Written by Owning your own business is often portrayed as the ultimate dream—the idea of being your own boss, setting your hours, and building something from the ground up. But ask any entrepreneur, and they will tell you the truth: starting a business is a nerve-wracking, all-consuming roller coaster. There’s excitement, sure, but also sleepless nights, long hours, and the constant pressure of wondering, “Will this succeed?”.
Now imagine doing all of that with a blueprint already handed to you—a business model that is proven, with marketing plans, a recognized brand, and a support system in place. It sounds easier, right? This is the appeal of opening a franchise.
THE STRUCTURE OF A FRANCHISE: A FRAMEWORK FOR SUCCESS
Franchising has a long history, and its model has revolutionized the way businesses grow and expand. One of the earliest examples of franchising can be traced back to the mid-19th century with the Singer Sewing Machine Company. Isaac Singer, needing a way to distribute his sewing machines across a vast and varied geography, developed a model that allowed local agents to sell and service machines under the Singer name. This early form of franchising set the stage for what we see today—an agreement where a franchisor (the company) licenses its brand, systems, and processes to a franchisee (the local business owner) in exchange for fees, usually including an initial investment and ongoing royalties.
Today’s franchise model is a powerful engine for business expansion. According to the International Franchise Association (IFA), there are over 792,000 franchise establishments in the U.S. alone as of 2023, contributing nearly $825 billion to the U.S. economy. The franchise industry employs approximately 8.5 million people in the U.S., demonstrating its vast economic impact. For someone looking to get into business ownership, it offers a way to mitigate some of the risks involved in starting a business from scratch.
THE COSTS AND COMMITMENT
Just like any business venture the first step (and perhaps the scariest one) is the investment, these vary with the brand. For example, opening a fast-food franchise like McDonald’s can require an initial investment ranging from $1 million to $2.2 million, including franchise fees, real estate costs, and equipment. On the other hand, a lower-cost franchise like Subway may require a starting investment of $100,000 to $300,000.
However, the financial commitment does not stop at the initial investment. Franchisees must also factor in ongoing expenses, such as royalty fees, which typically range from 4% to 12% of gross revenue, depending on the franchise. For example, Subway charges an 8% royalty fee on sales, while McDonald’s charges a 4% fee. These fees, while providing brand support, can feel like an ongoing burden, especially during the early months when cash flow is tight.
The responsibilities of the franchisee do not end here. In fact, the real work begins, that is: recruiting employees. Even when franchisors provide training materials and operational guidelines, it is more challenging than expected. The U.S. Bureau of Labor Statistics estimates that the average employee turnover rate in the restaurant franchise industry can be as high as 150%, meaning that, on average, a franchisee will replace their entire staff more than once per year.
REALITY CHECK FOR FRANCHISEES
One of the hardest parts of being a franchisee is balancing the autonomy of owning your own business with the restrictions imposed by the franchisor. You are not fully in control. If a corporate decision impacts your business negatively, whether it is a new product that does not resonate with your local market or a pricing structure that customers do not favor — you have little recourse. A 2021 Franchise Business Review survey found that 33% of franchisees felt their franchisor did not give them enough flexibility to adapt to their local market conditions.
THE REALITY OF PROFIT MARGINS
To better understand the economic realities of franchising, it is important to look at profit margins. In many franchise models, especially within the food industry, profit margins are typically low, sometimes ranging between 5% and 10% after all expenses are paid. That means if your franchise generates $500,000 in annual revenue, your net profit could be as low as $25,000 to $50,000 after deducting expenses like royalties, rent, labor, and supplies.
Many franchisees often assume that the support and brand recognition will automatically lead to strong profit margins, but the reality is more nuanced. Franchise Business Review reports that while 51% of franchisees earn more than $100,000 annually, nearly 25% of franchisees report that they earn less than $50,000 per year. This gap highlights that not all franchises are equally profitable, and success depends heavily on a variety of factors such as location, industry, and management.
One of the key reasons franchises can be attractive is the lower failure rate compared to independent businesses. According to FranData, franchises tend to have a 90% success rate after five years, compared to a 50% success rate for independent businesses. However, while franchisees benefit from the franchisor’s support, they still need to navigate significant financial and operational challenges.
WHY SOME FRANCHISES FAIL
Despite the established brand, business model, and support from franchisors, some franchises still fail. While a franchise system provides a proven blueprint, there are various reasons why a franchise might not succeed, both from an economic standpoint and operational missteps.
Having interviewed former franchisees of the fast-food industry, I was able to get first-hand information on their experience, where the struggles of owning a franchise came with full force. Some of the factors that helped fast-track the steady decline of the fast-food restaurant can be summarized into 4 factors: location, COVID-19, inflation and perhaps the naivety in inexperience of working with franchisors.
Location is one of the most critical factors in the success of a franchise. According to Franchise Direct, 30% of franchise failures can be attributed to poor location choice. Even if the brand is strong, if the franchisee opens in an area with low foot traffic or poor demographics, it can struggle to generate enough revenue to cover fixed costs. Most of the time, franchisors assign the franchisee with a set location that was chosen by realtors and the franchisors to better ensure success. However, the guides are not exempt from making mistakes, thus the franchisees must pay that price. In addition, rent, labor, and supply costs can quickly eat into profits, and some franchisees find it difficult to stay afloat, particularly in competitive markets. The COVID-19 pandemic illustrated this starkly, with many franchisees facing unprecedented drops in revenue while still needing to pay royalties and maintain costly leases. Many franchisees struggled with expensive ingredients and the franchisor’s mandatory promotions, which didn’t always lead to increased profits. Moreover, economic downturns, like the 2008 financial crisis, can severely impact franchises. Even if the overall brand is strong, reduced demand makes profitability harder to achieve.
It is crucial for Franchisee-franchisor’s relationship be at least cordial. Disagreements over decisions like marketing, product introductions, or pricing can cause tension, especially when franchisees feel the franchisor’s strategic outlook does not fit their local market. A 2021 survey found that 33% of franchisees felt they lacked the flexibility needed to adapt locally, leading to frustration and legal disputes.
Finally, some of these franchisees end up suffering from success. Franchisors may push for more units without providing adequate support, leading to underperforming stores. Quiznos is an example, expanding to 5,000 locations, but collapsing due to poorly performing stores, leaving only about 200 locations by 2023 as franchisees battle with high costs.
MANAGING EXPECTATIONS AND FINDING SUCCESS
Despite the struggles, there is a reason so many people still choose the franchise route. According to FranData, franchises tend to have a success rate of 90% after five years, compared to a 50% success rate for independent businesses. The support system, while sometimes restrictive, can provide stability, especially if the franchisor is strong and responsive to franchisee feedback.
CONCLUSION: THE FRANCHISE LIFE
Franchising is not a version of stress-free entrepreneurship, it is the real deal and must not be underestimated. In the end, the life of a franchisee is about balance, as these should have to balance the support of the franchisor with the challenges of day-to-day operations. Most importantly aspiring franchisees must balance their vision for the business with the limitations of the franchise model.
Sources: International Franchise Association (IFA), McDonald’s Franchise Information, Subway Franchise Information, Franchise Business Review, FranData, Franchise Times, Franchise Direct, Franchise Business Review
Alegra Maza
theawarenessnews.com 