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Franchising is a business model in which an established company (the franchisor) licenses out its brand, operational systems, and proprietary products or services to an independent owner, known as the franchisee. In exchange for paying ongoing fees to operate under the brand name, the franchisee gets to take advantage of its existing brand awareness, proven business model, and shared marketing resources.
According to the International Franchise Association (IFA), there were more than 830,000 franchise establishments in the US in 2025, supporting more than eight million jobs across industries including fast food, fitness, home services, and retail. If you’re considering business ownership, franchising is an alternative to starting a company from scratch in which you get a proven playbook for running a business.
This article covers what it takes to become a franchisee, what the business arrangement entails for both parties, and how franchising compares to starting a wholly independent business.
What is franchising?
Franchising is a business arrangement in which a franchisor licenses their brand, business model, operational playbook, trade name, and trademark to a franchisee, who pays for the right to operate under the established brand’s name, identity, and procedures.
In this contractual relationship, the franchisee can use the franchisor’s branding and other intellectual property, benefit from its support systems (such as operating manuals, technology platforms, and vendor relationships), and sell its products or services. Typically, the franchisor grants the franchisee rights to a specific territory—meaning no other franchisee can open a competing location in that contractually defined area.
Common franchising agreement models include business format franchises, in which the franchisor emphasizes consistency in brand experience, and product distribution franchises, in which the franchisor is less prescriptive.
Business format franchises
A business format franchise is the most common type of franchise and includes a complete framework for running the business—everything from how the store looks to how customers are greeted at the door. For example, franchises for a national gym brand may all use the same décor and color scheme, offer the same equipment and classes, and deliver a similar brand experience overall.
Consistency across franchises helps to maintain consumer trust and loyalty since a customer’s experience at one location—positive or negative—could reflect on other franchise locations and the brand itself. Franchisors enforce their brand standards and quality control through field audits, strict supplier requirements, and other means.
Product distribution franchises
Under product distribution franchise agreements, the franchisee distributes franchisor-made products, and there is less emphasis on standardized operations. Gas stations and car dealerships often operate under the product distribution model.
Compared to business format franchises, product distribution franchises have more flexibility when it comes to managing their day-to-day operations and customer experience. The franchisor is primarily concerned with how their own products are displayed and sold versus how the franchisee is running their business.
How do franchises work?
A franchisor-franchisee relationship continues long after both parties have signed the initial contract. While each party’s specific obligations will depend on the type of franchise model and the specific products or services to be sold, here are the core aspects of how franchises work.
Application process and vetting
The path to becoming a franchisee begins with an application process. Prospective franchisees submit background and financial information to the franchisor, who then evaluates whether the candidate has the capital, skills, and local market knowledge to succeed. Franchisors may conduct a background check and look for evidence of experience running a successful business, sufficient liquid assets, and an alignment with their brand values.
Potential franchisees should do their own due diligence in parallel, such as speaking with other franchisees of the brand, consulting independent legal and financial advisers, and reviewing the unit economics for comparable locations, if available. The US Small Business Administration offers resources and loan programs specifically geared toward franchisees who are evaluating how to fund a franchise investment.
Regulations and key documents
In the US, the Federal Trade Commission (FTC) regulates franchising under the Franchise Rule, which requires franchisors to provide a Franchise Disclosure Document (FDD) to prospective franchisees at least 14 days prior to the signing of any contracts or the exchange of any money. The FDD includes 23 different categories of disclosure, such as the franchisor’s litigation history, the estimated investment cost for the franchisee, all franchise fees, and the full terms of the eventual franchise agreement.
Some states require additional disclosures beyond what the federal Franchise Rule stipulates. For example, California and New York require franchisors to register the FDD with the state’s investor protection bureau and receive approval before agreeing to or selling a franchise license.
Assuming the franchising process continues past the FDD stage, both parties will sign the franchise agreement—a binding legal document outlining the contractual relationship between the franchisor and franchisee. It covers the length of the license (known as the term), territorial rights (where the franchisee can operate), brand standards, renewal options, and exit conditions. Franchise attorneys specialize in reviewing these contracts with franchisors and prospective franchisees before signing occurs.
Franchise fees
The financial relationship between franchisor and franchisee typically involves several layers of fees:
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Initial franchise fee. This is a one-time, upfront purchase price the franchisee pays to the franchisor at the time of signing. It guarantees the right to operate under the franchisor’s brand and potentially other things, like setup support and initial training for the franchise’s staff. According to the IFA, initial franchise fees can range from $20,000 to $50,000.
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Ongoing royalties. These are recurring payments—usually a percentage of a franchise’s gross revenue—that the franchisee pays over the lifetime of the franchise agreement. The IFA reports that ongoing royalties vary among industries and brands but average between 5% and 9% of a franchise’s gross sales.
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Marketing contributions. Franchise systems may require franchisees to contribute to a national or regional marketing fund that the franchisee won’t have to manage directly. This arrangement helps to cover advertising costs for both the franchisor and franchisee and coheres messaging across all locations.
Ongoing support
Once a franchise’s doors are open, the franchisor may provide forms of ongoing support, depending on what the franchise agreement dictates. Areas of support might include:
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Marketing
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Training and compliance
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Quality assurance and customer feedback
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Development of new products or services
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Vendor and supply chain management
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Performance benchmarking
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Advisory services
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Operations and customer service policies
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Software and hardware
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Access to a network of other franchises
Franchising vs. starting your own business
Franchising and starting a business from scratch involve many of the same fundamentals: hiring staff, managing operations, finding customers, and generating revenue. The primary difference is that franchises operate within an established business model, while independent business owners build their own. A franchise typically comes with recognized branding, proven operations, tested supplier relationships, and marketing assistance. For new businesses, this can reduce some of the uncertainty around starting a new venture.
However, that support comes with tradeoffs. Franchisees agree to operate within the franchisor’s systems and standards, which may restrict everything from choice of suppliers and product types to store design and customer service practices. Independent business owners retain full control over these decisions, and others. And while a franchise may represent a path to business ownership involving less business risk, a franchisee has ongoing fee obligations that an independent business doesn’t.
Buying a franchise also differs from buying a business. A franchise agreement grants a time-limited license—up to 20 years—to operate under a brand, rather than full ownership of an existing entity, and renewal is generally at the franchisor’s discretion and on their terms. Neither path is inherently better than the other. The right choice depends on your individual business goals, available capital, and local market conditions, as well as how much autonomy you want as an owner.
Franchising meaning FAQ
What are the types of franchising?
The two main types of franchising are business format franchises and product distribution franchises. In a business format franchise agreement, the franchisee licenses the full operating system, brand, and products or services of the franchisor (for example, a yoga studio). Under a product distribution model, the franchisee is licensing the right to distribute products under the franchisor’s brand (for example, a car dealership).
Is franchising a good way to start a business?
Franchising offers a structured path into business ownership with an established brand and training offerings, but it also involves significant upfront fees, reduced autonomy, and a time-limited contractual relationship with the franchisor that might not be renewed indefinitely. Whether it’s a “good way” to start a business depends on an entrepreneur’s financial situation, goals, and tolerance for operating within a defined system.
How much does it cost to start a franchise?
Franchising costs can vary considerably by brand and industry. Initial franchise fees can range between $20,000 and $50,000, with total startup costs—e.g., equipment, real estate, and working capital—ranging from six figures to several million dollars for larger franchise concepts.
