Financial Word of the Day: Franchise

Larry Jones
Jul 22
2 min read

Updated: Sep 26

Introduction

You’ve probably eaten at a McDonald’s, picked up coffee at Dunkin’, or grabbed a sub from Subway. But did you know each of those locations might not be owned by the corporation? Instead, they could be owned by an individual investor running a franchise.

So, what exactly is a franchise?

Definition of Franchise

At its core, a franchise is a business model where one party (the franchisor) grants another party (the franchisee) the rights to use its brand name, business processes, and proven systems to sell a product or service. In exchange, the franchisee typically pays an initial fee and ongoing royalties to the franchisor.

It’s like buying a “business in a box.” You get a recognizable brand, a tried-and-true operating playbook, and often ongoing support in training, marketing, and operations.

How a Franchise Works

Let’s say you buy a franchise with an initial fee of $50,000 and agree to pay 6% of your monthly revenue back to the franchisor. You’re also expected to follow their rules—everything from store layout to product quality—to keep the brand consistent across locations.

This arrangement benefits both sides. The franchisor expands its brand and market presence with less capital outlay. The franchisee gets a business blueprint that’s already been tested in the real world.

Franchise vs. Starting from Scratch

Starting your own independent business can be risky—statistics show many small businesses don’t survive past the first five years. Franchises come with built-in brand recognition and a support system, which can reduce some of that risk. But it’s not a free ride. Franchisees still work hard, put their own money on the line, and must play by the franchisor’s rules.

Example in a Conversation

“Instead of starting my own coffee shop, I’m thinking about buying into a franchise. It’s more upfront cost, but I get a proven system and brand recognition on day one.”

Money Smart Takeaway

Franchises can be a path to business ownership with training wheels, but they aren’t for everyone. They require significant capital, come with ongoing fees, and limit your ability to make major changes to the business model.

If you’re considering investing in a franchise, ask:

Do I have the financial resources for upfront and ongoing costs?
Am I okay following someone else’s playbook?
Does the franchisor have a strong track record of helping franchisees succeed?

Franchising isn’t just about flipping burgers or selling sandwiches—it’s a multi-billion-dollar industry with opportunities in everything from fitness to cleaning services.

But remember: it’s still a business. Success requires sweat equity, financial discipline, and good management.