Business Strategy
Definition
A franchise is a business model where a franchisor licenses its brand, systems, and operational methods to a franchisee who operates an independently owned location in exchange for upfront fees and ongoing royalties.
A franchise agreement grants the franchisee the right to use the franchisor's trademark, business systems, supply chains, and marketing in exchange for: (1) an initial franchise fee (typically $20K–$100K), (2) ongoing royalties (usually 4–8% of gross revenue), and (3) marketing fund contributions (1–3% of gross revenue). The franchisor provides training, operational manuals, site selection guidance, and ongoing support. The franchisee owns the business but must operate it according to the franchisor's standards — deviation can result in termination. Before selling a franchise, U.S. law requires the franchisor to provide a Franchise Disclosure Document (FDD) — a 300+ page legal document with 23 required items covering fees, litigation history, financial performance, territorial rights, and obligations. The FDD must be provided at least 14 days before any money changes hands. There are approximately 790,000 franchise establishments in the U.S. across over 3,000 brands. Total investment ranges from under $50K (home-based) to over $5M (hotels, large restaurants). The FTC's Franchise Rule governs disclosure requirements, and many states have additional franchise registration laws.
Buying a franchise is one of the largest financial commitments most people make, and the FDD is deliberately dense. Understanding territory exclusivity, renewal rights, transfer restrictions, and performance obligations is critical before signing. A franchise attorney can review the FDD and franchise agreement to identify unfavorable terms, while an accountant can analyze the Item 19 financial performance representations to model realistic returns. Many franchisees who skip professional review discover hidden costs or restrictive terms after it's too late to negotiate.