Franchise Business Model

Licensing a proven business system to independent operators who pay for the right to use your brand, processes, and support.

Why Franchise?

Factor	Advantage
Capital efficiency	Franchisees fund expansion
Motivated operators	Owners work harder than employees
Local knowledge	Franchisees understand their markets
Scale economics	Bulk purchasing, shared marketing
Recurring revenue	Royalties create predictable cash flow

The Two Sides

Perspective	What They Want	What They Risk
Franchisor	Rapid expansion, royalty income, brand equity	Quality control, legal exposure, reputation damage
Franchisee	Proven system, brand recognition, support	Upfront investment, ongoing fees, limited autonomy

Revenue Model

Stream	Typical Range	When Paid
Initial Franchise Fee	$10K-$100K+	Upfront
Ongoing Royalties	4-8% of gross revenue	Monthly
Marketing Fund	1-4% of gross revenue	Monthly
Product/Supply Markup	5-20%	Per order
Technology Fees	$200-$1,000/month	Monthly
Training Fees	$1K-$10K	Per event

Franchise Development Stages

PROVEN CONCEPT → DOCUMENT SYSTEM → LEGAL STRUCTURE → RECRUIT → SUPPORT → SCALE

Stage	Key Activities	Success Criteria
Proven Concept	Run company-owned locations profitably	2+ years profitable operations
Document System	Create operations manual, training program	Replicable by non-experts
Legal Structure	FDD, franchise agreement, territory maps	Compliant, clear, fair
Recruit	Find qualified franchisees	Strong unit economics for franchisee
Support	Training, opening support, ongoing coaching	Franchisee success rate >80%
Scale	Regional development, area developers	Maintain quality while growing

Operations Manual

The franchise operations manual is your primary control mechanism. It should cover:

Section	Contents
Brand Standards	Logo usage, signage, uniforms, customer experience
Site Selection	Demographics, traffic, competition, lease terms
Build-Out	Design specs, equipment lists, vendor contacts
Opening	Pre-launch checklist, soft opening, grand opening
Daily Operations	Opening/closing procedures, service standards
Products/Services	Specifications, quality control, approved suppliers
Staffing	Hiring, training, scheduling, performance management
Marketing	Local marketing, national campaigns, digital presence
Financial	POS setup, reporting, royalty calculation
Compliance	Health/safety, licenses, insurance requirements

Franchisee Selection

Who makes a good franchisee?

Trait	Why It Matters
Financial capacity	Can weather startup period, meet obligations
Operational mindset	Will follow systems, not reinvent them
Local connections	Understands market, has network
Management experience	Can hire, train, lead a team
Brand alignment	Believes in the mission, represents well

Red flags:

• Wants to "improve" the system immediately
• Undercapitalized
• Passive investor mindset (wants to hire a manager day one)
• Bad credit or legal history

Unit Economics

For franchise viability, both sides need to win:

Franchisor perspective:

Metric	Target
Franchise fee	Covers recruitment + training costs
Royalty rate	Sustainable for franchisee, meaningful for you
EBITDA margin on royalties	30-50% at scale
Franchisee payback period	2-4 years

Franchisee perspective:

Metric	Target
Initial investment	3-5x first year net income
Break-even	12-24 months
Cash-on-cash return	15-25%+ by year 3
Owner income	Competitive with alternative employment

Franchise Disclosure Document (FDD)

Required in most jurisdictions before selling franchises. Key sections:

Item	What It Covers
1-4	Franchisor background, litigation, bankruptcy
5-7	Initial fees, ongoing fees, investment range
8	Product/service restrictions
9-11	Franchisee obligations, advertising, training
12-13	Territory, trademarks
14-17	Renewal, transfer, non-compete, financial performance
19-23	Financial statements, contracts, receipt

Item 19 (Financial Performance Representations) is optional but increasingly expected. Franchisees want to see real numbers.

Support Systems

What ongoing support franchisees need:

Support Type	Delivery Method	Frequency
Operations coaching	Field visits, phone/video	Monthly
Training	Initial + refresher programs	Quarterly
Marketing	National campaigns, local toolkits	Ongoing
Technology	POS, CRM, reporting dashboards	Continuous
Purchasing	Vendor negotiations, approved suppliers	Quarterly
Peer community	Conferences, advisory councils	Annual + online

Common Friction Points

Issue	Prevention
Franchisee underperformance	Better selection, early intervention, clear benchmarks
System non-compliance	Regular audits, mystery shops, technology enforcement
Territory disputes	Clear territory definitions, protected vs. unprotected
Fee disputes	Transparent reporting, auditable systems
Renewal issues	Fair terms, early communication, improvement pathways
Transfer/exit	Clear process, first right of refusal, qualified buyer standards

Technology in Franchising

Modern franchises use technology for control and support:

Function	Technology
Operations	Cloud POS, inventory management
Training	LMS, video libraries, mobile apps
Marketing	Digital asset management, local marketing automation
Financial	Automated royalty calculation, benchmarking dashboards
Communication	Franchisee intranet, messaging platforms
Quality	Digital checklists, photo verification, IoT sensors

Franchise vs Other Growth Models

Model	Best When	Trade-off
Franchise	Capital-light, local execution matters	Less control, shared upside
Company-owned	Maximum control, high-value locations	Capital intensive, management complexity
Licensing	IP-focused, minimal operations	Low control, limited revenue
Area Development	Proven franchisee, large territory	Concentration risk
Master Franchise	International expansion	Very low control

Context

• Real Estate + Franchise — McDonald's model
• Consulting to Trades — High-ticket coaching model
• Vertical Integration — Owning the value chain
• Business Models Index

Links

• A to Z of Franchises
• Franchise Business Model
• What You Need to Know
• FTC Franchise Rule