What Is a Franchise Business? Types, Costs, & How It Works

In the United States, there are around 831,000 franchises. By one estimate, the United States would have 4 million fewer jobs if franchising weren’t an option. As franchise owners, entrepreneurs can run their own location of RE/MAX, Anytime Fitness, McDonald’s, or other global brands.

So, what is a franchise, and how does a franchise work in practice? To learn more about what a franchise is, the costs, requirements, and whether this business is right for you, read on.

What Is a Franchise Business?

A franchise is a business arrangement in which an established brand licenses its business name, trademarks, business model, and systems to a business owner. The established brand is the franchisor, and the independent owner is the franchisee. To run a franchise, the franchisee must pay an initial fee and ongoing royalties. 

Franchisor vs. Franchisee: What Is the Difference?

The franchisor is the established brand that licenses out its brand name. On the other side of the deal, the franchisee pays for the license. While the franchisee owns and operates their business, they must adhere to the franchisor’s strict rules and expectations. 

In the real world, many fast-food places are franchises. For example, Burger King serves as a franchisor. Then the Burger King shop in your area is owned and operated by the franchisee. To operate the franchise, the franchisee must pay ongoing royalties on their sales and an upfront license fee.

How Franchising Differs From a Corporate Chain

People often confuse franchising with corporate chains. Unlike a franchise, a corporate chain is owned and operated by the parent company. All profits from a corporate chain belong to the parent company and not the operator. In a franchise, the franchisee is considered a separate legal entity. The parent company does not own the franchisee. Instead, it licenses it out. This is why different Subway shops might have the same brand name, but they are owned by different entrepreneurs.

A Brief History of Franchising

The earliest forms of franchising began in the 1800s with Isaac Singer’s sewing machine licenses for traveling salespeople. Within a few decades, the concept of franchising continued to evolve with Martha Matilda Harper’s hair salon chain and Coca-Cola’s bottler licensing. By the 1950s and 1960s, Dunkin’ Donuts, McDonald’s, KFC, and other fast food franchises began popping up everywhere. According to the International Franchise Association, the franchise industry grew by about 2.5% in 2025.

How Does Franchising Work?

So, how does franchising work in practice? Franchising is a legal relationship between two entities, governed by two separate documents.

The Franchise Agreement

To understand the meaning of franchise in business contexts, it’s important to start with the franchise agreement. This legal agreement defines the fees and royalty structure, territory rights, renewal conditions, training requirements, termination conditions, and sale conditions. It will also set the term length of the agreement, which is normally between 5 and 20 years. To protect your interests, have this document reviewed by a lawyer before signing.

The Franchise Disclosure Document (FDD)

This document is legally required by the Federal Trade Commission (FTC). Franchisors must provide the FDD to the franchisee at least 14 calendar days before the franchisee pays any money or signs any agreement. The FTC requires 23 disclosures, including information about the franchisor’s background, franchise fees, audited financial statements, and renewal terms. This document is often between 300 and 700 pages long, so it’s a good idea to have an attorney review it for you.

What the Franchisor Provides

While the franchise agreement and FDD can vary, the franchisor is generally expected to provide a few things.

• National and local marketing materials
• Real estate support for selecting a site
• A business model
• Brand recognition
• Training programs
• Ongoing operational support

The quality of support varies significantly from one provider to another, so this is one of the most important things to evaluate before you sign on.

What the Franchisee Is Responsible For

As a franchisee, you also have certain obligations.

• The initial franchise fee
• The physical location and equipment
• Ongoing royalties
• Hiring and managing workers

Franchisees must meet the franchisor’s operating standards, sales goals, and quality benchmarks to maintain their license in good standing. 

Running a franchise isn’t a passive income opportunity. Franchisees carry the financial risk from their operations. While many franchises are successful, some fail.

Types of Franchises

If you’re trying to find out “What is a business franchise?”, it helps to understand the different structural and industry categories available.

Business Format Franchise

This is the most recognizable type of franchise. It is when the franchisor provides the products, brand, and business systems. For example, brands like McDonald’s and Anytime Fitness will have their own operations manual, training program, marketing materials, and tech stack. 

Product Distribution Franchise (Traditional Franchise)

While business-format franchises are more common, product distribution franchises are also quite popular. In this type, the franchisor produces a product and allows a dealer or distributor the right to sell it. For instance, Ford and Toyota manufacture cars that dealerships sell to customers. In terms of sales, this type is larger than business format franchising.

Franchises by Industry: Quick Overview

The cost of franchises can vary based on the industry involved.

• Food and Quick-Service Restaurants: This high-volume industry is often what people think of when they hear the word "franchise." It costs between $200,000 and $1,800,000 to start up.
• Retail: With a retail franchise, you can expect to pay between $50,000 and $1,900,000. 
• Health, Fitness, and Beauty: In this growing category, franchisees can expect to pay $150,000 to $1,400,000 to get started.
• Home-Based and Mobile Services: This industry includes travel, cleaning, and consulting businesses. The typical franchise will cost between $10,000 and $50,000 to set up.
• Childcare and Education: Setting up a daycare or academy as a franchisee can easily cost between $400,000 and $1,000,000 or more.

Single-Unit vs. Multi-Unit vs. Master Franchise

As a franchisee, it helps to understand the differences among single-unit, multi-unit, and master franchises.

Single-Unit Franchise

Most franchises are single-unit franchises with just a single location.

Multi-Unit Franchise

Eventually, the owner of the single-unit franchise may decide to add a new location. Often, franchisors will allow multiple locations under the same brand agreement if the franchisee is experienced. Under an Area Development Agreement (ADA), the franchisee legally commits to opening up a set number of units in a set timeframe.

Master Franchise

Meanwhile, a master franchise grants the franchisee the right to sub-franchise. In effect, they become the regional franchisor.

How Much Does a Franchise Cost?

So, what will a franchise cost? Franchises can cost anywhere from less than $10,000 for a home-based travel franchise to more than $2 million for a major quick-service restaurant. These costs consist of various fees.

Initial Franchise Fee: $20,000 to $50,000

This is a one-time upfront fee paid to the franchisor for use of the brand and business system. While it covers initial training, territory rights, initial support, and the license, it doesn’t include all of your upfront costs. It is generally not refundable.

Total Initial Investment: $10,000 to $5,000,000

You can find the total initial investment cost on Item 7 in the FDD. Depending on the industry, this cost can vary significantly. It includes all of the real estate deposits, equipment, working capital reserves, training travel, and other expenses you have to pay during your first year of operation. The total initial investment cost can range from $10,000 for a home-based business to over $5,000,000 for a hotel franchise.

Ongoing Royalty Fees: 5% to 9% of Gross Sales

The royalty fee is a recurring payment to the franchisor, charged as a percentage of sales. While costs vary by industry, royalty fees typically range from 5% to 9% of your gross sales. Because it is based on revenue and not income, you’ll have to pay royalties whether your business is profitable or not.

Marketing and Advertising Fees: 1% to 5% of Gross Sales

This is another fee that varies significantly across industries and franchisors. In most cases, you’ll pay between 1% and 5% of your gross sales to fund national and regional advertising campaigns. The fees are collected from every franchise and then used for brand-level marketing. In some cases, franchises may be expected to spend money on independent marketing.

Renewal and Transfer Fees

Franchise agreements generally have a fixed term of around 5 to 20 years. When you reach the end of the term, you’ll need to pay a renewal fee of 10% to 50% of the current going rate for initial franchise fees. 

If you decide to sell your franchise, you must pay a transfer fee of $5,000 to $25,000. Then, you’ll need to secure the franchisor’s approval of the buyer.

Advantages of Owning a Franchise

What is a franchise useful for? Is it a profitable business investment? 

Starting a franchise can offer several key benefits.

Proven Business Model and Reduced Failure Risk

When you operate a franchise, you’re not taking a risk on a new, unproven model. Franchisors have already refined the business model to reduce startup mistakes. While your success is never guaranteed, it helps to have a tested business model.

Brand Recognition and Built-In Customer Trust

If you fly to Taiwan, you can walk into a Starbucks and buy the same peppermint mocha that you would get in the United States. Customers feel comfortable with known brands, so they gravitate to them. While a new coffee shop has to spend money on marketing to build brand awareness, a Dunkin’ Donuts franchisee operates a household-name franchise.

Training and Ongoing Support

A franchisor provides initial training at your location or the corporate training center to help you get started. Afterward, you’ll receive ongoing support in the form of field visits, marketing materials, or a helpline. This type of support is invaluable for new business owners and is one of the key benefits that distinguish franchises from other business models. However, it can vary from one franchisor to another, so always check the training program offered before signing the franchise agreement.

Purchasing Power and Supply Chain Access

When you add to your inventory, you can leverage the franchisor’s greater purchasing power. This often means you can save more on buying equipment, materials, and supplies.

Easier Access to Financing

Financial institutions generally consider franchises to be lower risk than independent startups. This leads to an easier underwriting process. Many franchisors also have special relationships with preferred lenders, which can make financing easier. For franchise investments, most companies opt for SBA 7(a) or SBA 504 loans.

Disadvantages of Owning a Franchise

While there are benefits to running a franchise, there are also some limitations to this model. 

High Upfront Cost and Ongoing Fee Obligations

Established brands charge significant franchise fees. Even after you set up the business, you’ll have to continue paying royalty fees and marketing fees.

Limited Operational Freedom

Your franchise agreement will specifically detail the type of equipment, pricing structures, suppliers, uniforms, and marketing materials you must use. Even if you have a brilliant marketing plan or a new product idea, you won’t be allowed to use it.

Dependent on the Franchisor’s Brand Reputation

The franchisor’s brand reputation directly impacts your company’s revenue. No matter how efficient or popular your franchise is, your revenue can take a hit if the franchisor is involved in a scandal.

Franchise Agreement Terms Favor the Franchisor

The franchisor’s lawyers generally write a franchise agreement, so it naturally benefits the franchisor. It has specific clauses that allow it to terminate the agreement for not complying with the operational requirements. Unfortunately, franchisees have minimal negotiating power with franchisors.

Franchise vs. Starting Your Own Business: Which Is Right for You?

After learning more about the answer to “What’s a franchise?”, the next step is understanding whether an independent startup or a franchise is the right choice for you.

When a Franchise Makes Sense

A franchise makes more sense in a few key scenarios. 

• You want to lower your risk level by getting a proven business model.
• You don’t want to build everything from scratch.
• You want to leverage the brand recognition.
• You need structured training to get started in a new industry.
• You have the capital to cover the initial investment.

When an Independent Business Makes Sense

In other instances, it may make more sense to start a business yourself.

• You already have a product or service idea that doesn’t fit within a franchise model.
• You need more operational control.
• You don’t want to pay royalties.
• You already have industry experience and don’t need extra training.
• You are comfortable with the uncertainty that comes with a new enterprise.

Key Questions To Ask Before Buying a Franchise

Buying a franchise is a big decision, and it isn’t the right choice for everyone. To help you evaluate a potential franchise opportunity, always ask these questions first.

• What is my franchise territory?
• On average, what do existing franchises earn in annual revenue and net income? 
• How many franchisees have left the franchisor’s system in the last three years?
• Is the franchisor’s FDD registration current? 
• How are disputes handled with the franchisor? 
• Is the brand expanding or shrinking?
• Can I talk to a current or former franchisee?
• Is there a demand for this franchise in your community? Is the franchise a temporary fad?

Verifying a Franchise Opportunity Before You Invest

Before you commit any money to a new franchise, you must conduct due diligence.

Review the FDD and Franchise Agreement With Professionals

The FDD is a complex legal document that can run up to 700 pages. It should always be reviewed by an attorney experienced in franchising. Additionally, you should hire an accountant to review all of the financial disclosures in Item 19 of the FDD. You can expect to pay around $1,500 to $5,000 for this step.

Verify the Franchisor's Business Entity and Registration Status

Confirm that the franchisor is a registered business entity in good standing. You can use EntityCheck’s Secretary of State (SOS) Business Search to look up the franchisor’s entity type, ownership details, filing information, and registration status. It’s an immediate red flag if the franchisor isn't in good standing or has unresolved legal filings.

With EntityCheck’s Instant Professional License Lookup, you can see what types of professional licenses are required by the franchise. You can look at how other franchises are set up to get a better understanding of which professional licenses are needed for your business.

Talk to Existing and Former Franchisees

The best way to assess the quality of the franchisor’s support is to talk to current and former franchisees. This contact information should be automatically included in Item 20 in the FDD. To discover hidden issues, it helps to talk to former franchisees who left voluntarily.

Frequently Asked Questions

What is a franchise disclosure document? And how much will a franchise cost? To learn the answers to frequently asked questions, read on.

What is the difference between a franchisor and a franchisee?

The franchisor is the parent company that licenses out its brand. Meanwhile, the franchisee is an independent owner who pays to use that brand. While the franchisee owns and operates their location, they must adhere to the franchisor’s rules and pay royalties.

How much does it cost to buy a franchise?

It can range from industry to industry. Established brands tend to cost more. While a home-based franchise’s total investment cost can be as little as $10,000, a quick-service restaurant from a major brand can cost more than $2 million. 

What is an FDD in franchising?

The FDD is also known as the franchise disclosure document. The FTC requires franchisors to give it to prospective franchisees 14 calendar days before any agreement can be signed or any money paid. Franchisors are required to include 23 different items of information. Because this document is so complex, it should always be reviewed by an attorney.

Is owning a franchise profitable?

It can be. It depends on the brand, your location, and other factors. Quick-service restaurants often bring in just 3% to 9%, while service franchises often achieve 12% to 22%. Even if your franchise is not profitable, you will still have to pay royalties on any revenue generated.

Can I own a franchise with no industry experience?

Yes, you can. In fact, many business owners start franchises with little industry experience. Franchisors provide initial training programs and ongoing support that help owners learn how to run their businesses successfully.

What is a royalty fee in a franchise?

A royalty is the percentage of gross sales that the franchisee must pay to the franchisor. These are often paid monthly. Depending on the industry and franchisor involved, the amount paid can range from 5% to 9% of gross sales