How franchising works for a franchisee, how to evaluate a franchise and its Franchise Disclosure Document, the true costs, financing, signing and opening, and what running a franchise location is like day to day.
In a franchise, the franchisor licenses its brand, operating system and support to a franchisee, who owns and runs a location. In return, the franchisee typically pays an initial franchise fee, ongoing royalties (often a percentage of sales) and contributions to a marketing fund, and agrees to follow the franchisor’s standards. The franchisee is usually the employer of the location’s staff and is responsible for hiring, scheduling, payroll and compliance.
The appeal is a proven model and brand recognition. The trade-off is less independence and ongoing fees. Some franchisees thrive; others struggle with a system that does not fit their market or the costs.
Before looking at brands, be honest about what you want and can afford. Consider how much capital you can invest and how much you can borrow, whether you want to work in the business daily or manage managers, which industries you know and enjoy, and whether you are comfortable following someone else’s system. Many franchisors set minimum net worth and liquid capital requirements.
Look at several franchisors in your chosen industry. Compare brand strength, growth and closures, support and training, territory protection, fees and the profile of successful franchisees. Be wary of high-pressure sales tactics, promises of guaranteed income or a reluctance to let you speak to existing franchisees.
Under the Federal Trade Commission’s Franchise Rule, franchisors must provide prospective franchisees with an FDD at least 14 calendar days before they sign a binding agreement or pay any money. The FDD has 23 required items. Some to read closely:
| Item | What it tells you |
|---|---|
| Item 3: Litigation | Lawsuits involving the franchisor and its management |
| Item 5 and 6: Fees | Initial fee and ongoing fees such as royalties, marketing and technology fees |
| Item 7: Initial investment | Estimated range of total startup costs |
| Item 11: Franchisor’s assistance | Training, site selection, systems and support |
| Item 12: Territory | Whether you get exclusive territory and on what terms |
| Item 19: Financial performance | Any financial performance representations the franchisor chooses to make |
| Item 20: Outlets | Openings, closures, transfers and franchisee contact lists |
| Item 21: Financial statements | The franchisor’s audited financial statements |
Some states also require franchisors to register or file their FDD with a state agency before selling there, and offer additional protections.
The FTC’s Franchise Rule gives buyers two important protections:
Use the 14 days well. Read Items 5, 6 and 7 for cost, Item 19 for earnings claims and Item 20 for the list of current and former franchisees to call. If a franchisor pushes you to sign or pay a deposit before the 14 days are up, treat it as a serious warning sign.
Item 20 lists current and former franchisees. Call several, including some who left the system. Ask how long it took to break even, whether the Item 7 estimate was accurate, how good the training and support are, what they wish they had known and whether they would do it again. Their answers are often more useful than anything in the sales process.
One red flag is a reason to ask harder questions. Several together are a reason to walk away.
The initial franchise fee is only part of the investment. Typical costs include:
Franchise research checklist complete.
Labor is usually one of the largest ongoing costs. Build a realistic staffing plan and payroll budget. See how to calculate labor cost and the labor cost percentage calculator.
Have a franchise attorney review the FDD and franchise agreement before you sign. Pay attention to term and renewal, transfer rights, termination conditions, non-compete clauses, required purchases from approved suppliers and personal guarantees. Have an accountant review your financial projections. Decide on a business structure; many franchisees form an LLC or corporation. See C corp vs. S corp.
Common financing sources include personal savings, bank loans, SBA-backed loans, equipment financing and, sometimes, financing programs offered by the franchisor. Lenders will look at your credit, experience, the franchise brand’s track record and your business plan. Our small business plan template can help.
After signing, you will typically go through site selection, build-out, training, hiring and a grand opening. As a franchisee you are usually the employer, so you are responsible for wage and hour compliance, scheduling, payroll and employee policies, even when the franchisor provides templates. Plan hiring and onboarding well before opening; see how to onboard hourly employees. Questions of joint employment between franchisor and franchisee are a complex legal area, so follow the franchisor’s brand standards but make your own employment decisions with your own advisers.
Many successful franchisees grow to several units. Multi-unit operations depend on strong local managers and consistent systems for scheduling, time tracking, labor cost control and communication across sites. EZTime gives owners one view of every location: schedules, clock-ins, labor costs, tasks and announcements. See EZTime for franchise owners and multi-location businesses.
The FDD is a document franchisors must give prospective franchisees under the FTC Franchise Rule, with 23 required items covering fees, investment, obligations, litigation, territory, franchisee lists and financial statements.
Under the federal rule, at least 14 calendar days before you sign a binding agreement or pay any money to the franchisor.
It varies widely by brand and industry. The FDD’s Item 7 gives an estimated range of the initial investment, which typically includes the franchise fee, build-out, equipment, inventory, training and working capital.
Usually the franchisee, who hires, schedules and pays the location’s staff and is responsible for employment law compliance.
Ask about time to break even, accuracy of the investment estimate, quality of support and training, unexpected costs, relationships with the franchisor and whether they would buy the franchise again.
Most franchisees pay a royalty, often a percentage of sales, plus marketing or advertising fund contributions and sometimes technology, training or renewal fees. Item 6 of the FDD lists these ‘other fees’, so read it line by line and add them to your cash flow forecast.
Yes, before you sign. A franchise attorney reviews the FDD and franchise agreement, explains territory, renewal, transfer and termination terms and flags anything unusual. Their fee is small compared with the investment and the length of the agreement.
As soon as you have hourly staff, two jobs take more time than most owners expect: recording hours accurately and building a schedule everyone can see. Under the federal Fair Labor Standards Act (FLSA), employers must keep accurate records of hours worked and pay non-exempt employees overtime for hours over 40 in a workweek, and some states add daily overtime or meal-break rules. This is general information, not legal advice.
EZTime covers all three with a time clock app, employee scheduling and payroll-ready exports, from $2 per employee per month. See pricing and start a 14-day trial.
EZTime shows schedules, hours and labor alerts across locations, so multi-unit franchisees can compare stores without visiting each one.