doing business, while the franchisor expands their reach without funding every new location themselves. Understanding the roles of each party is the first step.

What is a franchisor?

A franchisor is the business that owns the brand, trademarks, and operating systems. They develop the business model and then license it to franchisees in exchange for fees and ongoing royalties. The franchisor typically provides training, marketing support, and operational guidance to help each franchisee succeed.

What is a franchisee?

A franchisee is the individual or company that purchases the right to operate under the franchisor's brand. As a franchisee, you run your own business day to day, but you follow the franchisor's systems and standards. A franchisee is a separate legal entity from the franchisor. You own and operate your outlet independently, even though you trade under their name. For a deeper look at what's involved, read the guide to becoming a franchisee.

How do franchises work?

The franchise business model follows a structured process, from initial enquiry through to running your own outlet.

You start by contacting a franchisor whose brand and industry interest you. They'll share information about the opportunity, including the investment required, territory availability, and what's expected of franchisees. If both sides are a good fit, you move to the formal application stage.

Once approved, you sign a franchise agreement. This contract sets out your rights and obligations, the territory you'll operate in, the fees you'll pay, and the support the franchisor will provide. After signing, you typically go through a training programme before setting up and opening your business.

The fee structure is a core part of the model. You'll usually pay an initial franchise fee upfront, which covers the right to use the brand and access the franchisor's systems. On top of that, most franchise agreements include ongoing royalties, typically calculated as a percentage of your revenue, and a marketing levy that funds national or regional advertising. These recurring payments are how the franchisor generates revenue from the network.

Types of franchises

Franchising comes in different forms, and knowing the distinction helps you choose the right opportunity. The 2 main types are business format franchising and product distribution franchising.

Business format franchising is the most common model. The franchisor provides a complete system for running the business, including branding, operations manuals, training, marketing, and ongoing support. Fast food restaurants, fitness centres, and cleaning services are well-known examples.

Product distribution franchising focuses on the right to sell a franchisor's products rather than replicate an entire business system. You'll often see this in the automotive, beverage, and fuel industries, where a dealer or distributor sells branded goods under an agreement with the manufacturer.

In South Africa, franchising spans a wide range of sectors. According to the Franchise Association of South Africa (FASA), there are over 865 franchise systems operating across 14+ business categories in the country, supporting more than 45,000 outlets. Common sectors include fast food and restaurants, retail, health and beauty, education, automotive services, and business-to-business services.

How much does a franchise cost?

Understanding the full financial picture is essential before you commit to a franchise. Costs vary significantly depending on the brand, industry, and scale of the operation.

The initial franchise fee is a once-off payment that gives you the right to operate under the brand. In South Africa, this can range from under R100,000 for smaller, home-based franchises to well over R1 million for major national or international brands.

Ongoing royalties are regular payments made to the franchisor, usually calculated as a percentage of your monthly revenue. These typically fall between 4% and 12%, though the exact figure depends on the franchise system. A marketing levy, often an additional 1% to 4% of revenue, funds collective advertising and brand promotion.

Beyond fees, you'll also need to budget for setup costs. These include fitting out your premises, purchasing equipment, initial stock, signage, and working capital to cover expenses in the early months. For a detailed breakdown, see the guide to startup costs. Some franchisors provide detailed cost breakdowns in their disclosure documents, so request these early in the process.

Advantages of franchising

Franchising offers several benefits that can give you a stronger start compared to building a business from scratch. Here are some of the key advantages.

Proven business model

You're working with a model that's already been tested and refined. The franchisor has done the hard work of figuring out what works, so you can focus on execution rather than experimentation.

Brand recognition

Starting under an established brand means you don't have to build awareness from zero. Customers already know and trust the name, which can help you attract business from day 1.

Training and support

Most franchisors provide comprehensive training before you open, along with ongoing support in areas like operations, marketing, and supply chain management. This is especially valuable if you're new to running a business.

Higher survival rates

Franchises tend to have higher survival rates than independent startups. Research shows that around 92% of franchise businesses remain open after 2 years, compared to lower success rates for independent ventures. The combination of a proven system, brand strength, and franchisor support contributes to this.

Easier access to finance

Lenders are often more willing to finance a franchise than an unproven startup. The established brand, track record, and documented systems reduce the perceived risk, which can make it easier for you to secure funding.

Buying power

As part of a franchise network, you benefit from collective purchasing. The franchisor negotiates supplier deals on behalf of the entire network, which means lower costs on stock, equipment, and services than you'd likely achieve on your own.

Disadvantages of franchising

Franchising isn't right for everyone. Before signing up, consider these potential drawbacks.

Limited autonomy

You must follow the franchisor's rules, systems, and brand guidelines. If you're someone who wants full creative control over your business, the restrictions of a franchise model may feel constraining.

Ongoing costs

Royalties and marketing levies are payable regardless of how your business is performing. These recurring fees reduce your profit margin and are a fixed obligation for the duration of your agreement.

Reputation risk

Your business is tied to the broader brand. If the franchisor or another franchisee damages the brand's reputation, your outlet can be affected even though you've done nothing wrong.

Contractual commitments

Franchise agreements are long-term contracts, often spanning 5 to 20 years. Exiting early can be costly and complex, so you need to be confident in your commitment before signing.

Restrictions on sale or transfer

If you decide to sell your franchise, the franchisor typically has the right to approve the buyer. Some agreements include first-right-of-refusal clauses, which limit who you can sell to and when.

Franchise agreements and legal considerations

The franchise agreement is the legal foundation of your relationship with the franchisor. Understanding what it contains protects your interests and sets clear expectations.

A typical franchise agreement covers the rights granted to you, the territory you'll operate in, the fees and payment schedule, performance standards, training requirements, and the conditions for renewal or termination. Contract lengths usually range from 5 to 20 years, depending on the franchise system and the investment involved.

Key clauses to review carefully include exclusivity provisions, non-compete obligations, and what happens if either party wants to exit the agreement. Pay close attention to renewal terms; some agreements don't guarantee renewal, which could leave you without a business at the end of the term.

In South Africa, the Consumer Protection Act (CPA) provides specific protections for franchisees. The CPA requires franchisors to provide a disclosure document at least 14 days before you sign the agreement or make any payment. This document must include the franchisor's financial statements, details of fees, and information about the franchise system's history and performance.

FASA also maintains a code of ethics that member franchisors commit to following. While FASA membership isn't compulsory, choosing a FASA-registered franchisor adds an extra layer of accountability. Have a franchise attorney review the agreement before you sign.

Questions to ask before buying a franchise

Asking the right questions upfront helps you avoid costly surprises and choose a franchise that matches your goals. Work through these before making any commitment.

• What is the total initial investment, including franchise fee, setup costs, and working capital?
• What ongoing fees will you pay, such as royalties, marketing levies, and technology fees?
• What training and support does the franchisor provide, both initially and on an ongoing basis?
• How many franchisees are currently in the network, and how many have left in the past 3 years?
• Can you speak to existing franchisees about their experience?
• What territory protections and renewal conditions are included in the agreement?
• What are the average revenues and profitability of existing outlets?

Doing your due diligence

Taking the time to investigate thoroughly before you invest can save you from a costly mistake. Due diligence is your opportunity to verify everything the franchisor has told you.

Start by reviewing the franchise disclosure document in detail. Check the franchisor's financial health, the growth trajectory of the network, and whether the franchisor has faced any legal disputes. Compare the information in the disclosure document with what existing franchisees tell you about their real-world experience.

Visit operating franchise outlets in person if you can. Observe the customer experience, speak with staff, and get a feel for how the business runs day to day. This gives you practical insight that no document can fully capture.

Engage professionals early. A franchise attorney can review the agreement and flag risks you might miss. An accountant can help you model the financials, assess cash flow projections, and determine whether the franchise is a viable investment for your situation.

Finally, evaluate your own readiness. Franchising requires commitment, discipline, and the willingness to follow a system. Be honest with yourself about whether this model suits your working style and long-term goals. If you're still exploring your options, a starting a business checklist can help you compare franchising with other paths.

Manage your franchise finances with Xero

Strong financial management is one of the biggest factors in franchise success. From tracking royalty payments and marketing levies to monitoring daily cash flow, having clear visibility over your numbers helps you make confident decisions. Good business accounting practices from day 1 set the foundation for long-term profitability.

Xero's cloud-based accounting software gives you real-time visibility into cash flow, expenses, and profitability, so you can focus on growing your franchise. Get one month free.

FAQs on franchising

Here are answers to some frequently asked questions about franchising.

Who bears more risk in a franchise, the franchisor or the franchisee?

The franchisee typically carries more personal financial risk because they invest their own capital, sign the lease, and take on operational debt. If the business fails, the franchisee absorbs the loss. The franchisor's risk is reputational and systemic; a string of failing outlets can erode brand value and make it harder to attract new franchisees.

How do you finance a franchise purchase?

Most franchisees use a combination of personal savings, bank loans, and sometimes investor funding. South African banks are often more willing to finance a recognised franchise brand than an independent startup because the proven model reduces lending risk. Some franchisors also offer in-house financing or payment plans for the initial franchise fee.

What red flags should you watch for when evaluating a franchise?

Be cautious if the franchisor refuses to share financial performance data, has a high franchisee turnover rate, or pressures you to sign quickly without time for due diligence. A missing or incomplete CPA disclosure document is a serious warning sign. Speaking to former franchisees who have left the network can reveal issues the franchisor may not disclose voluntarily.

What happens at the end of a franchise agreement?

When your agreement expires, you may have the option to renew, but renewal is not always guaranteed. Some franchisors charge a renewal fee or require you to refurbish your premises to current brand standards before extending. If the agreement ends without renewal, you typically lose the right to trade under the brand, which makes it essential to understand renewal terms before you sign the initial contract.

Do you need business experience to buy a franchise?

Not necessarily. Many franchisors specifically target first-time business owners because the franchise model provides the structure and training that an independent startup would not. That said, skills in people management, customer service, and basic financial literacy give you a stronger foundation. Some franchisors require industry-specific experience for more complex operations.