How Does a Franchise Business Work?
A franchise business works by allowing an entrepreneur to operate a business using an established company’s brand, products, services and business system. The company that owns the brand is called the franchisor, while the person or business operating the franchise is called the franchisee.
Instead of developing a business model completely from scratch, the franchisee uses the franchisor’s established system under agreed contractual terms. In return, the franchisee usually makes an initial investment and may pay franchise fees, royalties or marketing charges.
Franchising is commonly used in India across food and beverages, education, retail, healthcare, fitness, beauty, logistics and other sectors.
What Is a Franchise Business?
A franchise is a contractual business arrangement in which a franchisor gives a franchisee the right to operate using its brand and business model.
The franchisee generally invests in the outlet and manages its day-to-day operations, while the franchisor provides the brand, operating standards and varying levels of training and support.
India does not currently have one comprehensive franchise-specific law covering all franchise arrangements. Franchise relationships are therefore largely governed by contracts along with other applicable laws.
Who Are the Main Parties in a Franchise?
There are two primary parties:
Franchisor
The franchisor owns or controls the brand and business system. Its responsibilities may include:
- Providing brand rights
- Developing products or services
- Setting operating standards
- Providing training
- Marketing support
- Technology and operational support
- Supplying products or identifying approved suppliers
Franchisee
The franchisee operates the business according to the franchise agreement. Responsibilities may include:
- Investing capital
- Finding or leasing premises
- Hiring employees
- Managing daily operations
- Maintaining brand standards
- Paying applicable fees and royalties
- Following the franchisor’s procedures
The exact responsibilities depend on the franchise agreement.
How Does a Franchise Business Work?
The basic franchise process usually follows these steps.
- Franchisee Selects a Brand
The entrepreneur first researches available franchise opportunities and chooses a brand or business model.
Before making a decision, the franchisee should examine the total investment, fees, location requirements, support, agreement period, territory rights and operating expenses.
- Franchise Application
The prospective franchisee usually contacts the franchisor and submits an application or expression of interest.
The franchisor may evaluate factors such as:
- Financial capacity
- Business experience
- Proposed location
- Management ability
- Investment capacity
- Local market
The process differs between brands.
- Business and Financial Evaluation
The franchisee should calculate the complete cost of starting and operating the outlet.
| Cost | What It May Include |
| Franchise fee | Initial payment for franchise rights |
| Property | Rent and security deposit |
| Setup | Interiors, furniture and branding |
| Equipment | Machines, technology and other equipment |
| Inventory | Initial stock or raw materials |
| Employees | Recruitment and salaries |
| Marketing | Launch and promotional expenses |
| Working capital | Day-to-day operating funds |
| Royalty | Ongoing payment, where applicable |
The franchise fee should not be confused with the total investment. Property, equipment, employees and working capital can represent significant additional costs.
- Franchise Agreement Is Signed
If both parties agree to proceed, they enter into a franchise agreement.
This agreement establishes the rights and responsibilities of the franchisor and franchisee. Startup India provides a model franchise agreement among its model contract resources.
Important provisions can include:
- Franchise fee
- Royalty
- Agreement duration
- Renewal
- Territory
- Brand usage
- Supplier requirements
- Training
- Marketing obligations
- Quality standards
- Minimum performance requirements
- Termination
- Transfer or sale
- Dispute resolution
The franchisee should read the agreement carefully and consider professional legal review before signing, particularly for a large investment.
- Franchisee Sets Up the Outlet
After signing the agreement, the franchisee normally starts preparing the business location.
Depending on the business, this can involve:
- Selecting or finalising the property
- Completing interiors
- Installing equipment
- Setting up technology
- Installing signage
- Recruiting employees
- Purchasing inventory
- Obtaining required registrations and licences
The franchisor may provide specifications for the store design, equipment, branding and customer experience.
- Training and Support
One of the main features of franchising is the operating support provided by the franchisor.
Depending on the agreement, support can include:
- Employee training
- Operational manuals
- Product training
- Store setup assistance
- Marketing materials
- Technology systems
- Supply-chain support
- Business guidance
The level of support is not identical across all franchise businesses. Therefore, the franchise agreement should clearly state what support is actually included.
- Business Operations Begin
Once the outlet is ready, the franchisee begins operations.
Although the business uses the franchisor’s brand and systems, the franchisee may be responsible for everyday activities such as:
- Staff management
- Customer service
- Inventory management
- Local operations
- Cash-flow management
- Local marketing
- Maintaining cleanliness and quality
The EAC-PM report on franchising describes the FOFO model, for example, as one where franchisees own and operate individual units while following the franchisor’s brand and operating standards.
- Franchisee Pays Ongoing Fees
The financial relationship does not necessarily end after the initial franchise fee.
Depending on the agreement, the franchisee may have to pay:
- Royalty
- Marketing or advertising contributions
- Technology fees
- Renewal fees
- Product or supply-related charges
Royalty structures can differ. Some agreements use a percentage of sales, while others may use fixed or other contractual arrangements.
The franchisee should understand how every recurring payment affects the outlet’s profitability.
Different Franchise Business Models
Not every franchise works in exactly the same way.
Franchise-Owned, Franchise-Operated (FOFO)
The franchisee owns and operates the outlet. The franchisor provides the brand and business system while the franchisee handles daily operations.
Company-Owned, Franchise-Operated (COFO)
The company retains ownership of the unit but allows a franchise operator to manage its day-to-day operations under the agreed arrangement.
Franchise-Owned, Company-Operated (FOCO)
The franchisee owns the unit while the franchisor manages its operations.
These models can vary between businesses, so the exact ownership and operating responsibilities should always be confirmed in the agreement.
How Does the Franchisor Make Money?
A franchisor can generate revenue from its franchise network through several sources, depending on its business model.
These may include:
- Initial franchise fees
- Royalties
- Marketing contributions
- Product or inventory sales
- Technology fees
- Renewal fees
- Other contractual payments
At the same time, the franchisor may incur costs for brand development, training, marketing, technology, supply-chain management and franchise support.
How Does the Franchisee Make Money?
The franchisee generally earns revenue by selling the franchisor’s products or services to customers.
A simplified calculation is:
Revenue − Cost of Goods − Employee Costs − Rent − Royalty − Marketing − Other Expenses = Operating Profit
Actual profitability depends on sales volume, pricing, rent, staffing, inventory costs, royalty structure and other expenses.
A franchise agreement or brand should therefore not be treated as a guarantee of profit.
What Happens If the Franchise Business Fails?
If the outlet does not perform as expected, the franchisee may still have contractual obligations.
Depending on the agreement, the franchisee may be required to continue paying certain charges, follow termination procedures or meet specific conditions before transferring or closing the outlet.
This is why the termination, renewal and exit clauses should be examined before investing.
Franchise Business: Key Things to Check
Before entering a franchise agreement, check:
- Total investment
- Franchise fee
- Royalty
- Marketing charges
- Agreement period
- Renewal terms
- Territory protection
- Location requirements
- Supplier restrictions
- Training and support
- Expected working capital
- Termination conditions
- Transfer or resale rules
- Applicable licences and registrations
The business should also be established under an appropriate legal structure. Startup India identifies structures such as proprietorships, partnerships, LLPs and companies for conducting business in India.
Frequently Asked Questions
Does the franchisee own the brand?
No. The franchisor owns or controls the brand rights and permits the franchisee to use them according to the franchise agreement.
Does a franchise guarantee profit?
No. A franchise provides a business model and, depending on the arrangement, brand and operational support, but profitability depends on actual sales, costs, location and management.
Who pays for the franchise outlet?
The franchisee usually makes the investment required for the outlet under the agreed model. However, ownership and operating arrangements can vary between franchise models.
Can a franchisee change the products or store design?
It depends on the franchise agreement. Many franchise systems require franchisees to follow standardised products, branding and operating procedures.
What is the difference between franchise fee and royalty?
A franchise fee is generally an initial payment for obtaining franchise rights. Royalty is an ongoing payment that may be charged according to the franchise agreement.
Conclusion
A franchise business works by combining an established brand and business system with the investment and local operation of a franchisee. The franchisor provides the brand, systems and varying levels of support, while the franchisee generally invests capital and manages the outlet according to contractual standards.
Before entering a franchise, entrepreneurs should carefully evaluate the total investment, recurring fees, franchise agreement, operating responsibilities, support, location and exit terms. Understanding how the financial and operational relationship works is essential before making the investment.
