What Does Franchise Mean in Business? Explained

Are you curious about what a franchise really means in the world of business? Everywhere you look, whether it’s a favorite coffee shop, a gym, or a hotel chain, you’ll find franchises at work. Simply put, a franchise is a business model that lets you run your own business while using an established company’s brand, system, and products or services. Instead of starting from scratch, you gain training, ongoing franchise support, and the credibility of a trusted name in exchange for fees and royalties.

In this guide, we’ll break down the concept in simple terms, walk you through how franchising works, highlight the pros and cons, and share real-world examples, so you can decide whether investing in a franchise is the right path for you.

What Does Franchise Mean in Business?

The definition of a franchise is simple: it’s a contract between a franchisor and a franchisee. The franchisor provides a trade name, trademark, and business system. The franchisee usually pays the franchisor an fee plus ongoing royalty payments, often a percentage of monthly sales.

This agreement allows your company to operate on a specific territory using the franchisor's methods, management standards, and uniform marketing. You don’t just buy a license to a logo you get a premium business based on proven performance.

Key takeaway: a franchise is a way to own a business with less risk, because you plug into a tested system.

How Does Franchising Work Step by Step?

Running a franchise follows a clear method. Here’s how it typically works step-bt-step:

1. Purchase and pay the fee: You sign a franchise agreement and pay the initial entry cost.
   
   
2. Receive training: After that, you receive comprehensive training in operations, management, and customer service.
   
   
3. Site selection: The franchisor provides guidelines for site selection to ensure your territory or location has demand.
   
   
4. Set up operations: You open with the company’s uniform look, menu, or products and services.
   
   
5. Ongoing support: You continue to receive supplier lists and marketing support.
   
   
6. Royalty and reporting: You pay a monthly royalty, typically 4–12% of revenue, and maintain standard reporting.
   
   

Methodology reference: Data taken from the Federal Trade Commission (FTC) Franchise Rule and 2023 International Franchise Association reports.

Mini takeaway: The system is designed to allow you to launch quickly while ensuring good performance across all outlets.

Advantages and Disadvantages of Franchising in Today’s Market

Franchising has become one of the fastest-growing models in the business world. The U.S. franchising industry's economic output is projected to reach $936.4 billion in 2025. New sectors such as pet care, health food, and boutique fitness are expanding rapidly, while traditional giants like fast food and hotels continue to dominate. Based on the IFA, the top 10 fastest-growing states for franchise growth are: Georgia, North Carolina, Virginia, Arizona, South Carolina, Pennsylvania, Tennessee, Florida, Colorado, and Maryland. But before you sign that agreement, it’s important to explore both the benefits and drawbacks of being an owner of a franchise today.

Advantages of Franchising

• Lower threat: You follow a proven system, lowering failure rates compared to independent startups.
• Brand recognition: Customers trust a well-known trade name and trademark, which boosts early sales.
• Support and training: The franchisor provides ongoing management, supplier lists, and marketing tools.
• Access to funding: Banks often see franchising as a safer franchise investment, so loans are easier to secure.
• Faster market entry: With set standards and a ready-made method, you can operate within months.

Disadvantages of Franchising

• High upfront cost: The initial franchise fee and buildout can reach hundreds of thousands.
• Royalties and fees: A percentage of your sales goes to the franchisor, cutting into profits.
• Less control: You must follow uniform rules for products and services, limiting flexibility.
• Legal obligations: Strict contracts and territory rules can restrict how you expand.
• Performance varies: Even strong brands have underperforming outlets depending on location and market.
  
  
  Franchise Cost Breakdown in Today’s Market
  
  

Examples of Franchises in Business

• McDonald’s: Over 38,000 outlets worldwide, a global corporation with strict standards.
• Subway: Low franchise investment (~$15,000 franchise fee) but intense competition in the market.
• Anytime Fitness: Over 5,000 gyms, strong international presence, and 24/7 service offering.

 A small 2024 LinkedIn poll of 200 entrepreneurs found 63% felt franchising was a safer investment than independent business.

Mini-FAQ: Quick Answers

What is a franchise in simple terms?

It’s a legal arrangement where a franchisee pays to use a franchisor’s trademark and system.

What is franchise and franchisee in business?

The franchisor grants the right to use its trade name; the franchisee operates under those standards.

What is a franchise vs. a license?

A license is just right to use intellectual property. A franchise agreement includes training, support, and ongoing royalty obligations.

What are different types of franchises?

• Product distribution (cars, soda).
• Business format (fast food, gyms).
• Trade name or brand licensing.

Who should consider franchising?

Someone who wants to run a business but prefers a tested system with lower risk.

Conclusion & Key Takeaways

• A franchise business lets you operate with proven products and services.
• You pay fees and royalties but gain advantages like training, support, and brand recognition.
• Independence offers control, but higher risk and slower marketplace entry.
• Always review the franchise agreement, understand costs, and compare different types before signing.
• The Federal Trade Commission provides guides and disclosures to ensure transparency in franchising.

Whether franchising is appropriate for you depends on your expectation, budget, and willingness to follow a uniform system. If your goal is faster growth in a proven industry, without need to change brand,  franchising may be the right thing to help you succeed.