- Why companies franchise, and why people buy in
- The three payments in a franchise agreement
- Who does what: franchisor and franchisee
- The disclosure document, if you're buying in the US
- How buying a franchise works, step by step
- Franchise advantages and drawbacks at a glance
- Where I come in
- My take on buying a franchise
- Frequently asked questions
A franchise is a contract in which one business, the franchisor, lets another, the franchisee, use its brand, trademarks, systems and processes to run its own outlet. In return the franchisee pays an upfront fee and then shares a cut of its gross income as a royalty, according to Corporate Finance Institute (CFI).
CFI describes the franchisee as a dealer. You get the right to use the business model, including the brand name, and to sell its products and services. What you don't get is a blank page: the model, the name and the rules come as a package.
Why companies franchise, and why people buy in
CFI says franchising is a way for a company with a proven business model to scale and win more of a market without opening every outlet itself. For the franchisee, the draw is that you don't launch from scratch, and you don't have to spend your own resources building a brand and advertising it.
CFI names McDonald's, Dairy Queen, Taco Bell, Denny's, Jimmy John's, Subway, 7-Eleven and Anytime Fitness among the top franchises worldwide. It says the model first appeared in the US after the Civil War and grew in the 1950s and 1960s. A brand like that is a competitive advantage you're renting rather than building.
The three payments in a franchise agreement
This is the bit first-time buyers underestimate. It isn't one fee. CFI says a franchise agreement typically has three categories of payment.
| Payment | What it covers (CFI) | When |
|---|---|---|
| Lump sum fee | The rights to the brand, the model and the intellectual property | Once, at the start |
| Training, equipment and advisory payments | Support from the franchisor | As agreed in the contract |
| Royalty or licensing fee | A share of the franchisee's gross income | Ongoing, every month |
The royalty is the one to watch, because it's charged on revenue, not on profit. You pay it in a good month and you pay it in a bad one.
CFI gives a sense of scale using McDonald's. In CFI's example, the estimated total cost to launch one of its franchises ranges from $1 million to $2.2 million, and the franchisee remits 4% to 8% of its revenue to the franchisor each month in royalties. Those are US dollar figures from CFI, as of October 2026. Your own figures will differ, but the structure, a heavy start-up cost followed by royalties, is the same in whatever currency you trade.
Who does what: franchisor and franchisee
CFI splits the roles clearly, and it's worth reading them as a job description before you sign.
| The franchisor | The franchisee |
|---|---|
| Gives business support: training, equipment and know-how | Is free to hire, pay and set employment standards |
| Supplies advertising and promotion material | Keeps the model consistent with every other location |
| Runs national advertising most franchisees benefit from | Uses the required logos, signs and trademarks |
| Doesn't take part in the day-to-day running | Gets marketing campaigns approved by the franchisor before release |
That last line matters to anyone who likes to market their own way. In a franchise, your local campaigns go through the franchisor first. You trade some freedom for the weight of a national brand.
The disclosure document, if you're buying in the US
CFI says US franchises must follow state laws, and the Federal Trade Commission (FTC) is the federal regulator. Its Franchise Rule requires the franchisor to give a potential buyer a disclosure document setting out the benefits, risks and limits of the deal. CFI says that includes litigation history, a list of existing suppliers and estimated financial performance expectations.
That's a US rule. If you're buying elsewhere, ask a local adviser what the franchisor must show you before you sign, and ask for the same three things anyway.
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How buying a franchise works, step by step
- The franchisor offers its model to new franchisees.
- You read the disclosure document (the FTC Franchise Rule in the US) and the contract.
- You pay the lump sum and sign.
- The franchisor trains and supports you.
- You run the unit to the brand's rules and pay royalties each month.
Before step three, write a plan of your own. My free business plan template is a good place to test the numbers the franchisor gives you against what you think you can sell.
Franchise advantages and drawbacks at a glance
| Advantages (CFI) | Drawbacks (CFI) |
|---|---|
| You don't start from scratch | Relatively heavy start-up costs |
| No need to build a brand or fund your own advertising | Royalties on revenue for as long as the contract runs |
| Training, equipment and advice from the franchisor | A lack of creativity: you work to the existing rules and structure |
| National advertising behind your outlet | Campaigns need the franchisor's approval |
Where I come in
Whether you're weighing up a franchise or already running one, the marketing question is the same: what does the national brand do for you, and what's left for you to do locally? I work with small businesses on exactly that, the marketing that brings customers through the door, inside whatever rules they've signed up to. You can see how I work on my work with me page.
My take on buying a franchise
You're buying a system and a name, not a business that runs itself. Read the numbers and the contract the way a supplier would read yours: what do I pay up front, what do I pay every month, and what am I not allowed to do? If the royalty still works in a slow month, and you're happy following someone else's playbook, a franchise can save you years. If you'd hate asking permission to run a promotion, it's probably not for you.
Frequently asked questions
What is a franchise in simple terms?
It's a contract that lets you run a business using another company's brand, trademarks and systems. CFI says the franchisee pays a fee at the start and royalties on its gross income after that.
What are the fees in a franchise?
CFI lists three: a lump sum for the rights and intellectual property, payments for training, equipment and advice, and an ongoing royalty that the franchisor receives every month.
What's the difference between a franchisor and a franchisee?
The franchisor owns the brand and the model. The franchisee pays to use them and runs the outlet day to day.
What is the FTC Franchise Rule?
It's a US rule. CFI says it requires the franchisor to give a potential buyer a disclosure document covering benefits, risks and limits, including litigation history, existing suppliers and estimated financial performance.
What are the main drawbacks of a franchise?
CFI names heavy start-up costs followed by royalties, and a lack of creativity because you work to the franchisor's existing rules.
