Franchise Model
How franchising works, what it actually costs, and why the industry's success rate claims do not hold up to academic scrutiny.
A franchise is a business arrangement where you pay for the right to use someone else’s brand, operating systems, and playbook in exchange for upfront fees and ongoing royalties. Over 832,000 franchise establishments operate in the United States, generating $921 billion in economic output and employing nearly 8.9 million people, which makes franchising one of the most significant business structures in the country by sheer scale.
The franchise industry promotes itself with survival rates as high as 90 to 95%, but a landmark study by Wayne State University economist Timothy Bates analyzing over 20,000 small businesses found that franchises actually survived at a lower rate (65.3%) than independent businesses (72%) over four years, despite requiring roughly five times more capital to start. The industry’s inflated numbers came from surveys sent only to existing franchisees, which excluded everyone who had already failed and closed.
How It Works
What you are buying: the brand, the system, and the restrictions
When you buy a franchise, you are purchasing a license to operate under an established brand using the franchisor’s proven business model, training systems, and supply chains. The franchisor provides the playbook for everything from store design to marketing to daily operations, and in exchange, you follow their rules. The franchise relationship is governed by two key documents: the Franchise Disclosure Document (FDD), a 23-item legal filing the FTC requires franchisors to provide at least 14 calendar days before any contract is signed or any money changes hands, and the franchise agreement itself, which typically runs 5 to 20 years and defines your territory, obligations, and the conditions under which either party can walk away.
The real costs: the franchise fee is the entry ticket
The franchise fee, which typically runs $20,000 to $50,000 for most brands, is the most visible cost and also the most misleading because it represents only a small fraction of total investment. Crumbl charges a $50,000 franchise fee, but the total investment to open a single location runs $816,000 to $1.4 million, which means the fee itself accounts for roughly 3 to 6% of what you will actually spend. Beyond the initial investment, franchisees pay ongoing royalties of 4 to 8% of gross sales (Crumbl charges 8%), a marketing fund contribution of 1 to 4% of gross sales (Crumbl charges 3.5%), and absorb the cost of any system upgrades the franchisor mandates, which must be implemented at the franchisee’s expense.
What the franchisor controls: you are not your own boss
The FTC itself warns prospective franchisees that “the franchisor may control many aspects of your business, for example, your site location, your sales territory, the design of your retail establishment, and the products or services you can (and can’t) sell.” Franchisors can require you to buy supplies from designated vendors who do not have to compete with open market prices, mandate specific technology platforms and point-of-sale systems, dictate operating hours, and reserve the right to terminate your agreement and keep your franchise fee if you violate brand standards. The consistency that makes franchise brands recognizable to customers is the same system that limits your autonomy as an owner.
The Cost Comparison
The total cost of opening a franchise varies enormously by category, from under $10,000 for a home-based travel franchise to over $2 million for a restaurant with a commercial kitchen, real estate, and equipment.
| Category | Franchise Fee | Total Investment | Royalty |
|---|---|---|---|
| Food/Restaurant | $25K–$50K | $250K–$2M+ | 4–8% |
| Retail | $10K–$50K | $100K–$600K | 4–12% |
| Service | $20K–$50K | $50K–$300K | 8–12% |
| Home-based | $2K–$25K | Under $100K | Varies |
The median food franchise requires $700,000 in total investment with $200,000 in available cash, which puts it out of reach for most first-time business owners and explains why home-based and service franchises have become the fastest-growing segments of the industry.
Examples
The fastest franchise in history
Crumbl went from a single cookie shop in 2017 to 1,059 locations and an estimated $1.2 billion in system-wide sales by the end of 2024, making it one of the fastest franchise expansions in American business history. The company sold 863 franchises in just two years, collecting $43.15 million in franchise fees alone, and average net profit per store swung from $298,000 in 2022 to $123,000 in 2023 to $252,000 in 2024, a volatility that reflects both the risks of rapid expansion and the brand’s strong recovery. Franchisee complaints have centered on the fact that Crumbl does not help franchisees find a site, can legally keep the $50,000 franchise fee upon termination, and was fined $60,000 in 2022 for child labor violations across 11 stores in six states.
When the franchisor profits at your expense
Quiznos is the textbook cautionary tale of a franchisor extracting profit from its own franchisees. At its peak in 2007, Quiznos had 4,700 U.S. locations, and by 2017 fewer than 400 remained. The collapse happened because Quiznos forced franchisees to purchase supplies through its own subsidiary, American Food Distributors, at prices that pushed food costs to 39% of revenue (the industry standard is 30%), which made it nearly impossible for store owners to turn a profit. Many franchisees lasted three years, accumulating $150,000 in operating losses on top of $300,000 in startup costs, and Quiznos lost lawsuits totaling $301 million to its own franchisees.
Beauty and fitness franchises
Drybar, the blowout salon founded by Alli Webb in 2010, charges a $50,000 franchise fee with total investment running $410,000 to $1 million and average unit volume of $904,000, with top-performing locations bringing in $1.8 million annually. Orangetheory Fitness, co-founded by exercise physiologist Ellen Latham in 2010, expanded to over 1,500 studios across 50 states and 24 countries, surpassed $1 billion in systemwide sales in 2018, and merged with the parent company of Anytime Fitness in 2024 to form a combined operation of 7,000 locations with $3.5 billion in sales. Both brands illustrate that beauty and fitness franchises can reach significant scale, though the capital requirements are substantial: Orangetheory requires $500,000 in liquid capital and a $1.5 million net worth to qualify.
What People Get Wrong
“Franchises can’t fail.” The franchise industry has promoted survival rates of 90 to 95% for decades, but those numbers came from surveys sent only to existing franchisees, which by definition excluded everyone who had already failed. The Bates study, which tracked actual Census Bureau data on over 20,000 businesses, found franchise survival at 65.3% after four years compared to 72% for independent businesses. Franchises with startup costs below $25,000 fail at nearly twice the rate of those above that threshold.
“You’re your own boss.” The FTC warns that “the franchisor may control many aspects of your business,” including your location, territory, store design, and the products you can sell. Franchisees have day-to-day operational responsibility but operate within a framework where the franchisor dictates suppliers, pricing, marketing, technology systems, and operating standards, and can terminate the agreement for noncompliance.
“The franchise fee is the main cost.” For most franchises, the franchise fee represents 3 to 6% of total investment. A $50,000 franchise fee on a $1 million total investment means you need $950,000 more before you open the doors, plus ongoing royalties of 4 to 8% and marketing contributions of 1 to 4% paid on gross sales every month for the life of the agreement.
“Buying a franchise is like buying a turnkey business.” Franchisees still work long hours building the business, managing employees, handling customer issues, and navigating local market conditions. The FTC notes that even franchisees who hire managers find ownership involves a major commitment of time, effort, and resources, and the franchisor can mandate costly system upgrades, require technology platform changes, and alter operational requirements at any point during the agreement.
Frequently Asked Questions
How much does a franchise cost?
The majority of franchise investments fall between $100,000 and $300,000, though the full range extends from under $10,000 for home-based franchises (Dream Vacations starts at $2,000) to over $5 million for large restaurant or hotel concepts. The franchise fee itself ($20,000 to $50,000 for most brands) is a fraction of total investment, which also includes build-out, equipment, inventory, working capital, and initial operating expenses. The median food franchise requires $700,000 in total capital with $200,000 in liquid cash.
Are franchises profitable?
The average franchise owner earns $102,000 to $134,000 per year, with multi-unit operators owning five or more locations averaging $214,000 annually. However, averages conceal wide variation: Crumbl’s best-performing stores earned over $252,000 in net profit in 2024, while worst-performing stores lost over $241,000 in 2023. Approximately 51% of franchisees reach profitability within the first year, but the timeline extends to two to four years for high-investment concepts like McDonald’s.
What is a franchise fee?
A franchise fee is the one-time upfront payment to join a franchise system, typically ranging from $20,000 to $50,000. Established or premium brands charge $50,000 to $100,000 or more (Orangetheory charges $59,950), while some home-based franchises charge as little as $495. The fee covers the license to use the franchisor’s brand, trademarks, and operating systems, plus initial training and onboarding.
What is a royalty fee?
A royalty fee is the ongoing percentage of gross sales that franchisees pay to the franchisor, typically 4 to 8% (though some service franchises charge up to 12%). Royalties are usually paid monthly or weekly and are calculated on gross revenue, not profit, which means you pay the same percentage whether you are profitable or not. Most franchises also require a separate marketing or advertising fund contribution of 1 to 4% of gross sales.
What is an FDD?
A Franchise Disclosure Document is a 23-item legal document the FTC requires franchisors to provide at least 14 calendar days before a prospective franchisee signs any contract or makes any payment. It contains the franchisor’s litigation and bankruptcy history, all fees and estimated investment costs, contact information for current and former franchisees, audited financial statements, and (optionally) financial performance data in Item 19. Only about 60 to 65% of franchisors include financial performance representations in their FDDs, and if a franchisor or salesperson makes earnings claims that do not appear in Item 19, the FTC considers that a red flag.
How long until a franchise is profitable?
Most franchises reach profitability within one to three years, with the timeline varying by industry, investment level, and execution quality. Fitness and service franchises can break even within six months to a year, while restaurant franchises with large buildouts typically require two to four years. Independent startups, by comparison, generally take three to five years to reach profitability.
What percentage of franchises are owned by women?
Women own approximately 31% of all U.S. franchises, up from 20.5% in 2013 to 2014, representing a 38% increase over the past decade. One-third of female franchise owners have operated their businesses for over a decade, and 88% report that they enjoy operating their franchise. Service-based franchises in health, wellness, education, and home services see the highest rates of female ownership.
What are the best franchise categories for women?
Service-based franchises dominate the lists of top franchises for women because they tend to offer more flexibility and lower startup costs. According to Franchise Business Review’s survey of 9,000 female franchise owners across 350 brands, top categories include health and wellness, education and enrichment, home services, and personal care. Low-cost options like Dream Vacations ($2,000 to $21,000 total investment) and cleaning service franchises make franchise ownership accessible at lower capital levels.
How does a franchise compare to starting your own business?
Franchises offer brand recognition, proven systems, and structured training, but require significantly more capital (average franchise investment is $500,000 versus $100,000 for independent startups, per the Bates study) and limit your autonomy over suppliers, pricing, and operations. Independent businesses give you full control and keep all the profits but come with no established playbook and require you to build brand recognition from scratch. Franchises tend to reach profitability faster (one to three years versus three to five years), though the Bates study found independent businesses had higher four-year survival rates than franchises.
How do you finance a franchise?
SBA 7(a) loans are the most common financing vehicle for franchise purchases, with the SBA supporting 103,000 small business financings totaling $56 billion in fiscal year 2024, the highest level since 2008. Franchise lending volume reached $2.3 billion in 2024 at an average interest rate of 12.1%. Other financing options include conventional small business loans, bootstrapping through personal savings, home equity lines of credit, 401(k) rollovers (known as ROBS, or Rollovers for Business Startups), and some franchisors offer in-house financing or partnerships with preferred lenders.
Sources
- IFA/FRANdata, “2026 Franchising Economic Outlook,” 2026. Franchise establishment count, economic output, employment, and growth projections.
- Timothy Bates, “A Comparison of Franchise and Independent Small Business Survival Rates,” Small Business Economics, 1995. Franchise versus independent survival rate data from Census Bureau records.
- FTC, “Franchise Fundamentals: Debunking Five Myths About Buying a Franchise,” 2023. FTC warnings on franchise ownership misconceptions and franchisor control.
- FTC, “A Consumer’s Guide to Buying a Franchise”. FDD requirements, 14-day rule, and franchise buying process.
- Franchise Business Review, “How Much Do Franchise Owners Make?”. Average franchise owner income by ownership structure.
- Restaurant Business Online, “Crumbl Slows Its Growth, and Restaurant Volumes Increase,” 2025. Crumbl 2024 FDD data, average unit volumes, and net profit figures.
- Restaurant Business Online, “A Brief History of Quiznos’ Collapse”. Quiznos franchisee losses and supply chain exploitation.
- Sharpsheets, “Drybar Franchise FDD, Profits & Costs,” 2025. Drybar investment costs and unit volume data.
- Sharpsheets, “Orangetheory Fitness Franchise FDD, Profits & Costs,” 2025. Orangetheory investment requirements and financial data.
- Zippia, “Franchise Owner Demographics and Statistics,” 2026. Women-owned franchise statistics.
- SBA, “Franchise Fees: Why Do You Pay Them and How Much Are They?”. Franchise fee and royalty ranges.
- SBA, “Loan Program Performance Report,” 2024. SBA lending volume and franchise financing data.