Franchising

Franchising is a way of running and growing a business in which one company, the franchisor, licenses its business model to independent operators, the franchisees. What is licensed usually includes the brand and trademarks, the know-how and operating procedures, and other intellectual property. The franchisee runs a local outlet under the franchisor's name, sells its products or services, and in return pays fees and agrees to follow the rules set out in a franchise agreement.

For the franchisor, franchising is a growth strategy. It lets a brand expand quickly using other people's capital and local effort, with less investment and less liability than opening company-owned "chain stores." For the franchisee, it offers a ready-made business with a known name, a tested system, training and support, in exchange for fees and a large loss of independence.

The relationship is rarely equal. Franchisors usually hold substantial legal and economic advantages. They write the contract, control the brand, set the rules and decide on renewal. Well-structured franchising, with honest disclosure, sensible law and good market research, can work well for both sides. Badly structured franchising can leave franchisees locked into unprofitable businesses with large debts. Because of this imbalance, many countries regulate franchising. The Wikipedia article on the subject notes that 36 countries have laws that explicitly regulate it.

This article covers the history of franchising, how a franchise works, the money involved, the legal framework in the United States and elsewhere, advantages and disadvantages for both parties, other forms of franchising, common misconceptions and frequently asked questions.

What a Franchise Is

The legal definition in the United States

US federal law gives a precise definition. Under the Federal Trade Commission's Franchise Rule, a franchise is "any continuing commercial relationship or arrangement, whatever it may be called," in which three things are true:

Trademark. The franchisee gets the right to operate a business that is identified or associated with the franchisor's trademark.
Control or assistance. The franchisor exerts, or has authority to exert, a significant degree of control over the franchisee's method of operation, or provides significant assistance with it.
Required payment. As a condition of getting or starting the franchise, the franchisee makes, or commits to make, a required payment to the franchisor or its affiliate.

The phrase "whatever it may be called" matters. A company cannot avoid the rule by calling its arrangement a "licence," a "dealership" or a "partnership." If the three elements are present, it is a franchise in the eyes of US federal law.

Two main types

Franchising is commonly divided into two forms. The US Small Business Administration (SBA) describes them as product or trade name franchising, which focuses on supply chains, and business format franchising, which covers the whole way of running the business.

Type	What the franchisee gets	Typical examples
Product or trade name franchising	The right to sell the franchisor's products under its name; the main link is supply	Car dealerships, soft drink bottlers, fuel stations
Business format franchising	The full system: brand, operating manual, training, site and design standards, marketing, ongoing support	Fast-food restaurants, hotels, fitness centres, tax preparers, cleaning services, real estate agencies

Most of what people think of as franchising today, such as fast food, hotels and service chains, is business format franchising.

The parties and structures

Role	Description
Franchisor	Owns the brand and system and grants franchises
Franchisee	Independent business owner operating one or more outlets
Multi-unit franchisee	A franchisee operating several outlets, sometimes dozens or hundreds
Area developer	A franchisee with the right, and often the obligation, to open a set number of outlets in a territory
Master franchisee	A party that can sell sub-franchises within a territory, often a whole country, taking on part of the franchisor's role there
Franchise broker	An intermediary who matches prospective franchisees with franchisors, usually paid by the franchisor

History

Early forms

Arrangements resembling franchising are old. In the Middle Ages, landowners contracted out the collection of taxes to tax collectors, who kept a share of what they collected. According to Wikipedia, that practice ended around 1562. In seventeenth-century England, holders of franchises could sponsor markets and fairs or operate ferries. The original meaning of "franchise" was a privilege or right granted by an authority, a sense that survives in phrases such as "the electoral franchise."

Nineteenth-century America

In the United States, the Singer sewing machine company tried a franchising plan in the 1850s. It failed, and Singer later bought back the franchise rights. John Stith Pemberton's beverage of 1886, an early version of Coca-Cola, became associated with licensed bottlers. Bottling franchises became one of the classic forms of product franchising. Car makers later built their sales networks on franchised dealers.

Business format franchising

In 1902 Louis K. Liggett formed a druggists' cooperative that became Rexall, which Wikipedia describes as a model for later franchisors. Howard Johnson's is credited with the first modern restaurant franchise in 1932, and motel franchising followed in the 1930s.

The great boom came after the Second World War. The US Interstate Highway System and the rise of fast food were key drivers. Travellers on new highways wanted predictable food and lodging in unfamiliar towns, and a national brand offered that. In 1955 Ray Kroc, then a franchise agent for the McDonald brothers' restaurant concept, opened a McDonald's in Des Plaines, Illinois. The company dates its founding to 15 April 1955, although that restaurant was the ninth McDonald's overall. Kentucky Fried Chicken, Holiday Inn and many others built national systems on franchising in the same period.

Scale

Franchising grew into a major part of the US economy. Wikipedia cites 2005 figures of 909,253 franchised businesses in the United States, producing $880.9 billion of output and accounting for about 11 million jobs. McDonald's shows how far the model can go. At the end of 2025 its system had 45,356 restaurants in more than 100 countries, and about 95 per cent of them were operated by franchisees.

Regulation arrives

Rapid growth brought abuses. Some sellers made inflated earnings claims or took fees for franchises that never opened. California passed the first state franchise investment law in 1970. The FTC's Franchise Rule followed at federal level in 1979. The FTC amended the rule substantially in 2007, and the amended rule became mandatory on 1 July 2008. The FTC's compliance guide for franchisors is dated May 2008.

Timeline

Year	Event
Middle Ages to c. 1562	Tax collection contracted out to collectors who keep a share
17th century	English franchises to hold markets and fairs and run ferries
1850s	Singer's franchising plan, later abandoned
1886	Pemberton's beverage, an early Coca-Cola, later sold through licensed bottlers
1902	Liggett's druggist cooperative, later Rexall
1932	Howard Johnson's credited with the first modern restaurant franchise
1950s	Highway and fast-food boom in US franchising
1955	Ray Kroc opens a McDonald's in Des Plaines, Illinois (15 April)
1970	California passes the first state franchise investment law
1979	FTC Franchise Rule takes effect
2008	Amended FTC Franchise Rule becomes mandatory (1 July)

How a Franchise Works

The franchise agreement

The franchise agreement is the contract at the centre of the relationship. Agreements typically run for five to thirty years. The FTC's consumer guide says terms can run up to 20 years, and that renewal is not automatic. A typical agreement covers:

The grant of rights: what the franchisee may sell, under which marks, and where.
The territory, and whether it is exclusive.
Initial and ongoing fees.
Standards for the premises, products, service, signage, uniforms and hours.
Required suppliers and purchasing rules.
Training and support the franchisor will provide.
Advertising obligations and contributions.
Reporting, auditing and inspection rights.
Renewal, transfer, termination and what happens afterwards, including non-compete clauses.
Dispute resolution, including where and under which law disputes are decided.

Wikipedia notes that such contracts often carry no warranties, are largely non-negotiable, and may be renewable only at the franchisor's option, and that the venue for disputes and the governing law are usually set by the franchisor.

Obligations on each side

Franchisor typically	Franchisee typically
Protects and develops the trademark	Uses the trademark only as permitted
Maintains and improves the business system	Follows the operations manual and brand standards
Provides initial and ongoing training	Attends training and trains staff
Supports site selection and opening	Funds the premises, fit-out, equipment and opening
Runs national or regional marketing	Contributes to the advertising fund and does local marketing
Negotiates supply arrangements	Buys from approved suppliers
Safeguards know-how and trade secrets	Keeps the system confidential
Inspects and audits units	Reports sales and permits inspections

Some franchisors run their own training academies or "corporate universities." Wikipedia also notes that training can be too short for businesses with complex equipment, which is one reason prospective franchisees are told to ask existing owners what the training was really like.

The Money

Fees

Franchise fees come in several forms:

Fee	What it is	Typical basis
Initial franchise fee	One-off payment for the right to open	Fixed sum; the FTC says it is typically tens of thousands to several hundred thousand dollars and often non-refundable
Royalty	Ongoing payment for use of the brand and system	Usually a percentage of gross sales
Advertising or marketing fee	Contribution to a brand marketing fund	Usually a percentage of gross sales
Technology fees	Point-of-sale systems, software and online ordering	Fixed or per-unit
Training fees	Initial or ongoing training	Fixed or per-person
Renewal and transfer fees	Charged on renewal or sale of the unit	Fixed
Product mark-ups	Profit the franchisor or affiliates earn on required supplies	Built into prices

Wikipedia cites an average royalty of about 6.7 per cent plus an average marketing fee of about 2 per cent, though the figures vary greatly by industry and brand. It also gives a historical example from 1983 of the computer retailer ComputerLand charging a fee of 8 per cent of revenue.

The total investment

The franchise fee is usually a small part of what it costs to open. The FTC lists other start-up costs: leasing, building out and equipping premises, initial inventory, licences, insurance and grand-opening expenses, plus professional fees for accountants and lawyers. It warns that breaking even can take more than a year, that some franchises never break even, and that buyers should plan for first-year operating costs and up to two years of personal living expenses. In the US, the franchisor must give an estimate of the total initial investment in its disclosure document.

Why royalties on sales matter: worked example (hypothetical)

Royalties and marketing fees are almost always calculated on gross sales, not on profit. The FTC notes that royalties are owed even when the franchisee is losing money. That has big consequences, as this hypothetical example shows.

A hypothetical franchised café has annual gross sales of $800,000. It pays a 6 per cent royalty and a 2 per cent marketing fee.

Royalty: $800,000 × 0.06 = $48,000
Marketing fee: $800,000 × 0.02 = $16,000
Total fees: $48,000 + $16,000 = $64,000

Suppose the café's profit before these fees, after paying for food, staff, rent and everything else, is $100,000. After fees, the owner keeps $100,000 − $64,000 = $36,000. The fees take 64 per cent of the pre-fee profit, even though they are "only" 8 per cent of sales.

Now suppose a bad year in which sales fall 10 per cent to $720,000 and pre-fee profit drops to $50,000.

Fees: $720,000 × 0.08 = $57,600
Owner's result: $50,000 − $57,600 = −$7,600, a loss

The franchisor still receives $57,600, while the franchisee loses money. This is the structural reason the interests of the two sides can diverge. The franchisor earns on sales. The franchisee lives on profit. A franchisor might favour price promotions or new outlets that raise total system sales even if they cut individual franchisees' profits.

Why franchisors use this structure

From the franchisor's side, fees based on sales are easier to verify than profit, which franchisees could reduce through their own accounting choices. They also tie the franchisor's income to the growth of the brand. Some franchisors earn a large part of their income in other ways. McDonald's, for example, owned about 56 per cent of the land and 80 per cent of the buildings of the restaurants in its consolidated markets at the end of 2025, and earns rent as well as royalties and fees from franchisees.

Why Companies Franchise

Capital and speed

Opening company-owned outlets requires the brand owner to fund every site. Franchising shifts most of that cost to franchisees. The franchisor can expand faster, into more markets, with less capital and less financial risk. That matters most for young brands that cannot borrow enough to grow on their own.

Motivated local operators

A franchisee who has invested his or her own savings is often more motivated than a salaried manager. Franchisees also bring local knowledge and connections.

Entering foreign markets

Franchising is a common way to enter other countries. The franchisor avoids much of the development cost and risk of a new market, and a local master franchisee or area developer brings knowledge of local law, property and customers.

The main drawback: control

The main disadvantage for the franchisor is quality control over distant, independently owned units. One badly run outlet can damage the whole brand. Franchisors manage this through detailed manuals, inspections, mystery shoppers, required suppliers and, ultimately, the right to terminate. Wikipedia notes that setting up subsidiaries to manage franchising in each country or state is one suggested remedy.

Why People Buy Franchises

Advantages for the franchisee

The SBA lists the main advantages: brand recognition, promotions and marketing from the larger brand, training, management help and a proven business model. Franchisors may also help with site selection and sometimes with getting finance. Franchisees often benefit from the franchisor's purchasing power with suppliers.

Disadvantages for the franchisee

The SBA also lists the downsides. Franchisees must follow the franchisor's rules on how they run the business. Contracts generally favour the franchisor. Franchisees typically must meet sales quotas and buy specified equipment, supplies and inventory.

The FTC lists the areas where franchisors typically restrict independence:

Site selection and store design, including required renovations.
Which products and services may be offered.
Operating hours, signage, uniforms, advertising and accounting methods.
Mandatory suppliers, which may cost more than alternatives.
Pricing promotions required through advertising cooperatives.
Sales territory, which may not protect against competition from the franchisor's own online sales, catalogues or other outlets.

Termination and renewal

The FTC warns that termination can follow from missed royalty payments or failure to meet performance standards. Some contracts allow a "cure" period for minor lapses, but termination usually means losing the whole investment. Renewal may bring higher royalties, new design rules, tighter restrictions or a smaller territory. After termination or expiry, non-compete clauses may stop the former franchisee from running a similar business nearby, potentially for up to three years. Wikipedia also notes allegations that some franchisors have used minor rule violations to terminate contracts without compensation.

The Law in the United States

The FTC Franchise Rule

The FTC Franchise Rule, at 16 CFR Part 436, is a disclosure law. It does not regulate the terms of franchise agreements or review whether a franchise is a good investment. It requires franchisors to give prospective franchisees a Franchise Disclosure Document (FDD) containing specified information, so that buyers can make informed decisions.

The franchisor must provide the FDD at least 14 calendar days before the prospective franchisee signs a binding agreement or pays any money. The FTC advises that buyers may ask for the document once the franchisor has their application, and should request any updates before signing.

The 23 items of the FDD

Item	Title	Why it matters
1	The franchisor and any parents, predecessors and affiliates	Who you are dealing with, and the competitive landscape
2	Business experience	Background of the executives
3	Litigation	Lawsuits, including against franchisees
4	Bankruptcy	Recent bankruptcies of the franchisor or its officers
5	Initial fees	Up-front payments
6	Other fees	Royalties, marketing and all ongoing fees
7	Estimated initial investment	Total cost to open
8	Restrictions on sources of products and services	Required suppliers
9	Franchisee's obligations	Cross-reference of duties in the contract
10	Financing	Any financing offered
11	Franchisor's assistance, advertising, computer systems and training	What support you get, and how the ad fund is used
12	Territory	Whether you have any protected area
13	Trademarks	Whether the marks are registered and any disputes
14	Patents, copyrights and proprietary information	Other intellectual property
15	Obligation to participate in the actual operation of the franchise business	Whether you must work in the business personally
16	Restrictions on what the franchisee may sell	Product limits
17	Renewal, termination, transfer and dispute resolution	The exit and conflict terms, including arbitration
18	Public figures	Celebrity endorsements and their involvement
19	Financial performance representations	Any earnings claims, with their basis
20	Outlets and franchisee information	Openings, closures, transfers, and contact lists for current and former franchisees
21	Financial statements	Usually audited statements, the FTC's guide says covering three years
22	Contracts	Copies of the agreements
23	Receipts	Proof you received the document

The FTC calls out several items as especially important. Item 3 shows litigation history, including lawsuits against franchisees. Item 17 shows the terms for leaving or resolving disputes. Item 19 contains any earnings claims. Item 20 shows how many outlets opened and closed and lists people to call.

Earnings claims

Franchisors are not required to make earnings claims. If they make one, it must appear in Item 19 with a reasonable basis and an explanation of the data and assumptions. The FTC urges buyers to be sceptical of averages, which a few high earners can inflate, of gross sales figures, which ignore expenses, of figures from company-owned stores, which may have lower costs, of results from unusually strong locations, and of outdated data. It warns that if a buyer is asked to sign a questionnaire about what they were told, they should disclose every claim, or they may give up the right to dispute it later.

Exemptions

The rule does not apply in some situations. Under 16 CFR § 436.8, they include:

Exemption	Condition (current thresholds)
Minimum payment	Total required payments, from before opening through six months after, are less than $735
Fractional franchise	An experienced business adds a franchised line expected to be a small share of its sales
Leased department	The relationship is a leased department within another retailer
Petroleum marketing	The relationship is covered by the Petroleum Marketing Practices Act
Large investment	The initial investment, excluding franchisor financing and unimproved land, is at least $1,469,600, with a signed acknowledgment
Large franchisee	The franchisee has been in business at least five years and has a net worth of at least $7,348,000
Insiders	Buyers of at least 50 per cent who have been senior officers or managers of the franchisor for at least two years, or owners of at least 25 per cent of it for two years
No written document	No written document describes any material term of the relationship

The FTC must adjust the dollar thresholds every fourth year based on the Consumer Price Index. A fractional franchise, as defined in the rule, requires that the franchisee or its senior people have more than two years of experience in the same type of business, and that the parties reasonably expect sales from the franchise to stay within a set share of the franchisee's sales.

State laws

Many US states add their own rules. Some require franchisors to register their offering with a state agency before selling there. Others regulate the relationship itself, for example by limiting termination without good cause. Wikipedia notes that 15 or more states give franchisees a private right of action for fraud. There is no federal registry of franchises. The FTC tells buyers to check their own state's laws and to contact the state attorney general, consumer affairs office or securities division.

Employment law and franchisor liability

Who is responsible for franchisees' workers is a recurring legal question. Wikipedia discusses California's AB 5 law of 2019 and the Ninth Circuit's 2019 decision in Vazquez v. Jan-Pro Franchising International, which raised questions about when franchisors may be liable as employers of their franchisees' workers, or of franchisees themselves. The more control a franchisor exercises over daily operations and staff, the stronger the argument that it should bear employer responsibilities. This creates tension, because control is also how franchisors protect their brands.

Dispute resolution

Most franchisors use mandatory arbitration clauses, according to Wikipedia. Arbitration can be faster and more private than court, but it limits franchisees' ability to bring class actions and to appeal. Item 17 of the FDD must disclose these terms.

Financing and the SBA

Many franchisees borrow to open. The SBA maintains a Franchise Directory listing brands eligible for SBA-backed financing. Brands that meet the FTC's franchise definition must be listed for their franchisees to get SBA loans. The SBA states that a listing is not an endorsement and does not guarantee success. The FTC adds that a bank's approval of a loan does not confirm that a franchise is sound, and that some franchisors give banks overstated projections.

Regulation Around the World

Franchise law varies widely. Some countries have detailed disclosure laws. Others rely on general contract and competition law or on voluntary industry codes.

Country or region	Approach	Key features (as described in sources)
United States	Federal disclosure rule plus state laws	FDD at least 14 days before signing or payment; state registration and relationship laws
Australia	Mandatory Franchising Code of Conduct	Enforced by the ACCC; disclosure at least 14 days before signing; the code was replaced from 1 January 2015, adding good-faith obligations, penalties and a risk information sheet
Canada	Provincial legislation	Disclosure requirements and franchisees' right to associate and act collectively
Brazil	Law No. 8,955 of 15 December 1994	Mandatory disclosure; failure to disclose can void the agreement; registration with INPI
China	National regulations	Rules from 2005; a "two shops, one year" requirement before franchising; minimum three-year term; disclosure 20 days in advance
India	General contract law	Contract Act 1872 and Specific Relief Act 1963; no franchise-specific statute
Kazakhstan	Franchise law since 2002	More than 300 systems and nearly 2,000 outlets; 2013 franchise turnover of US$2.5 billion
France	Doubin Law, 1989	Disclosure at least 20 days before signing
Spain	Retail Trading Act	Disclosure 20 days before signing; Franchisors' Register
Italy	2004 law	Disclosure at least 30 days before signing
Russia	Civil Code, 1996	Agreements must be written and registered; franchisors may not set franchisees' prices
United Kingdom	No franchise-specific law	Self-regulation through the British Franchise Association; a 2010 case, MGB Printing v Kall Kwik, recognised a possible duty of care
New Zealand	No franchise-specific law	Voluntary code from 1996 covering about a third of franchises
Norway	No franchise-specific law	Competition Act applies

The European Union has no uniform franchise law. Wikipedia lists six EU member states with pre-contract disclosure laws: France (1989), Spain (1996), Romania (1997), Italy (2004), Sweden (2004) and Belgium (2005). Estonia and Lithuania impose mandatory terms. The European Franchise Federation's code of ethics has no legal force.

Some figures from the same sources give a sense of scale. Australia had about 1,120 brands and 79,000 units in 2016. Brazil had about 2,031 brands and 93,000 locations at the end of 2012, about 11 per cent of them foreign. Canada has about 1,300 brands and 80,000 units. Chinese franchise systems are small on average, about 45 outlets compared with more than 540 in the United States, and franchising there accounts for about 3 per cent of retail trade.

Other Forms of Franchising

The franchise idea has been adapted well beyond fast food and hotels.

Community franchising

In community franchising, a community group licenses local operators to deliver services under a shared brand. The leading example cited by Wikipedia is Dolomiti Superski in Italy, founded in 1974. It brings together more than 160 local companies across 12 ski areas under one pass. Revenue is collected centrally and shared out according to how many passengers each company carries.

Social franchising

Social enterprises use franchising to spread models that employ disabled and disadvantaged people. Examples include the Kringwinkel second-hand shops in Flanders, with about 5,000 employees, and CAP Markets in Germany, with about 100 stores. The Hotel Tritone in Trieste inspired a social franchise called Le Mat.

Event franchising

Events can be replicated in many places under one brand. Examples cited include the World Economic Forum's regional meetings, the World Social Forum, and a UK speed-dating brand called When The Music Stops.

Home-based and service franchises

Many franchises need no shop at all: cleaning, tutoring, home care, lawn care, pest control, tax preparation and similar services. These usually need less capital, although the work is still demanding. Third-party logistics is another growing area. Wikipedia notes that three logistics franchise firms appeared in the 2012 Inc. 5000 list.

Buying a Franchise: A Practical Checklist

The FTC's consumer guide gives a detailed set of steps for anyone considering a franchise.

Know yourself

Be honest about how much capital you have, how much you can afford to lose, your technical and management skills, how much income you need and how many hours you can work. Ask whether you are comfortable being told how to run your business.

Evaluate the opportunity

Demand. Is the product seasonal, a fad, or something people buy repeatedly? Will your community buy it?
Competition. Who else sells it locally, regionally, nationally and online?
Resilience. Could you run the business if the franchisor collapsed?
Brand. How old is the franchisor, what is its reputation, and how good is its quality record?
Trademark. Is it federally registered? If not, you could be forced to rebrand at your own expense.
Experience. How long has the franchisor managed a franchise system, not just run a business?
Growth. Is the system expanding faster than its support can handle?
Complaints. Check state regulators, Better Business Bureaus and consumer protection agencies.

Talk to franchisees

Contact as many current and former franchisees as possible, including some not on the franchisor's list, because owners with problems may be left off it. Ask owners open about a year whether they opened on time and whether training and launch support were good. Ask owners open about five years how long it took to break even and to earn a reasonable income, whether the franchisor keeps its promises, and whether they would buy again. Ask former franchisees why they left. If buying an existing outlet, examine its real financial records and be wary of units that have changed hands frequently.

Get professional help

Have an accountant review the financial statements, build a business plan and test any earnings projections. Have a lawyer experienced in franchise law review the contract before you sign. Problems found after signing can be costly or impossible to fix.

Watch for warning signs

Be wary of high-pressure sales, especially at franchise expos. Be wary of brokers who are paid more for selling costlier franchises, and of earnings claims that are not in Item 19 or that the seller will not back up in writing.

Limits and Criticisms of Franchising

The power imbalance

The franchisor drafts the contract, controls the brand and its standards, decides on renewal, and often chooses the forum for disputes. Individual franchisees have little negotiating power. Franchisee associations exist partly to rebalance this.

Divergent incentives

As the worked example showed, royalties on sales mean franchisors and franchisees can want different things. Opening a new outlet near an existing one can add to franchisor revenue while taking sales from the existing franchisee. Required suppliers can be a source of franchisor profit at the franchisee's expense. Required renovations can impose large costs.

Encroachment

The FTC warns that a franchisee's territory may not protect against competition from the franchisor's own online sales, catalogues or other channels. Item 12 of the FDD discloses what territorial protection exists, and often it is limited or none.

Information gaps

Disclosure laws exist because buyers have far less information than sellers. Even with an FDD, a prospective franchisee may not know how many owners are struggling or how realistic the earnings claims are. That is why the FTC places so much weight on talking to current and former franchisees.

Common Misconceptions

"Franchises almost never fail." Franchising is often promoted as much safer than starting an independent business, and Wikipedia describes franchise failure rates as much lower than those of independent start-ups. Comparisons are difficult, though. Outlets that are sold on, closed or quietly transferred may not be counted as failures, and results vary enormously between brands. The FTC warns that some franchises never break even and that termination usually means losing the whole investment. Item 20 of the FDD, which shows closures and transfers, is a better guide to a particular system than any industry-wide figure.

"A franchise is a guaranteed income." The FTC says plainly that a franchise is an investment with no guaranteed return.

"The franchise fee is the main cost." The initial fee is usually a small part of the total investment, which includes premises, fit-out, equipment, inventory and working capital, plus ongoing royalties and fees.

"The government has checked that this franchise is a good deal." The FTC rule is a disclosure rule. Neither it nor an SBA directory listing is an endorsement.

"I own the business, so I can run it my way." Franchisees own their business entity and assets but must follow the franchisor's system closely, under threat of termination.

"Renewal is automatic." It is not. Renewal may require new fees, new terms and renovations, or may be refused.

"Big brands are always safe." Strong brands reduce some risks, but a franchisee's results depend on location, management, local competition and the contract terms. The cost of entry is also usually higher.

Frequently Asked Questions

What is franchising in one sentence?

It is an arrangement in which a franchisor licenses its brand and business system to independent franchisees, who pay fees and follow the franchisor's rules in exchange for running an outlet under its name.

What is the difference between a franchise and a licence?

In US federal law, an arrangement is a franchise if it involves the franchisor's trademark, significant control or assistance, and a required payment, whatever it is called. A simple trademark licence without significant control or assistance may not be a franchise.

What is a Franchise Disclosure Document?

It is the document US franchisors must give prospective franchisees at least 14 days before they sign or pay. It covers 23 required items, including fees, litigation, territory, financial statements and contact details of other franchisees.

How are franchise fees usually calculated?

There is usually an initial fee and then ongoing royalties and marketing fees, typically a percentage of gross sales. Because they are based on sales, they are due even when the franchisee makes a loss.

How long does a franchise agreement last?

Typically five to thirty years, according to Wikipedia. The FTC mentions terms of up to 20 years. Renewal is not automatic.

Can a franchisor terminate the agreement?

Yes, on the grounds set out in the contract, such as unpaid royalties or failure to meet standards. Some contracts allow a cure period. Some US states limit termination without good cause.

Do franchisees have protected territories?

Sometimes. Item 12 of the FDD sets out what protection, if any, a franchisee has, and it may not cover the franchisor's online sales or other channels.

Is franchising regulated outside the US?

Yes, in many countries, through disclosure laws in places such as Australia, France, Spain, Italy, Brazil and China, and through codes of conduct or general law elsewhere. About 36 countries have franchise-specific laws.

What is a master franchise?

A master franchisee buys the right to develop a whole territory, often an entire country. It usually opens some outlets itself and sells sub-franchises to others, taking over many of the franchisor's duties locally, such as recruitment, training and support. Franchisors use master franchising mainly for international expansion, where a local partner understands the market, law and property far better than a distant head office.

Why is Item 20 of the FDD so useful?

Item 20 shows how many outlets the system opened, closed, transferred and took back over recent years, and lists contact details for current franchisees and for those who recently left. Those numbers show whether a system is really growing or quietly losing units. The contact lists let a buyer hear directly from people who have run the business, which the FTC treats as one of the most valuable steps in any investigation.

Should I hire a lawyer before buying a franchise?

The FTC and the SBA both recommend consulting a lawyer experienced in franchise law, and an accountant, before signing.

Summary

Franchising lets a brand owner expand by licensing its business system to independent operators. It began with medieval tax farming and English market rights, took modern shape with American bottlers, car dealers, Rexall and Howard Johnson's, and boomed after the Second World War with highways and fast food. Today it covers restaurants, hotels, retail, services, ski areas and even social enterprises.

The model offers franchisors fast, capital-light growth and offers franchisees a proven system and a known brand. It also builds in a lasting imbalance of power and a split in incentives, because franchisors earn on sales while franchisees live on profit. That is why the United States requires a 23-item disclosure document at least 14 days before any deal, why many other countries have their own franchise laws, and why regulators advise every prospective franchisee to read the documents closely, talk to existing owners and get independent professional advice before signing.