August 31, 2026

 

Table of Contents

 

1. Essence of a Franchise

2. Typical, Minimum Conditions of Franchises

3. Main Pros & Cons of Franchises

    a. For the Franchisee

    b. For the Franchisor 

 

It's not uncommon for people to mistakenly think that a franchise is synonymous with a chain: a business with multiple locations. This is understandable since chains and franchises have something in common -- a shared idea, a name, that transcends any one location of the business. That shared idea is called a brand.

 

A franchise is an agreement in which one business (the franchisor) allows another business (the franchisee) to carry their brand name. The franchisee  could have only one location or more, and could itself be a chain. If the franchisee has several locations, it won't necessarily carry the brand name at all of them -- it might want to test the waters first and see how things go before jumping further in.

 

Every franchisor is different and thus franchises can in theory differ radically. Nevertheless, such an agreement usually occurs under certain, bare minimum stipulations.

 

One is that the franchisee can offer only the franchisor's products or services at franchise locations. This is mainly to guard against inferior products or services getting associated with the brand and hurting its image.

 

Secondly, the look, layout, and operation at each franchise location must meet the franchisor's standards. Again, this is mainly for consistency in customer experience and to protect the brand's image.

 

Third, the franchisor will provide training and support to ensure that standards are met.

 

Fourth, the franchisee bears all costs of any physical, location changes demanded by the franchisor.

 

Finally, for the privilege of carrying the brand name, the franchisor will collect a royalty from the franchisee. This will often involve an entrance fee and afterwards a certain percentage of the franchisee's revenue from all of their franchise locations. These royalties are usually collected on a monthly basis.

 

For both the franchisor and franchisee, there are both pros and cons to a franchise.

You might wonder why a franchisee would forfit so much of their autonomy, and part of their revenue, just to carry a brand name. The main reason is that a well known, respected brand is much more likely to consistently attract customers over the long run. Secondly, much of the intellectual work, such as finding and testing viable products and services, is left to the corporate headquarters of the franchisor. This allows small franchisees to focus on ground-level operations of running their locations and avoid the anxiety and headache of researching those more general questions. Likewise, medium and large franchisees can spend time on more specific issues, such as where to expand or eliminate locations, rather than being pulled into the questions of which products or services to offer.

 

However, franchisees must pay royalties regardless of whether or not they are making a profit. In some cases, the royalty itself could be why a profit wasn't made during a certain time period.

 

And, as mentioned earlier, franchisees must cover the costs of any changes the franchisor wants. These demands can occur unexpectedly and cost the franchisee greatly. For example, if a restaurant franchisor decides to prepare their food differently, each franchisee must buy the new equipment that will go into each franchise restaurant.

As for franchisors, there's a clear benefit in avoiding the overhead of all of its franchise locations, while still collecting a royalty from them. When its franchisees expand, it expands its locations without any construction or related costs and then receives even more royalties.

 

However, it's not always as smooth as it sounds. While franchises seem like instant, easy cash for the franchisor, it's not unheard of for training and support costs to outweigh the royalties received at certain franchise locations. This is especially true with new or struggling locations. For franchisors with few franchisee locations, these costs can realistically consume a large portion of their total royalties.

 

Besides those contingencies, it would seem that everything is in the franchisor's favor when a franchise occurs. Legally, the franchisee certainly has the leverage. For example, if a franchisee refuses to make a franchisor's desired change -- perhaps afraid of the costs -- usually the franchisor can simply end the contract.

 

But suppose many franchisees, or a single franchisee with many locations, revolt. Even though the franchisee has the legal leverage, ending the contract with these franchisees would cause the franchisor significant financial harm in lost royalties. Moreover, even if many franchisees don't threaten to leave or refuse changes, but communicate that such changes will cause them long-term loss, a sensible franchisor will likely cancel the proposed changes. Receiving royalties is less likely from franchisees that go bankrupt or have second thoughts about the franchise. And undesired changes make it less likely that franchisees will expand their franchise locations, depriving the franchisor of further revenue.

 

So, while franchisors for the most part have the legal leverage, franchisees have the economic leverage in the relationship.

 

But it's not as if franchisees have little legal power. With proposed changes, franchisors run the risk of being prosecuted for selective, discriminatory enforcement of changes; unfair termination of the contract; breach of the implied contract; and, in some cases, getting kickbacks from mandated vendors who overcharge the franchisees. How enforceable such charges are partly depends on the state's laws where the franchisee sues.

 

This potential for protest and legal action makes franchises an unreliable route for franchisors to roll out and test new products, services, or anything else. Such things can be more easily done at corporate stores, which the franchisor owns.

 

It has certainly happened that franchisors have dramatically cut overhead by making all or most of their locations franchise-based, only to later find they could not implement large-scale changes necessary to compete. Thus, while franchisees lose some of their autonomy in a franchise, so do franchisors.