The Complete Guide to Franchises

Dominique Harroch
Thu, 05 Jun 2025 20:22:31 +0000
Franchises, Franchise-model, Franchisee, Franchisor, Franchise-business-ownership, Starting-a-business, Starting-a-franchise, Buying-a-business, Franchise

What Is a Franchise?

A franchise is a type of license that allows a franchisee to operate a business using the franchisor's trademarks, branding, and business methods. The franchisor provides the framework for business success through established systems, operational guidelines, and brand recognition. In return, the franchisee pays an initial franchise fee and ongoing royalties.

This business model has evolved into a powerful pathway for entrepreneurs who want the benefit of an existing brand while running their own business. Franchising is especially appealing because it balances independence with support. Franchisees enjoy access to training, a known product or service, national marketing campaigns, and ongoing assistance—advantages that startups often lack.

Franchising isn't new. It dates back to the 19th century when companies like Singer Sewing Machines and Coca-Cola used licensing systems to expand distribution. Today, franchises span dozens of industries and range from small home-based opportunities to global fast-food giants.

Note: The Federal Trade Commission (FTC), the nation's consumer protection agency, regulates franchising through the FTC Franchise Rule, which is designed to help you make an informed decision about investing in a franchise opportunity.

Costs Involved in Franchising

Before diving into a franchise, it's essential to understand the full scope of costs:

Franchise Fee: This is a one-time upfront payment for the rights to operate under the franchisor's name. It generally ranges from $10,000 to $50,000 but can exceed $100,000 for premium brands.

Startup Costs: These include build-out expenses, equipment purchases, signage, and working capital. These costs can vary widely depending on the franchise type—from just a few thousand dollars for a home-based business to over $1 million for a full-service restaurant.

Royalty Fees: Most franchisors charge either monthly royalties as a percentage of gross sales, typically between 4% and 8%, or a set monthly fee. These fees fund continued access to systems, support, and brand resources.

Marketing Fees: Many systems require contributions to a national or regional advertising fund, typically an additional 1% to 4% of sales.

Training and Support Fees: While some franchisors include training in the franchise fee, others charge separately for training programs, travel, and materials.

Lease Payments: Security deposit and monthly rent on leased premises.

Keep in mind that there are also recurring costs like utilities, payroll, software licenses, and insurance. It's vital to plan for contingencies and cash flow shortfalls, especially in the first 6 to 12 months of operation.

Examples of Well-Known Franchises

Here are some notable and widely recognized franchise systems across various industries:

McDonald's: A global leader in fast food with a proven system and strong brand recognition.

The UPS Store: A top retail shipping, postal, and printing services brand.

Subway: Known for its customizable sandwiches and worldwide presence.

Anytime Fitness: A 24/7 gym model catering to convenience and fitness trends.

7-Eleven: A convenience store franchise with a robust support system and global reach.

Great Clips: Specializes in affordable, no-appointment-needed haircuts.

FASTSIGNS: Offers B2B services like signage, marketing, and visual communications.

Servpro: Specializes in cleaning and restoration for commercial and residential clients.

Ace Hardware: A retailer cooperative model offering support and independence.

Jersey Mike's Subs: Known for fresh subs and community involvement.

Risks of Franchising

Although franchising reduces some of the risks associated with starting from scratch, it doesn't eliminate them. Key risks include:

Limited Flexibility: Franchisees must follow the franchisor's playbook. Innovation is often restricted to maintain brand consistency.

Reputation Risk: A scandal or failure in one franchise location can affect the entire brand.

Hidden or Underestimated Costs: Initial estimates may fall short due to regional variables or economic shifts.

Long-Term Legal Commitments: Franchise agreements can span 10–20 years and often contain strict renewal and termination clauses.

Over-Saturation: When too many franchise units exist in a market, cannibalization can reduce profitability.

Contractual Obligations: Franchise contracts last only for the number of years stated in the contract. You can lose the right to your franchise if you don't comply with the contract, and you won't have a right to renew unless the franchisor gives you that right.

Due diligence and legal review of the Franchise Disclosure Document (FDD) and franchise agreement are essential to avoid costly surprises.

Franchisor Controls

To ensure uniformity, franchisors usually control how franchisees conduct business. These controls may significantly restrict your ability to exercise your own business judgment. A franchisor may control:

Site Approval: Many franchisors retain the right to approve sites for their outlets and may not approve a site you select. Some franchisors conduct extensive site studies as part of the approval process, and a site they approve may be more likely to attract customers.

Design or Appearance Standards: Franchisors have design or appearance standards to ensure a uniform look among their outlets. Some franchisors require periodic renovations or design changes; complying with these requirements may increase your costs.

Restrictions on Goods and Services You Sell: Franchisors will have a say in the goods and services you sell. For example, if you own a restaurant franchise, you may not be able to make any modifications to your menu.

Restrictions on Method of Operation: Franchisors may require that you operate in a particular way. They may dictate hours, pre-approve signs, employee uniforms and advertisements, or demand that you use certain accounting or bookkeeping procedures.

Restrictions on Sales Area: A franchisor may limit your business to a specific location or sales territory. If you have an "exclusive" or "protected" territory, it may prevent the franchisor and other franchisees from opening competing outlets or serving customers in your territory, but it may not protect you from all competition by the franchisor. For example, the franchisor may have the right to offer the same goods or services in your sales area through its own website, catalogs, other retailers, or competing outlets of a different company-owned franchise.

Franchise Types

Franchising remains a cornerstone of the U.S. economy. According to the International Franchise Association (IFA), franchises supported over 8.4 million jobs and produced $860 billion in economic output in 2024. Here's a closer look:

Food and Beverage (36% of all franchises)

Investment Range: $250,000–$1,000,000+

Examples: McDonald's, Subway, Dunkin'

Notes: High brand recognition; tight margins and labor intensive.

Retail (17%)

Investment Range: $100,000–$300,000

Examples: 7-Eleven, Ace Hardware, The UPS Store

Notes: Steady foot traffic required; real estate is a key factor.

Health and Fitness (12%)

Investment Range: $75,000–$500,000

Examples: Orangetheory Fitness, Anytime Fitness, Planet Fitness

Notes: Recurring revenue through memberships; seasonal fluctuation.

Business Services (11%)

Investment Range: $50,000–$150,000

Examples: Jan-Pro, TeamLogic IT, FASTSIGNS

Notes: Often home-based; requires networking and B2B sales.

Personal Services (10%)

Investment Range: $80,000–$200,000

Examples: Great Clips, Kiddie Academy, Massage Envy

Notes: Strong demand in wellness sectors.

How to Finance a Franchise

Here are some financing options for a franchise:

SBA Loans: The 7(a) loan program is the most popular. The SBA Franchise Directory lists eligible brands.

Bank Loans: Some banks have franchise-specific programs.

Franchisor Financing: Some offer loans directly or through partners.

Alternative Lenders: Quick but costly, suitable for smaller needs.

ROBS (Rollover for Business Startups): Use 401(k)/IRA funds to invest without penalty.

Deck for Lenders

You will want to prepare a pitch deck for your franchise lender, which should include:

Executive Summary

Franchise Overview and Brand Value

Market Research and Competitive Landscape

Buildout and Startup Costs

Financial Projections (3-5 years)

Break-even Analysis

Borrower Profile (resume, credit, net worth)

Use of Proceeds

Risk Mitigation Strategies

FDD Highlights

Presenting a polished and data-driven package improves your odds of loan approval.

Understanding the Franchise Disclosure Document (FDD)

The Franchise Disclosure Document is a comprehensive document outlining the key points of a franchise. It contains 23 detailed sections mandated by the Federal Trade Commission (FTC). Under the FTC's Franchise Rule, you must receive it at least 14 days before signing any contract or paying any money to the franchisor or an affiliate of the franchisor. You have the right to ask for—and get—a copy of the FDD once the franchisor has received your application and agreed to consider it.

How to Obtain It

Directly from the franchisor

Through legal or franchise consultants

Occasionally online through research platforms

Key Items to Review

Item 1: Corporate history and organization

Item 2: Business backgrounds of key executives

Item 3: Past or pending lawsuits

Item 4: Bankruptcy information for the franchisor, its predecessors, and affiliates

Item 5-7: Fees and full investment range

Item 8: Supplier restrictions and rebates

Item 11: Franchisor's support, training, and advertising programs

Item 12: Territory rights and exclusivity

Item 17: Renewal, termination, transfer, and dispute resolution

Item 19: Earnings claims—read carefully!

Item 20: Unit growth, closures, and contact information for current and former franchisees

Item 21: Financial statements

We strongly recommend hiring a franchise attorney to walk you through the FDD. Red flags include excessive litigation, limited support, or high turnover among franchisees.

Updated FDD Information

Be aware that the franchisor's disclosures may change between the time you receive the FDD and the time you sign the franchise agreement. For example, the franchisor may have updated its FDD each calendar quarter and must update the FDD after its fiscal year ends.

You have the right to ask for a copy of any updated information before you sign the franchise agreement. An updated FDD may reveal new lawsuits were filed by or against the franchisor, changes in the franchisor's management or training teams, more current financial performance data, or other useful information.

Terminations and Renewals

A franchisor can end your franchise agreement for a variety of reasons, including your failure to pay royalties or abide by performance standards and sales restrictions. Many franchise contracts will give you a chance to "cure" an occasional failure to comply (like making one late payment) but keep the right to terminate your franchise for other failures. If your franchise is terminated, you're likely to lose your entire investment.

Franchise agreements may run for as long as 20 years. Renewals are not automatic. At the end of the contract term, the franchisor may decline to renew or may offer a renewal that doesn't have the same terms and conditions as your original contract.

For example, the franchisor may raise the royalty payments, impose new design standards and sales restrictions, or reduce your territory. Any of these changes may result in higher costs, reduced profits, or more competition from company-owned outlets or other franchisees.

Comparison Tools for Evaluating Franchises

Evaluating franchises takes more than browsing a few websites. Use a mix of tools and analysis:

FDD Analysis: Dive into Item 19 and Item 21

Satisfaction Surveys: Franchise Business Review

ROI Calculators: Estimate time to profitability

Comparison Sites: FranchiseDirect, FranchiseGator, Entrepreneur’s Franchise 500

Consultants: Professional guidance can be worth the fee

Better Business Bureau: Check with the local BBB in the cities where the franchisor has its headquarters for any complaints

Government Resources: Check with your state Attorney General's office, office of consumer affairs, or state securities division for additional protections

Evaluating Potential Earnings

When evaluating earnings claims in Item 19 of the FDD, consider:

Is the Earnings Claim Typical? If a franchisor claims franchisees earned $50,000 last year, is this representative of typical earnings? The FDD should tell you how many franchises were surveyed and the percentage reporting at that level.

Average Income vs. Individual Performance: An average income of $75,000 might be inflated by a few very successful franchises.

Gross Sales vs. Net Profits: High gross sales might still result in losses due to high overhead and expenses.

Geographic Relevance: Earnings may vary by location. Ask if data comes from franchisees in your area.

Different Backgrounds: Franchisees have different skills and education levels; others' success doesn't guarantee yours.

Be aware that franchisors are not required to provide earnings information and many franchisors will leave Item 19 blank.

Protecting Your Rights

Franchisors may ask you to sign a statement confirming whether you received any earnings or financial performance representations during the buying process.If they provided information about potential earnings, report it fully on this statement. If you don't, you may be waiving any right to contest the earnings representations that were made to you and that you used to make your decision to buy.

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Talking to Current and Former Franchisees

One of the most reliable ways to verify the franchisor's claims is to talk with current and former franchisees. Item 20 of the FDD must provide contact information for current franchisees and those who have left the system during the franchisor's last fiscal year.

Questions for New Franchisees (1-2 years)

What was their total investment?

Were they able to open their outlet in a reasonable time?

Were they satisfied with the franchisor's training and opening assistance?

Does the franchisor provide ongoing help as promised?

Have they been able to break even?

Questions for Established Franchisees (5+ years)

How long did it take to break even, earn a reasonable income, and recoup their investment?

Is the franchisor fulfilling its contractual obligations?

What problems do they have with the franchisor?

Would they invest in another outlet?

Are they satisfied with the advertising program and supplier arrangements?

Former Franchisees

Try to talk to former franchisees, although some may have signed confidentiality agreements. Ask:

What problems did they have?

Did they break even or make a profit?

How long did they operate the outlet?

Why did they leave the franchise system?

Franchisee Associations

Both franchisor-sponsored and independent franchisee associations can provide valuable information about the franchisor-franchisee relationship. Ask association members about:

Common system problems or issues they discuss

Successfully resolved system problems

Challenges franchisees face in operating their outlets

Any ongoing issues with the franchisor

Key Factors for Success

Location Strategy: High-traffic areas or underserved markets

Managerial Capability: Strong leadership equals strong teams

Franchisor Support: Look for training, tech tools, and field reps

Product-Market Fit: Is the brand suited to your region?

Exit Options: Can you sell or transfer the business?

Additional Sources of Information

Accountants and Lawyers

An accountant can help you understand financial statements, develop a business plan, assess earnings projections, and find a franchise suited to your resources and goals. A lawyer experienced in franchise matters can help you understand contract obligations. Legal problems that arise after signing can be very expensive to fix.

Banks and Financial Institutions

Bank lenders may provide Dun & Bradstreet reports or financial profiles of the franchisor. They might obtain sales and profit information the franchisor won't give you directly. However, remember that bank approval of a franchise loan doesn't necessarily mean the franchise is a good investment.

Step-by-Step Franchise Checklist

1. ☐ Understand what a franchise is

2. ☐ Decide if franchising fits your entrepreneurial and life goals

3. ☐ Research different franchise models and industries

Evaluate the Costs of Franchising

4. ☐ Review typical franchise fees ($10,000-$50,000)

5. ☐ Understand startup costs ($50,000-$1M+)

6. ☐ Account for royalty fees (4-8% of gross sales)

7. ☐ Include marketing fees (1-4%)

8. ☐ Check for any additional training costs

Assess the Risks of Franchising

9. ☐ Consider your comfort level with lack of control

10. ☐ Evaluate the reputation risk of the franchisor

11. ☐ Plan for potential cost overruns

12. ☐ Carefully review contractual obligations

13. ☐ Analyze the risk of market saturation

Research Industry Segments

14. ☐ Explore Food and Beverage franchises ($250K-$1M)

15. ☐ Explore Retail franchises ($100K-$300K)

16. ☐ Explore Health and Fitness franchises ($75K-$500K)

17. ☐ Explore Business Services franchises ($50K-$150K)

18. ☐ Explore Personal Services franchises ($80K-$200K)

Plan Franchise Financing

19. ☐ Investigate SBA Loans

20. ☐ Compare traditional bank loans

21. ☐ Ask about franchisor financing options

22. ☐ Consider ROBS plans (retirement funds)

23. ☐ Research online lenders (Lendio, OnDeck, etc.)

Build a Lender Deck

24. ☐ Write an executive summary

25. ☐ Describe the franchise brand overview

26. ☐ Identify the market opportunity

27. ☐ Create a startup budget

28. ☐ Include financial projections

29. ☐ Share your personal background

30. ☐ Report credit score and net worth

31. ☐ Highlight key points from the FDD

Review the Franchise Disclosure Document (FDD)

32. ☐ Obtain the FDD (from franchisor or online)

33. ☐ Review Item 1: Franchisor Identity

34. ☐ Review Item 3: Litigation History

35. ☐ Review Items 5-7: Fees and Costs

36. ☐ Review Item 12: Territory

37. ☐ Review Item 19: Financial Performance Representations

38. ☐ Review Item 20: Unit Growth

39. ☐ Review Item 21: Financial Statements

Use Franchise Evaluation Tools

40. ☐ Analyze the FDD for transparency and metrics

41. ☐ Review franchisee satisfaction surveys (e.g., Franchise Business Review)

42. ☐ Use ROI calculators

43. ☐ Browse franchise directories (FranchiseDirect, FranchiseGator, Entrepreneur)

44. ☐ Get help from advisory services or franchise consultants

Get Expert Advice

45. ☐ Learn from successful franchisees

46. ☐ Network with other franchise owners in your industry

Evaluate Success Factors

47. ☐ Assess the location potential

48. ☐ Assess your management capabilities

49. ☐ Evaluate the franchisor’s support system

50. ☐ Determine market fit

51. ☐ Plan an exit strategy

Make Your Decision

52. ☐ Reassess if franchising aligns with your financial and lifestyle goals

53. ☐ Make a final decision and prepare for launch

Final Thoughts on Franchises

Franchising offers a compelling blend of independence, support, and scalability. But it's not a shortcut to success. Like any business, it requires commitment, research, and capital. The more you prepare—through expert advice, financial analysis, and conversations with experienced franchisees—the better your chances of thriving.

Whether you plan to run a single unit or build a multi-unit empire, franchising can be a transformative journey. Treat it like a business investment, not a turnkey dream.

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